Letting Empire Go For-Profit
The New York Times
October 1, 2001
Editorial
"Sound management led Empire (Blue Cross and Blue Shield) from near-insolvency to a strong balance sheet in the late 1990's. Even now, Empire is managed much as a for-profit company would be. Yet lately it has struggled to compete with New York's big for-profit insurers. Their market shares have increased almost every year, leaving Empire behind. A takeover by another not-for-profit might help, but only at the cost of hundreds, perhaps thousands of New York jobs, including those of Empire's proven managers."
"If Empire becomes a for-profit company and raises money by selling stock, it will keep its successful management team and gain the ability to grow by acquiring other insurers in nearby states. Expanding into other geographical areas would allow Empire to exploit economies of scale without threatening competition or taking on worse risks."
"The sticking point on conversion is exactly what to do with the proceeds from Empire's sales of stock. Part of the money will help Empire to cover claims, build new offices and grow. Because the company began as a state-subsidized insurer, it has also agreed to put a big chunk of the proceeds of its stock sales to charitable purposes."
"If lawmakers in Albany cannot decide what Empire should do with the $1 billion, they could allow it to sell shares immediately and put the proceeds in escrow pending an agreement. But there is no reason to make Empire wait any longer."
http://www.nytimes.com/2001/10/01/opinion/01MON3.html
Comment: Why is there a big push to convert Empire Blue Cross and Blue Shield from a not-for-profit to a for-profit entity? The oft stated reason is that it opens capital markets (selling shares of stock) which would provide funds to "make investments needed to compete with other insurers." This would enable growth through the acquisition of other insurers in other markets. Then "economies of scale could be exploited." This is the same reasoning that was given when Blue Cross of California converted into a for-profit insurer, WellPoint Health Networks. The California conversion is hailed as a great success, and it is from the shareholders perspective. But what has happened to patients in California?
It has been contended that the for-profit versus not-for-profit status has little meaning other than that the for-profit model is much more effective from a business perspective. But is that really the only difference? As a not-for-profit insurer, the mandated mission is to provide the best services possible for the beneficiary-patient. All resources are devoted to that. The for-profit model is absolutely mandated to enhance shareholder value. The mission under the for-profit corporate culture is to direct resources toward providing the greatest value for the shareholder. But wait. It is even more than this. The senior management and board of directors in a for-profit corporation are compensated handsomely for directing a successful business model. Usually not only are salaries much higher than in not-for-profit entities, but they are also given generous ownership positions through stock options. Now is the management team really interested in being sure that most revenues are distributed as medical benefits, or might they be tempted to increase the bottom line (higher beneficiary cost-sharing and fewer benefits) considering the great financial rewards that they would receive for doing so? It might be instructive to look at Leonard Schaeffer's compensation before and after he converted Blue Cross of California to a for-profit; the numbers suggest that altruism was nowhere in sight, but that the motivating factor seems to have been pure, simple greed.
Since the tax payers have a vested interest through the years of favorable tax treatment as a not-for-profit, some funds raised by selling shares should be used for the public benefit. In California two foundations were established for that very reason. And some of those funds are being spent for the public good. But the Blue Cross-WellPoint board members remained very influential. Hundreds of millions of dollars are available for research on methods to improve health care delivery in California. But the funds have been directed to studies on how to "make managed care work" and other aspects of the "business" of health care, whereas proposals to study universal, publicly administered coverage have been rejected. Is it really in the interests of the citizens of California to limit studies to those that will enhance current business models (supplemented with public "welfare" programs)? Are the foundations primarily dedicated to benefiting health plans, or patients?
And what about the concept of selling stock for merger and acquisition activities? Is that necessarily a good thing? Blue Cross-WellPoint wasted a lot of funds in its failed attempt to acquire Aetna. It's probably a blessing for Blue Cross-WellPoint that the attempt failed (as Aetna's prior merger with US Healthcare proved to be disastrous) . But if it had been successful for shareholders, how could that benefit those insured by Blue Cross? M & A might offer some lucrative opportunities for shareholders, but it really isn't the most important mechanism of enhancing shareholder value. The fundamental principle in business is still foremost to simply increase profits. Blue Cross-WellPoint has been a leader in demonstrating innovative methods of enhancing profits. Their primary thrust is to create innovative benefit packages (reduced benefits) and increased cost sharing (increased out-of-pocket expenses). In other words, they are abandoning the traditional insurance role of pooling risk as they are passing that risk on to the beneficiary-patients. To do otherwise would be to fail the obligation to the shareholders to maximize value. The for-profit model has been very beneficial for the shareholders that were brought into the picture by the conversion, but that success has been at the expense of the health plan beneficiaries.
Does New York really want to follow California's lead? Maybe instead, New York should consider dumping all of the health plans, and adopt a universal, publicly administered program. Until that can be accomplished, New York should concentrate on making the existing system work better for patients rather than sacrificing health care for the benefit of new investors injected into the picture.
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