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Add New York to the list of states where a nonprofit Blue Cross Blue Shield health insurer has morphed into a for-profit enterprise. The state is the 15th to change since 1994, when the Chicago-based Blue Cross Blue Shield Association—which licenses its name to 40 insurance plans around the country—rewrote its rules to allow for-profit companies to be licensees. The reversal triggered a chain reaction among several of the Blues’ traditionally nonprofit plans to either become for-profit companies or merge with one. The latest to pass muster, the New York deal is now all but complete, thanks to a recent state high court decision rejecting a constitutional challenge to the transaction, proposed in 1996 to help guide the then-struggling Empire Blue Cross Blue Shield out of financial straits. Consumers Union v. State of New York, No. 83 (N.Y. June 20, 2005) There are now three for-profit companies that run Blue Cross plans: Triple-S in Puerto Rico; Indianapolis-based WellPoint Inc., the largest for-profit Blue Cross player, controlling plans in 13 states; and WellChoice, a newly christened, publicly traded company created to be the new owner of eastern New York’s Empire Blue Cross Blue Shield. Like New York’s transaction, several other Blue Cross conversions have been mired in litigation. But the issues in the New York case are unusual, and its resolution cuts against the trend among Blue Cross insurers seeking to make a profit. The key issue in the New York litigation was the transfer of the insurer’s assets. The plaintiffs alleged that the deal constituted a taking of the charity’s property by the government. In the transaction, 95% of the shares of WellChoice went to a corporation controlled by the state. That left 5% to a charity helping poor people pay for health insurance. Before it had the Empire money in hand, nearly $2 billion held in escrow, the state already had allocated the money to fund, among other things, raises for hospital workers. The plaintiffs in the case, led by Consumers Union, publisher of Consumer Reports magazine, argued that Empire’s assets were being misappropriated. “We think this is the largest state taking of charitable assets in U.S. history,” said the attorney for Consumers Union, Mark P. Scherzer of the Law Offices of Mark P. Scherzer in New York. In defending the deal, Empire argued that Consumers Union couldn’t make a takings argument because the state was not compelling Empire to fork over assets, said the insurer’s attorney Steven Alan Reiss of Weil, Gotshal & Manges in New York. If there was no compulsion, there wasn’t a taking, Reiss said, noting that the case was unusual because it involved the value of a quasi-public business that no one owned. “It’s an odd beast,” he said. The court rejected the plaintiffs’ takings argument and granted the insurer’s motion to dismiss the complaint. Scherzer said Consumers Union may ask the U.S. Supreme Court to review the case. Writing for the 4-2 majority, New York Court of Appeals Judge Susan Phillips Read wrote, “Plaintiffs ask us to find that [the legislation] imposes an exaction on Empire because conversion is conditioned upon Empire’s dedication of its not-for-profit assets legislatively articulated public and charitable purposes. We decline to . . . expand our exaction analysis beyond the realm of land-use regulation.” In a dissent, Judge Robert Smith said he was troubled by the “peculiar nature of Empire and the uses to which the State is putting Empire’s money.” While asset transfer was key in New York, most other contested Blue Cross conversions haven’t questioned asset transfers but examined solely whether the deals are good for consumers, said Alwyn Cassil, spokeswoman for the Center for Studying Health System Change, an issue-neutral, nonpartisan research organization in Washington. Unlike the approval of the New York deal, conversion proposals in other states have been rejected, said Charles Bell, programs director of Consumers Union. Proposals rejected Since 2002, proposals in Kansas, Maryland, Washington state and Alaska were rejected by state regulators. Regulators said that the changes would push up premiums or that the deals were too generous to the insurance plan’s top executives, among other things. When the door opened to for-profit status, many Blue Cross companies were struggling and regulators felt pressure to approve conversions, said Laurie Sobel, senior staff attorney at Consumers Union and director of its Consumers Health Asset Project, which monitors Blue Cross conversions. Since then, the Blues have bounced back, she said, and regulators have been giving conversion proposals more scrutiny. The trend of Blue Cross conversions has not played out, however. Nonprofit insurers wanting to switch “are likely to keep trying to figure out how to do this,” said Cassil of the Washington group tracking Blue Cross conversions.

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