By Todd Cohen
RALEIGH, N.C. — Plans by Blue Cross and Blue Shield of North Carolina to become a for-profit company – and create a big new health foundation serving the state — have hit some bumps over the role the foundation would play in the insurer’s big business decisions.
With the state Department of Insurance preparing to hold three public hearings in October on the Blue Cross plan, at least four key issues divide the insurer from state regulators that must decide whether to approve the conversion – the Insurance Department and the Department of Justice – and from consumer advocates.
The Insurance Department and an outspoken consumer advocate both say the new Health Foundation for North Carolina, which initially would own all the insurer’s stock, should get a greater voice in Blue Cross’ fundamental business transactions that could affect the value of its stock.
Those transactions include approval of stock-option plans, removal of corporate directors, and amendment of articles of incorporation and corporate bylaws.
The disputed issues — the focus of ongoing talks between Blue Cross and state regulators — were not resolved in a new conversion plan Blue Cross submitted July 26 to the Insurance Department, say the top lawyers for Blue Cross and the Justice Department.
“These three issues are addressable,” says J.B. Kelly, general counsel for the Justice Department. “We are addressing them and continue to address them. They have been part of the negotiations and everyone agrees they continue to be honed.”
He says previous talks also did not fully address a fourth issue: Blue Cross’ proposal to bar the foundation from communicating with potential buyers of the insurer’s stock until the foundation owns less than 20 percent of the stock.
The negotiations also did not address a related Blue Cross proposal to let the insurer terminate the foundation’s right to vote its stock on transactions related to talks it held with potential buyers.
Brad Wilson, Blue Cross’ senior vice president and general counsel, says the insurer knew when it submitted its newest plan – revising one it submitted Jan. 2 – that several issues still had not been resolved.
“We’re ready, willing and able to consider any other reasonable approach to try to approach these issues,” he says.
But Wilson and consumer advocate Martin Eakes both say the issue of communication with potential stock buyers could be a “deal-breaker” in the proposed conversion and creation of the foundation.
“Continued shopping of the company would be a huge distraction to day-to-day operations of the company, would put the company in play and would in our judgment have the potential to negatively impact the value” of the stock, Wilson says.
Eakes, CEO of Durham-based Self-Help, says the foundation should have no role in the insurer’s day-to-day operations but “must have corporate oversight over these fundamental corporate transactions.”
The foundation, for example, should be able to communicate with potential buyers of Blue Cross stock to “gain information that would help it know the value of the company to ensure that an acquisition proposal submitted by the company is a fair one,” says Eakes, a spokesman for the Coalition for the Public Trust, which helped shape the 1998 state law that governs the conversion process.
But Tom Lambeth, retired executive director of the Z. Smith Reynolds Foundation in Winston-Salem and a finalist for a seat on the new foundation’s 11-member board who has worked with the coalition, says he is “puzzled” by its response to Blue Cross’ new plan.
“This sort of monitoring, regulating, second-guessing the management of Blue Cross is not a role that I had foreseen for the charitable enterprise, the foundation,” he says. “I don’t know that serving the fiduciary role of the foundation requires the degree of participation in the management of Blue Cross that it seems is being suggested by the coalition.”
The divided opinion on all four issues reflects tensions stemming from efforts to fashion a conversion plan that would give the new foundation unprecedented clout as a stockholder but also curb the actual power it could exercise in big corporate decisions by Blue Cross.
The key challenge in the negotiations, participants say, has been to create a plan that both Blue Cross and advocates for the foundation believe will protect the value of the stock in the face of moves that either party might make.
That’s a big issue, parties to the talks say, because the plan would put the foundation in the unusual position of initially owning all the insurer’s stock and having some say in its big decisions while also being required to reduce its holdings over 10 years.
So the foundation, forced by the conversion plan to sell big chunks of its shares at intervals of one, three and five years, might not benefit in the short-term from moves that Blue Cross might want to make because it believed they could benefit the company over the longer term.
And because a buyer typically will pay more per share if it can buy all of a company’s stock, the foundation’s ability to reap that per-share premium could decline over time because it would be forced to reduce its shares.
Based on market conditions at the time it is sold, the foundation’s stock initially is expected to be worth at least $1 billion – making it one of North Carolina’s largest philanthropies.
Under the Blue Cross plan, 95 percent of the foundation’s shares initially would be placed in a voting trust, and the foundation could direct the voting of those shares on “fundamental corporate transactions,” such as sale or merger of the company or any transaction involving at least 25 percent of the company’s assets or stock.
Wilson says no foundation created through Blue Cross conversions in any other state initially has owned all of the new company’s stock or has had as much clout in the company’s “most important business matters.”
But Blue Cross’ new plan also would require that the new foundation cut its shares in Blue Cross stock to less than 5 percent over 10 years at the latest after reducing its holdings to less than 80 percent after one year, less than 50 percent after three years and less than 20 percent after five years.
The Blue Cross plan also would let the foundation, based on mutual agreement with the Blue Cross board, select a Blue Cross board member, and would give the foundation a say in some basic corporate decisions.
But the plan would prohibit the foundation from communicating with potential buyers of the insurer’s stock until it owned less than one-fifth of the shares, or from removing directors involved with serious wrongdoing.
And it would let Blue Cross reject the foundation’s vote of its shares on stock-option plans or changes in the company’s articles or bylaws proposed by Blue Cross.
“There must be, for fundamental changes in the company, the ability for the foundation to protect the value of the shares held in public tru
st,” says Eakes, who recently resigned as an unpaid consultant to the Insurance Department on the conversion so he could voice his criticism without the appearance of a conflict of interest.
In the face of highly publicized corporate scandals involving financial wrongdoing, Eakes says, the foundation needs a voice in corporate decisions involving moves that could have a big impact on the value of its stock.
Wilson, the insurer’s general counsel, says that while some advocates want Blue Cross to “give away complete control,” it will not.
“It is difficult to comprehend that some individuals’ personal desires to have the new foundation essentially run the new for-profit company are more important than the creation of a well-endowed foundation that will have the ability to address North Carolina’s health needs for decades to come,” he says.
He says the Blue Cross and Blue Shield Association – which owns the rights to the use of the “Blue Cross” and “Blue Shield” names and marks — will not approve any conversion that does not keep the foundation from communicating with potential stock buyers.
“At the end of the day, the sale terms and conditions have to go to the foundation for approval,” Wilson says. “The foundation has an absolute right to vote its shares of stock.”
Attorney General Roy Cooper, who is charged by state law with picking the foundation board from finalists screened by several groups, has completed his interviews of 22 finalists and expects to name the 11-member board within two weeks, said Justice Department spokesman John Bason.