Philanthropy Journal – Blue fight turns on green

By Todd Cohen

A fight over money and power is clouding the intertwined fates of North Carolina’s biggest health insurer and what could become the state’s biggest charitable foundation.

The battle, pitting state regulators against Blue Cross and Blue Shield of North Carolina, has been pitched over the insurer’s plan to become a for-profit business and create a new health foundation that initially would get all the insurer’s stock.

At issue are potentially conflicting ideas about the voice the foundation should have in the new company, and the flexibility the company should have in making critical business decisions.

Regulators and Blue Cross – along with its trade association – need to move quickly to resolve those conflicts.

Their common goal should be to find common ground in which a strong for-profit insurer and a strong health foundation can take root together, nurture one another and best serve North Carolinians.

Blue Cross has grown into the state’s largest health insurer in part because of tax-exempt status it enjoys under North Carolina law.

Now, it wants to become a commercial enterprise so it can compete more effectively in a brutally competitive health-care industry.

To do that, Blue Cross is required by state law to return the favor to state taxpayers by placing all its stock – equal to the new company’s fair market value – in a new foundation that would have the job of addressing the health needs of North Carolinians.

State regulators, to comply with state law, want to be sure the new Health Foundation for North Carolina gets Blue Cross’ fair market value – estimated to total $2 billion to $3.5 billion.

The two regulators charged with deciding whether to approve the conversion – the Department of Insurance and the Department of Justice – also must balance the foundation’s need to reap the full value of the Blue Cross stock it gets with the insurer’s need to be a nimble business.

In addition, the Insurance Department must weigh the possible impact creation of the foundation would have on rates Blue Cross charges its North Carolina customers.

And consumer advocates want to be sure the foundation, as the owner initially of all Blue Cross’ stock, gets the greatest value for its stock and serves as the insurer’s corporate watchdog.

To ensure the successful launch of a for-profit Blue Cross and a new foundation, parties to talks on the conversion – along with consumer advocates — need to find a compromise rooted in the trust on which charities and businesses alike depend.

The main dispute in ongoing talks over a tangle of complex legal and financial issues stems from the fact that while the foundation initially will own all its stock, Blue Cross wants to curb the foundation’s shareholder role.

The insurer wants to be sure actions by the foundation do not hurt the value of the company’s stock or its ability to maneuver effectively in the marketplace.

Regulators and consumer advocates want the foundation to play a bigger role so it can protect the value of its stock and get the most value for it – either through the possible sale of Blue Cross or the sale of big chunks of stock the conversion plan would require the foundation to make at intervals over 10 years.

A solution seems to be in sight, and both the Justice Department and Blue Cross have signaled their willingness to compromise.

However, the Insurance Department and Blue Cross and Blue Shield Association – which must decide whether to let the for-profit insurer use its valuable “Blue Cross” and “Blue Shield” names and marks — have ratcheted up their rhetoric opposing Blue Cross’ conversion plan.

The Insurance Department, possibly worried that if it approves the conversion it could be held accountable for subsequent Blue Cross rate hikes, says the plan gives the foundation too little clout with Blue Cross.

And the trade group, possibly trying to boost the insurer’s negotiating position, says the plan gives the foundation too much clout.

The trade group also needs to stop posturing and concede – as lawyers for the Insurance Department point out — that its own rules would give the foundation a bigger role on the insurer’s board than even Blue Cross has proposed.

But the Justice Department and Blue Cross are on the right track in their willingness to bend and talk through their differences.

Now, regulators and Blue Cross each must give up some turf so they can stake out common ground.

The Justice Department, for example, says one compromise might be to limit the foundation’s rights to sell or keep its shares while letting it “protect its investment” during the period in which it is required to sell its stock in intervals.

While the department has not spelled out how such a compromise might work, a possible option for moving the talks forward would be to look for separate solutions to two separate issues — protecting the value of the foundation’s shares, and helping the foundation get the most value for those shares.

To help the foundation protect the value of its stock, Blue Cross could agree to ease restrictions it wants to impose on the foundation in voting its shares.

While Blue Cross has proposed giving the foundation a voice in critical corporate decisions — such as removing board members and selling stock – that could hurt the value of its shares, the insurer at the same time wants to impose restrictions that could seriously muzzle that voice.

On the second issue — helping the foundation get the most value for its stock — Blue Cross could agree to pay a cash “premium” to the foundation if curbs on its shareholder role limit the value it gets for its shares if and when the company is sold or the foundation sells stock as required by the conversion plan.

Blue Cross also could pay a premium in return for the foundation agreeing to extend the period of time in which the plan would bar it from communicating with potential buyers of the company.

In return, regulators could ease their demand that Blue Cross give the foundation watchdog powers beyond those it should be able to exercise as a major shareholder or needs to exercise to keep the value of its shares from shrinking.

Preserving and maximizing the stock’s value should be a concern both for the foundation, which will own the stock, and the Blue Cross board, which will have a fiduciary responsibility to its shareholders.

Ultimately, the foundation’s shares will be worth only as much as a buyer is willing to pay – and that will based on the buyer’s assessment of Blue Cross and its management.

Whatever the details of any conversion plan approved by state regulators, Blue Cross and the foundation will have to work hand in hand to best serve their respective constituents.

Because the foundation initially will own all the stock and could continue to be a major shareholder for 10 years, Blue Cross as a practical matter will need to keep the foundation fully informed about and engaged in its business strategy.

And because Blue
Cross’ competitiveness will help determine the value of its shares, the foundation will need to give Blue Cross room to move quickly and effectively in the marketplace.

Building that partnership into the conversion plan in a way that meets the needs of both Blue Cross and the foundation simply will make them stronger players and partners – and better able to serve North Carolinians.

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