By Todd Cohen
Blue Cross and Blue Shield of North Carolina informally has given state regulators a new plan to become a for-profit business that it says will make a charitable foundation the conversion will create stronger than would a previous plan it submitted July 26.
Blue Cross says changes in the plan, the subject of public hearings set for October, should meet the approval of the Blue Cross and Blue Shield Association, which owns the names and trademarks the insurer says it needs.
Blue Cross expects to submit its new plan to state regulators the week of Sept. 23 if they signal they are likely to approve the changes. If not, Blue Cross says, it will consider whether to withdraw its plan and remain a nonprofit entity.
The association voted in August not to approve the previous plan because it would have given the new Health Foundation for North Carolina too big a role in Blue Cross’ big business decisions.
Under state law, the foundation initially will own stock equal to Blue Cross’ full fair market value, which could range from $1 billion to $3.5 billion, according to estimates.
The new plan also aims to overcome objections by the Department of Insurance and the Department of Justice, which are charged by state law with deciding whether to approve the conversion – and which say the previous plan did not give the foundation enough say in the insurer’s big business decisions or help it protect the value of its Blue Cross shares.
“These agreements give the foundation adequate protection of its interest in the company while satisfying requirements of state law and the Blue Cross and Blue Shield Association that the company and the foundation remain independent of one another,” Bob Greczyn, Blue Cross’ president and CEO, says in a written statement.
Blue Cross plans have converted to for-profit businesses in 10 other states “under agreements that look very similar to these,” Greczyn says. “There is no legitimate reason for North Carolinians – particularly our most vulnerable citizens – to miss out on the significant resources conversion could devote to the state’s health care needs.”
Blue Cross officials in North Carolina believe the association, which meets Sept. 19, will approve its plan, as well as that of Empire Blue Cross and Blue Shield in New York.
Many of the changes in the North Carolina plan are based on the Empire plan.
Changes in the plan, most of which Blue Cross announced in recent weeks, include:
* A “designated” director that Blue Cross and the foundation together will pick will serve on the insurer’s corporate board for six years or until the foundation owns less than 5 percent of Blue Cross’ stock.
Under its previous plan, the designated director would have served only until the foundation owned less than half the company’s stock.
* The designated director will be responsible for sharing information with the foundation and consulting with it on any proposed sale of the company as long as the foundation owns at least 20 percent of Blue Cross’ stock.
* The designated director can consult with the foundation if the company receives an purchase offer in writing that it plans to pursue, and before it signs a deal to be sold.
Under the previous plan, Blue Cross would have consulted with the foundation before considering a buyer’s proposal, and the designated director would have been able to share more information with the foundation than it would under the new plan if the company was present.
But the previous plan would have put more limits on when the discussions could take place and what they could involve.
* The foundation will be able to vote all its shares on any sale of the company approved by the corporate board – a provision that also was in the previous plan.
* On stock-option plans proposed by the company, a voting trust that initially will hold 95 percent of the foundation’s shares will vote the same portion of those shares as that voted by a majority of shareholders other than the foundation and Blue Cross directors and officers.
The previous plan would have let the foundation vote its shares on a stock plan but gave Blue Cross’ board the right to veto that vote.
*The foundation cannot solicit offers for Blue Cross or talk to potential buyers for 10 years or until the foundation owns less than 5 percent of the company’s stock.
The foundation also can vote its stock on a proposed sale even if it violates the prohibition against shopping the company or talking to prospective buyers.
Under the previous plan, the foundation would not have been permitted to solicit offers or talk to possible buyers until it owned less than 20 percent of Blue Cross’ shares. The foundation also would have lost its right to vote on a proposed sale if it violated those prohibitions.
* The foundation will not lose its right to vote on a proposed sale if talks with the designated director violate terms of the conversion agreement.
Under the previous plan, such violations would have barred a foundation vote.
* Blue Cross will adopt new rules on corporate governance – a move proposed by the Justice Department – and will require members of its board to meet tough “independence” guidelines adopted by the California Public Employees Retirement System and the New York Stock Exchange.