Philanthropy Journal – Blue debate off course

By Todd Cohen

If North Carolinians don’t move quickly, we are going to blow a rare chance to get a firm grip on the health needs in our state, and to help shape how we address those needs.

Blue Cross gave us that chance when it asked state regulators to let it become a for-profit business.

But instead of a civic conversation that engages consumers, policymakers, health-care providers and others about how best to deliver and support health care, the debate has been overheated, the facts overstated and the implications overlooked.

Insurance Commissioner Jim Long must decide whether North Carolinians would enjoy better health-insurance rates, coverage, products and service under a nonprofit or for-profit Blue Cross.

And if he finds those options a relative wash, he can decide whether the balance should be tipped in favor of conversion because it would create a big new charitable foundation that initially would own all of Blue Cross’ stock.

Vowing not to raise rates or reduce coverage as a result of conversion, Blue Cross says for-profit status would free it from regulatory handcuffs, let it raise the capital it needs to develop competitive products and services and keep it from being swallowed by a larger insurer in a rapidly consolidating industry.

Consultants to Long studying the impact of a for-profit Blue Cross say conversions in other states generally have not hurt rates or coverage.

But while Blue Cross says its competitiveness, products and services will suffer unless it operates as a for-profit business, it has not explored in depth the long-term implications of remaining a nonprofit – a scenario that Long’s consultants also are not likely to examine.

For their part, consumer watchdogs and health-care experts say greed is driving the conversion, which they say will result in higher compensation for Blue Cross executives, loss of coverage in rural counties and prohibitively expensive premiums for thousands of North Carolinians.

But they, too, have failed to explore the long-term implications of Blue Cross remaining a nonprofit – other than voicing an almost mystical belief that nonprofit status ensures that health care will be affordable and accessible to those living on the margins of society.

The Insurance Department has further fanned the confusion by touting an undocumented estimate by its investment-banker consultant that a for-profit Blue Cross – the stock of which initially would be owned by the new foundation — could be worth $3.5 billion.

That estimate — reported widely by the news media, including the Philanthropy Journal – is important because some Blue Cross backers are pinning their support for conversion on the value of the foundation it would create.

According to experts, however, the initial value of the company – and thus of the foundation – could total far less than the estimate by the Insurance Department.

And now that the department has injected that huge estimate into the public debate, its general counsel, Peter Kolbe, has backpedaled, saying any estimate of the foundation’s value is “highly speculative.”

Experts say that a Blue Cross company converting to for-profit status can be valued by multiplying its projected earnings, or profit, by the ratio of the price of its stock to its earnings per share.

Price-to-earnings ratios for Blue Cross companies in other states and other health-care insurers range from 8 to 20, experts say, and net income for North Carolina’s Blue Cross totaled $85.6 million in 2001.

Assuming Blue Cross, as a publicly held firm not yet tested in the market, might fall in the lower range of P/E ratios for comparable companies, its initial value could total $856 million to $1.03 billion – based on earnings of $85.6 million times a P/E ratio of 10 to 12.

If earnings were to grow by 10 percent a year, the company could be worth $1.25 billion to $1.5 billion by its fifth year.

North Carolinians deserve and should demand better facts and more rigorous analysis than the dire forecasts of gloom, doom, sunny skies and corporate rape offered, respectively, by Blue Cross, consumer watchdogs, regulators’ consultants, academics and others.

Salvaging the opportunity to focus the conversion debate on how to address health needs in our state will require that all the parties, along with citizens, work to find, share and make sense of the facts – and hammer out a deal that makes the best sense for North Carolina.

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