Nonprofit Health Care and Insurance: Protecting the Public Interest

This Alliance report is a reprint of an article in Inquiry, presenting the proceedings of a June 20, 2006 public forum, “The Role of Nonprofit Health Insurance in New Jersey: Protecting the Public Interest in an Era of Health Restructuring,” held in Trenton, N.J., on June 20, 2006. Co-sponsored by Consumers Union and the New Jersey Appleseed Public Interest Law Center, the conference emphasized nonprofit health insurance and the state of New Jersey. However, the various presentations provided, in many instances, a much broader context—the role and performance of nonprofit health care and the nonprofit sector across the United States, and ensuring their public accountability. Panelists at the forum were: Howard Berman, chairman of the board of the Alliance; William J. Marino, president and CEO of Horizon Blue Cross Blue Shield in New Jersey; Mark Schlesinger, professor in the Division of Health Policy and Administration at Yale University School of Public Health; and Deborah J. Chollet, a senior fellow at Mathematica Policy Research, Inc., in Washington, D.C.

Dispelling the Myth. Why Conversions of Blues Plans to For-profit Don’t Make Economic Sense

This 2004 report by Carl J. Schramm, PhD, under commission by the Alliance for Advancing Nonprofit Health Care, found based on 1997-2002 data that: (1) nonprofit Blues plans were financially healthy and could be expected to continue to be so; and (2) many of the intended or supposed efficiencies associated with conversions are hard to achieve and no economies of scale have been observed in integration of information-processing systems.

The Saga of a Failed Conversion to For-Profit: The CareFirst BCBS Story, Part 1

This is a reprint of an article by Bruce McPherson in the journal Inquiry presenting in details the facts surrounding CareFirst Blue Cross Blue Shield’s failed attempt to covert to for-profit status and be acquired by the for-profit company, Wellpoint Health Networks, Inc. It chronicles events and describes the political environment leading up to the Maryland insurance commissioner’s review of the application, the review process and roles played by various stakeholders and the media, the commissioner’s decision and rationale, and the aftermath of actions and reactions by various parties, including state legislation to reform CareFirst.

Lessons Learned from a Failed Conversion to For-Profit: The CareFirst BCBS Story, Part 2

This is a reprint of an article by Bruce McPherson in the journal Inquiry presenting lessons to be learned for other states and all types of nonprofit health care organizations from the failure of CareFirst Blue Cross Blue Shield to covert to for-profit status and be acquired by the for-profit company, Wellpoint Health Networks, Inc. The lessons presented relate only in part to conversion. The author contends that more broadly they concern any kind of strategic decision-making by boards of directors and executives that substantially affect the public interest.

Nonprofit Health Insurers: The Financial Story Wall Street Doesn’t Tell

This white paper, written by Susan R. Barrish and commissioned by the Alliance for Advancing Nonprofit Health Care, provides evidence that nonprofit health plans are financially healthy overall. Contrary to the argument made by Wall Street investment firms that an infusion of equity capital is critical to insurers’ survival, Ms. Barrish concludes that nonprofits have been more successful than for-profits in “implementing a capital-building and retention strategy—without access to the equity capital market, when you compare NAIC’s risk-based capital formula for managed care organizations.”

Premera Blue Cross's Proposed Conversion to For-Profit Status: Key Issues and Findings of Expert Consultants in the Review Process

 This report by the Alliance for Advancing Nonprofit Health Care presents a summary of the findings and conclusions of the major consultant reports commissioned in the course of the Washington State Insurance Department’s review of Premera Blue Cross’ proposed conversion to for-profit status. The summary is of value not only because the expert consultants undoubtedly had a major bearing on if not actually determined the commissioner’s decision, but also because their studies provide a fascinating and informative illustration of the range and complexity of the major issues—philosophical, strategic and technical—that merit attention in analyzing and reaching decisions on proposed conversions.

Also available under Advocacy on the home page of the Alliance’s website is the amicus curiae brief that the Alliance filed in 2005 in support of the commissioner’s decision, which was challenged in court by Premera Blue Cross.

Conversion Foundations

Community Catalyst has available on its website, www.communitycatalyst.org,  several publications dated January 2005 related to conversation foundations: “Conversion Foundations: Defining Mission and Structure”, “Some Guidelines for Managing Charitable Assets from Conversions’, ‘Conversion Foundations: Standards for Governing Boards”, “federal tax Designation for Foundations Created from Conversions”, and “Conversion Foundations: Ensuring Community Participation”.

Grantmakers in Health, founded in 1982 and primarily funded by private health care-related foundations, many of which were established as a result of conversions, provides survey information about foundations, individually and collectively, and provides educational programs, newsletters and other publications to foundations to assist them in their governance and operations. Its website is www.gih.org.

The For-Profit Conversion of Nonprofit Hospitals in the U.S. Health Care System: Eight Case Studies

This 30-page report, published in May 2001, presents findings of a retroactive study by researchers Sara Collins, Brad Gray and Jack Hadley on the conversion of eight hospitals in the states of Florida, Illinois and California in 1990. Overall, the findings of the study, supported by the Commonwealth Fund, challenged the conventional wisdom about the ability of for-profit purchasers to turn around failing nonprofit hospitals in competitive markets.

The study found that in most of the cases, particularly those in urban and suburban locales where the purchasers were multi-hospital for-profit systems, the purchasers did not have long range strategies. They tended to make minimal investments in the aging physical plants, relied on short-term fixes such as changes in billing practices, experienced high rates of administrator turnover, and underwent subsequent sales or mergers. The study also found that most of the hospitals in the sample did not experience a decline in their community benefit activities, not having engaged in them prior to conversion. There was evidence, however, of decline in teaching, research and care to the uninsured in two cases. This document is available on the Commonwealth Fund’s website, www.cmwf.org (publication #455).

Fiscal Options for America’s Best Hospitals

This 8-page article by Thomas P. Weiland and Glenn M. Pearl, appearing in the June 2001 issue of Managed Care Interface, published by Medicom International, reports on a study contrasting the fiscal health of fifteen of the best teaching hospitals with that of the largest investor-owned chains, HMOs and physician practice management companies. While finding that about half of the former were experiencing some fiscal distress, the authors found even more serious weaknesses in the latter, in both operating margins and debt-equity ratios. The authors contend that, “aside from raising possible ethical, quality and cost issues, this financial analysis suggests that conversion by America’s top teaching hospitals from nonprofit to for-profit might not guarantee an improvement in their long-term fiscal outlook.” The article is available on Medicom’s website, www.medicomint.com

The Curious Conversion of Empire Blue Cross

The July/August 2003 issue of the Health Affairs Journal (Project Hope) includes an 18-page article by James C. Robinson, a professor of health economics at the University of California at Berkley, chronicling the seven-year political and legislative battle that ultimately culminated in the conversion of Empire Blue Cross to a publicly traded company. The author notes that “the philosophical question of whether to convert should have been addressed prior to the posing of the political question of who should receive the organization’s assets subsequent to conversion. As a practical matter, however, the changing responses to the second question exerted a decisive influence over answers to the first. Each of the stakeholders began with a philosophical opposition to for-profit insurance and then switched in favor of conversion in anticipation of obtaining control of the assets”. This article is available on the Health Affairs website, www.healthaffairs.org.

The Common Law Power of the Legislature: Insurer Conversions and Charitable Funds

This 2005 article by Horwitz and Fremont-Smith in the Volume 83, Number 2 issue of the Milbank Quarterly draws on the history of common law in the U.S. to suggest that the types of actions taken by the legislature and attorney general in New York State over the Empire Blue Cross conversion not only undermined the nonprofit form but also raised constitutional questions. This article is available for purchase at www.milbank.org/quarterly.html.

Sale of Health Midwest

The website of the Office of the Attorney General of Missouri, http://www.ago.mo.gov  contains a July 23, 2003 news release on Attorney General Jay Nixon’s final settlement agreement with Health Midwest, a large multi-hospital system, on its sale to HCA Inc. and on the creation of a new independent foundation to serve the greater Kansas City area with more than $425 million in assets. (A Kansas foundation was also formed in a separate agreement between Health Midwest and the state of Kansas, with the foundation receiving 20 percent of the assets from the conversion.) The website also has links to the actual final settlement document and to testimony at public hearings by Health Midwest (claiming capital shortfalls) and others.

Out-of-State Transfer of Assets by Banner Health from Sales of Some of its Providers

In 2002 Banner Health, a nonprofit system with headquarters in Phoenix and provider holdings in eight states, sold a number of its facilities, both hospitals and nursing homes, which were located in North Dakota, South Dakota and New Mexico. In these cases, the sales were to other nonprofit healthcare organizations, rather than to for-profit companies. The attorneys general in these three states each sued Banner to prohibit the sales proceeds from being diverted to Banner’s headquarters, arguing that long-standing tax exemptions and private philanthropic donations created an implied trust, and that the sales proceeds are therefore subject to the law of charitable trust and must not leave the areas served. Banner counter-sued in U.S. District Court each case, claiming among other things that the state laws do not grant state control over the sales, that the facilities were sold to other nonprofits better prepared financially to meet future needs and that Banner had itself invested, time, effort and millions of dollars in the maintenance and expansion of facilities.

Law suits in New Mexico were dropped, with Banner agreeing to provide $4 million for local charities and $4.5 million to pay off debt. In North Dakota, in August 2003 a judge within the state dismissed the state attorney general’s suit, ruling that he had failed to prove that Banner had an implied agreement with the state and the communities served. See the article at www.bizjournals.com  (/phoenix/stories/2003/08/11/daily49.html.) In December 2003, in the midst of an appeal to the state supreme court, the state attorney general and Banner reached an out-of-court settlement wherein Banner will pay $1 million in proceeds from the sales of facilities in North Dakota into a charitable trust for the benefit of the affected communities. One of the reasons stated for the settlement was the novel and untested legal theories involved in the suit.  In South Dakota, the state supreme court ruled in May 2003 that the assets of a nonprofit healthcare corporation, and proceeds from any sale, are subject to the law of charitable trust, and that an out-of-state corporation must leave charitable assets with the local community. The court also held that Banner’s corporate officers may have breached their fiduciary duty to the facilities sold. (See the article at www.consumersunion.org/conv/pub/statesdstates/000563.html.)

The Impact of Blue Cross Conversions on Health Spending and the Uninsured

This article in Health Affairs (March/April 2005 issue), by Christopher Conover, Mark Hall and Jan Osterman, reports on the results of a multivariant analysis they performed using statewide data on health spending and uninsured rates to investigate the impacts of Blues conversions on health care costs and coverage. The authors found mixed results but concluded that overall the impact of Blues conversion may be to reduce hospital spending and total spending. The articles are available for purchase on Health Affairs’ website, www.healthaffairs.org. (In a Letter to the Health Affairs Editor (July/August 2005 issue) on this article, Bruce McPherson, executive director of the Alliance for Advancing Nonprofit Health Care, responded that the entire study was fatally flawed because of the lack of critical data, only some of which was acknowledged by the authors. This Letter is also available for purchase on Health Affairs’ website.)

ORGANIZATIONS (in addition to the Alliance) 

Community Health Corporation

This organization, established in 1996 by VHA Southwest, a cooperative of nonprofit hospitals in Texas and New Mexico and supported by working capital from a number of VHA Southwest’s members and from VHA, Inc., seeks to “preserve the not-for-profit status of community-based healthcare organizations…and to help them improve operations and care through partnership and shared vision.” CHC assists community hospitals with education and consultative services, managerial support, leasing or purchasing of hospitals and participation in joint ventures. Since 1997, CHC has provided consultative assistance to more than 36 hospitals, primarily focused on privatization of publicly governed hospitals. It has also conducted community campaigns to prevent conversions to for-profit and has coordinated the acquisition of for-profit hospitals by nonprofit organizations. CHC currently has three leased hospitals in Texas and New Mexico and has acquired two hospitals in Texas. Its education and consulting services are offered throughout the U.S.

More information about CHC is available on its website, www.communityhealthcorp.org.