State rejects Premera Blue Cross' for-profit plan

By Kyung M. Song
Seattle Times staff reporter

Insurance Commissioner Mike Kreidler issued ruling.

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In his 58-page ruling, Kreidler resoundingly rejected Premera's application on grounds that it could expose policyholders to excessive premium increases, particularly in Premera's stronghold in Eastern Washington.

Kreidler also concluded that Premera would transfer less than its full fair value to new charitable foundations after dissolving as a nonprofit, as required by law. And he dismissed Premera executives' assurances that they intended to remain in Mountlake Terrace, saying a for-profit Premera stood a high likelihood of becoming an acquisition target.

The ruling means that Premera, the state's largest health insurer, will remain nonprofit — at least for now. And it preserves Washington as a bastion of nonprofit insurers, with Premera, Regence BlueShield and Group Health Cooperative controlling 75 percent of commercial health-insurance enrollees.

What's next? Premera has 10 days to ask Insurance Commissioner Mike Kreidler to reconsider; Kreidler says his ruling is final. Premera also has 30 days to appeal the ruling to Thurston County Superior Court. The company is debating whether to do so.

Kreidler said his ruling is final. Premera has 30 days to file an appeal with Thurston County Superior Court; the insurer is debating whether to do so.

Premera is awaiting a ruling from the state insurance director in Alaska on a request to change its status. The deadline for that decision is July 25. The Alaska insurance director's staff members have recommended rejection of Premera's request.

Immediately after Kreidler's news conference at a Seattle hotel, Yori Milo, Premera's chief legal officer, said the decision appears inconsistent with state law and "fails to take into account the wealth of evidence that shows this conversion should be approved."

Foes of the conversion — doctors, hospitals, consumers and advocacy groups who have campaigned vigorously against Premera's plan — hailed Kreidler's decision as fair and in the public good.

The rocky pursuit of for-profit status Premera's attempt to convert to an investor-owned company spanned two years and cost policyholders $35 million. September 2002: Premera formally files conversion application. October 2003: Deputy Washington Insurance Commissioner Jim Odiorne privately warns Premera that he can't endorse the company's conversion. February 2004: Premera files revised conversion application addressing some of the concerns raised in the state consultants' reports. March 2004: State experts again conclude that Premera's plan should not be approved outright. May 2004: Staff of the Washington Insurance Commissioner's Office recommends rejecting Premera's conversion plan. The opinion is not binding on the final ruling. Yesterday: Insurance Commissioner Mike Kreidler rejects the conversion. Source: Seattle Times reporting

They urged Premera to abandon the conversion, on which the company so far has spent $35 million. About $20 million of that reimbursed the state for outside consultants and other expenses, while the rest was incurred by the insurer. That amounts to 65 percent of Premera's net income last year.

"It's subscribers' money. They ought to quit spending it," said Cassie Sauer, spokeswoman for the Washington State Hospital Association, which filed a lawsuit in 2003 in an attempt to derail the conversion.

Kreidler's decision continues a recent national trend against allowing Blue Cross, BlueShield plans to switch to for-profit status.

After a spate of conversion to investor-owned companies during the 1990s, state insurance regulators tightened their scrutiny. Since 2002, Kansas and Maryland have rejected proposed sales of plans by Blue Cross, BlueShield health plans to seek for-profit insurers. That prompted plans in North Carolina and New Jersey to abandon their own conversion attempts.

The number of independent Blue Cross, BlueShield plans has shrunk from more than 125 in the early 1980s to 41 today. Of those, 37 are nonprofit, three are for-profit, stock-traded companies and one is a for-profit privately owned company.

Two of the for-profit Blue Cross, BlueShield health plans, WellPoint Health Networks of California and Anthem of Indiana, operate in 13 states between them. WellPoint and Anthem are proposing to merge.

Kreidler, who is running for a second term, said his goal was to make a careful decision that would withstand an appeal. But his ruling appeared all but inevitable.

Expert consultants hired by the state twice advised Kreidler to deny the conversion, and his staff members in May recommended rejecting the plan.

Kreidler noted that his office heard "overwhelming" opposition from the public as well. The state received nearly 5,400 signed postcards distributed by consumer groups opposed to the conversion.

Reasons for rejection Insurance Commissioner Mike Kreidler cited several reasons for denying Premera's bid to become for-profit: • Converting to an investor-owned company could lead to excessive premium increases. • Premera's plan won't transfer the fair-market value of the company to new nonprofit foundations, as required by law. • Compensation for Premera's top executives is higher than the company's relative financial performance and could go higher once Premera became a stock-traded company. • Premera is financially sound and can remain so as a nonprofit. • A for-profit Premera would likely become an acquisition target.

The ruling erases the prospect that Premera would transfer its initial stock, worth several hundred million dollars, to endow two new health-care foundations. The stock was meant to repay state taxpayers for the loss of Premera's original nonprofit mission.

But conversion foes argued that the price of allowing Premera to become an investor-owned company outweighed the potential charitable windfall.

Premera said it needed to convert to make it easier to raise money to grow membership, beef up its reserves and remain competitive. Experts for Premera testified at hearings that the conversion would have no effect on the rate of premium increases or reimbursement to health-care providers.

Kreidler rejected Premera's basic argument that it needs to raise money by issuing stock. He said Premera has been spending robustly, including $125 million to roll out its Dimensions insurance plan. At the same time, Premera had not spelled out how it intended to spend the money it would have raised on Wall Street, he said.

Kreidler also dismissed Premera's contention that a conversion was needed to shore up its reserves, noting that Premera's financial cushion would have been greater had it not been for the millions spent on seeking for-profit status.

Kyung Song: 26-464-2423 or ksong@seattletimes.com

Copyright © 2004 The Seattle Times Company

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