A decade ago, the Blue Cross and Blue Shield Association broke with a nonprofit tradition dating from the Depression and allowed member Blues plans to convert to for-profit businesses.
That touched off a cascade. By the time Maryland-based CareFirst BlueCross BlueShield announced its intention to go for-profit in 2001, more than a dozen Blues had converted on their own or been snapped up by growing national companies.
Suddenly, in place of a cascade, there isn't even a trickle.
Regulators turned thumbs-down on conversions and sales in Kansas and Maryland. Then, in quick succession, Blues in North Carolina and New Jersey backed away from their conversion proposals.
Since the CareFirst plan was rejected by Maryland regulators more than a year ago, not a single Blues plan has proposed going for-profit.
Analysts, industry sources and advocacy groups disagree about whether conversions have slowed permanently or are simply in a lull between waves.
"I just don't see [conversions] happening frequently, particularly if organizations like ours are doing our jobs well to protect nonprofit health care and to enhance its performance," said Bruce McPherson, executive director of the Alliance for Advancing Nonprofit Healthcare. His group formed about a year and a half ago to represent and promote nonprofit insurers, hospitals and nursing homes.
Thomas A. Carroll, a health care analyst with Legg Mason Wood Walker in Baltimore, disagrees: "I can't imagine we're not going to see the Blues conversions pick up again."
Insurers need access to capital, he said, and nonprofit plans will convert because "it gets you in the game. In the future, you can tap the equity markets," selling stock to raise money.
What's clear, however, is that future conversions won't be like the early ones in the mid-1990s, when financially troubled plans often won quick approvals from state regulators.
First, the remaining nonprofit plans are healthier, both because the weaker plans were quicker to convert and because all health insurers have recently been booking fatter profits.
CareFirst, for example, posted an operating surplus of $171 million last year - double what it earned the year before its attempted conversion.
"Most of the Blue nonprofits have been quite successful in implementing a capital-building and retention strategy - without access to the equity capital market - while adding 3.8 million new customers ... and making significant infrastructure and product investments," Susan R. Barrish, a former Blue Cross Association official, wrote in a recent report for McPherson's nonprofit alliance.
Conversions have been pushed, Barrish wrote, by "Wall Street investment firms" that stand to pocket fees for conversions and acquisitions.
Second, the Kansas and Maryland battles saw the development of what amounts to a scrutiny industry for Blues conversions. Take the one current conversion case, in the state of Washington.
Steven B. Larsen, who blocked the CareFirst deal when he was Maryland's insurance commissioner, did a report for the hospital association there, pointing out problems with the proposed conversion. Calvin Pierson, president of the Maryland Hospital Association, gave a deposition in support of his counterparts.
And two consultants who worked for Larsen in Maryland - Patrick Cantillo, a Texas lawyer, and the Blackstone Group, a New York investment banking firm - have assumed similar roles for Washington's insurance commissioner.
"You've got an army of experts, folks out for hire like Mr. Larsen," said Eric Veiel, a health analyst in the Baltimore office of Wachovia Securities. (Larsen is now in private practice.)
"Consumers, regulators and providers have gotten a lot smarter," said Dawn Touzin, an attorney for Community Catalyst. Her Boston-based group, in a joint project with Consumers Union, works with local consumer organizations on conversion issues.
The result has been more contentious battles over conversion, attracting more attention - and ending with more regulators turning thumbs-down.
Early Blue Cross and Blue Shield plans offered coverage at one low rate to pretty much anyone who wanted to buy it, and they continued that way for decades. They were generally known as "insurers of last resort," willing to write policies for just about anyone, because they could spread the risk over a large membership pool.
In the 1980s, however, for-profit insurers began selling coverage at lower prices to young and healthy members. In the 1990s, HMOs, many of them for-profit, began offering cut-rate policies to buyers willing to accept more restrictions on care.
Blues plans were slow to adapt to the competition. Membership in the system nationally plummeted from 87.8 million in 1980 to 65.2 million in 1994.
That year, the national Blue Cross and Blue Shield Association, which sets the rules for plans using the cross and shield trademarks, voted to allow for-profit ownership. And the conversions have been successful, in the sense that the for-profit Blues have seen growth in membership, profit margin and share price.
The nonprofit Blues prospered as well over the period, benefiting from consumer backlash against tight-fisted HMOs, regaining the membership lost in the 1980s and 1990s and improving their balance sheets.
Apart from for-profit conversions, Blues began reshaping themselves in other ways to cope with the changing marketplace. There were many nonprofit mergers, such as the ones that joined Blue Cross to Blue Shield in Maryland and the ones in which the Maryland Blues joined with the District of Columbia plan (and later Delaware) to create CareFirst.
In the decade before CareFirst announced its plan in 2001 to convert to for-profit and sell itself, the Blue Cross Association reported 36 mergers, acquisitions, conversions and other transactions.
CareFirst sought permission to convert to for-profit operation and sell the company for $1.3 billion to WellPoint Health Networks Inc., a converted California Blues plan that has gobbled up already converted Blues in Missouri, Georgia and Wisconsin.
But, as the conversions pushed ahead, consumers and providers began to push back, and regulators joined in.
At first, conversion fights focused not on whether plans should switch to for-profit but on the terms of the deal.
Since nonprofits are considered public assets, advocates worked to make sure the full value of the asset went to a foundation or other public purpose. After a few battles, a pattern was set, with converting plans generally giving all the stock in the new company to a foundation.
Then, however, the focus shifted to whether conversions were in the public interest at all.
The issues varied from state to state. The insurance commissioner in Kansas based her rejection of a conversion-and-sale deal largely on a study by consultants that predicted premiums would rise more quickly.
Larsen's ruling focused on lavish benefits for CareFirst executives built into the deal - including a $9 million bonus and $30 million in deferred compensation, retirement benefits, severance pay and tax benefits for William L. Jews, the chief executive.
Larsen, rejecting a deal that he said had been tainted by the bonus negotiations, called them "essentially a ransom a bidder would have to pay for the right to purchase the company."
In North Carolina, regulators raised questions about the type of stock the foundation would receive, and consultants predicted that a conversion would lead to more uninsured people. The plan there withdrew its application.
The only conversion still pending is by Premera Blue Cross, operating in Washington state and Alaska. A last round of public hearings will be conducted over the next few weeks, and a decision is expected this summer.
"We could see a tipping point if Washington can get it done," with other Blues restarting their march to conversion, said Veiel, the Wachovia analyst.
But if Washington state blocks the deal in the wake of similar rulings in Kansas and Maryland, it could be seen as sort of a third strike - "You could actually argue it's more than three," given the Blues in North Carolina and New Jersey abandoning conversion efforts, Veiel said.
Others see the Washington ruling as less pivotal.
While there has been a pause lately, "If there were all these plans interested before, has the interest gone away?" asked Joy Grossman, associate director of the Center for Studying Health System Change, a Washington think tank. She is the author of a recent study predicting that Blues conversions will resume.
And the acquisition of WellPoint (the company that tried to buy CareFirst) by Anthem Inc., another Blues consolidator, will create new pressure for conversions and acquisitions by the merged company, predicted Touzin, of Community Catalyst.
"They're going to be hungry. They're going to have to be," she said. "Their investors have an expectation for growth."
Scott Forslund, communications director for Premera, said his company's board had decided that it needed to be a for-profit, given its financial reserves (only slightly more than Blues minimum guidelines), the competition in its market and its desire to expand through acquiring or developing other businesses in the region.
On the other hand, he said, conversion isn't necessarily for everyone. "Where a single Blue plan may have large market share, little competition and their capital is ample, there may not be a need to convert," Forslund said.
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