Blue Cross Blue Shield Conversions and Mergers Likely to Continue

Study Finds Little Impact of Blues' For-Profit Conversions and Mergers on Consumers

News Release
Jan. 29, 2004

FURTHER INFORMATION, CONTACT:
Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.— Recent regulatory setbacks have slowed the pace of for-profit conversions and mergers among Blue Cross and Blue Shield health plans, but the trend is likely to resume among the Blues as plans adapt conversion strategies, according to a study released today by the Center for Studying Health System Change (HSC).

Historically, the Blues, which insure nearly one in three Americans, operated as local, nonprofit organizations or mutual companies owned by policyholders, but a 1994 decision to allow for-profit organizations to hold Blue Cross Blue Shield licenses spurred a decade-long trend of for-profit conversions and mergers among the plans.

"There’s definitely a lull in the for-profit conversion trend among the Blues as state regulators increase scrutiny of the proposed deals," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

While only four of the 41 independent Blue plans are for-profit companies, the for-profit Blue plans operate in 14 states and Puerto Rico and cover more than a quarter of Blue enrollees. Two consolidator Blue plans—Anthem Inc. and WellPoint Health Networks Inc.—have played key roles in the conversion and merger trend. The two announced a planned merger in October 2003 that would make the new company, WellPoint Inc., the largest U.S. health insurer.

"Anthem and WellPoint believe the underlying factors driving conversions and mergers will continue and that the newly combined company will be well positioned to resume acquisitions," said Joy M. Grossman, Ph.D., HSC associate director and co-author of the study with HSC Research Analyst Bradley C. Strunk.

Insurance commissioners in Kansas and Maryland have rejected proposed Blue plan conversions and mergers in recent years, and two Blue plans—Blue Cross Blue Shield of North Carolina and Horizon Blue Cross Blue Shield of New Jersey—abandoned plans to convert to for-profit status in 2003.

"Conversion and merger activity is likely to pick up again as plans identify ways to satisfy regulators’ concerns," Grossman said. "To date, there’s little available evidence of either positive or negative consequences for consumers in states where conversions and mergers have occurred."

In the past, many Blue plans were required to provide various types of public benefits, such as serving as insurer of last resort. In return, Blue plans, for example, received tax breaks. However, over time, these special requirements and benefits have diminished, and most nonprofit Blue plans now play a public benefit role in informal ways rather than through mandates.

The study’s findings are detailed in a new HSC Issue Brief—For-Profit Conversion and Merger Trends Among Blue Cross Blue Shield Health Plans—available here. The study is based on a review of conversion and merger proceedings across the country and four rounds of HSC site visits to 12 nationally representative communities between 1996-97 and 2002-03. The 12 communities are Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

Other key study findings include:

• Clear differences of opinions exist among Blue plan executives about the pros and cons of conversions and mergers.
• The most commonly cited benefits of conversions and mergers include greater access to capital through public markets, which can be used to improve operations and shore up reserves of money-losing plans; spreading fixed costs over a larger enrollment; and drawing on the management expertise of parent companies such as WellPoint and Anthem.
• Executives at most of the nine nonprofit or mutual Blue plans in HSC’s 12 site-visit communities were strongly committed to the traditional Blues’ mission of serving local communities and believed they can compete effectively without converting and merging.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.