In the series of health insurance company mergers and acquisitions around the nation purportedly driven by the Affordable Care Act, the latest chapter is unfolding in Montana. Tomorrow, Montanans will hear representatives of Blue Cross Blue Shield of Montana (BCBSMT) and Health Care Service Corporation (HCSC) make their pitch for the benefits of this merger and then lay out their concerns, pro and con, about the acquisition. Blue Cross Blue Shield of Montana is a nonprofit (though not a 501(c)(3) public charity) and it is Montana’s largest health insurer. With its 13 million members around the country (mostly in Illinois and Texas), the Health Care Service Corporation, based in Illinois, is the fourth-largest insurer in the United States.

When New Mexico welcomed HCSC’s acquisition of its BCBS, John Franchini, the state superintendent of insurance, noted that, with HCSC, “It’s a new corporate master, and it’s a very big corporate master.” Does Montana have enough wherewithal to bring a new corporate master to heel, or would an HCSC acquisition mean that the state would simply have to bet and hope that the out-of-state player will somehow yield better health outcomes for state residents? Montana State Auditor Monica Lindeen is arguing that Montana’s 270,000 BCBS customers should be allowed to approve or disapprove the HCSC acquisition. Is this an example of the advantages of scale, which some observers say are necessitated by the healthcare climate created by President Barack Obama’s Affordable Care Act? Or is this just another example of big players gobbling up littler players with unpredictable consequences and risks for consumers and taxpayers?

After a review of WellPoint’s proposed acquisition of Amerigroup last year, one market analyst issued a dire prediction about what he said will be a continuing wave of healthcare insurance mergers: “After the merger wave is done, there may very well only be a small number of large companies competing for healthcare insurance on a national scale. Imagine the day that ‘too big to fail’ pertains to your healthcare insurance provider rather than just your big bank.”

HCSC calls the acquisition of BCBSMT an “alliance” in their application to the state, but the text makes is clear that big HCSC is acquiring and eventually dissolving little BCBSMT. Mergers and acquisitions have been occurring in lots of fields, including the nonprofit sector. The cover story proposed by the acquiring entities is that scale is necessitated by the market, that the publicly traded managed care organizations such as WellPoint, Aetna, UnitedHealth, and others have been adding millions of members (in the years prior to the ACA, it should be pointed out) while the “non-investor owned” Blues have lost large chunks of members, particularly among the smaller Blues like Montana’s, which lost 12.4 percent of its membership between 2007 and 2011.

Nonprofit Quarterly is not prepared to judge the legitimacy of the business rationale proposed by BCBSMT and HCSC in their 218-page application to the state, but we are prepared to questions that nonprofits and communities in Montana—and nationwide—should ask to ensure that the interests of people in need and the preservation of not-for-profit assets are protected. Below, we posit several questions that we suggest nonprofit advocates should think about, whether they plan to take to the mic in Helena or simply monitor the situation to learn about these transactions in order to understand what is happening to the content of healthcare coverage across the country.

First and foremost, is this deal truly in the public interest of Montanans? As a single-state nonprofit health insurer, has the board of Blue Cross Blue Shield of Montana met its fiduciary responsibilities by demonstrating that it needs to become part of a much larger health insurance provider? Also, how will the proposed plan, if it is truly in the public interest of Montanans, protect and preserve the nonprofit assets of Blue Cross Blue Shield of Montana? If, as is typical, the assets get converted into the structure of a “health conversion foundation,” have the assets been valued fairly and accurately? Will they be used to further the healthcare objectives that led to the creation of Blue Cross Blue Shield of Montana and, for that matter, the not-for-profit BCBS system in the U.S.?

How Would Proposed Acquisition Impact Montanans’ Healthcare Coverage and Costs?

The baseline question is this: will Montanans be better off or worse off in terms of their healthcare coverage if the HCSC acquisition goes through? In the course of the debates over national health insurance, it seems that the nation has fallen prey to giving precedence to health insurers’ role as financial services entities as opposed to their role of guaranteeing the healthcare coverage of all Americans. Health, not money, is the primary purpose of Blue Cross Blue Shield (or at least, that is what it is supposed to be). Writing for the Helena Independent Record, a representative of the Montana Chamber of Commerce argued that the HCSC acquisition would be good for Montanans by virtue of spreading BCBSMT’s administrative costs across HCSC’s larger customer base and by virtue of HCSC’s consideration of creating 100 new jobs in Montana.

Consumers in Montana are likely to be less concerned with a new job-creating HCSC call center in Great Falls and more concerned with whether the merger or alliance generates benefits for them in terms of healthcare outcomes and healthcare costs. One has to question the cost benefits of Blue Cross mergers and acquisitions when a report finds that seven out of ten Blue Cross plans around the nation had amassed and held three times the amount of surplus required by state regulators, meaning that they were charging rates potentially higher than needed in order to add to their surpluses rather than lowering premium charges for consumers.

The HCSC surplus in Texas, where HCSC runs the Blue Cross network, showed a surplus that was five times the size of what regulators considered necessary for protection against insolvency. This surplus was achieved by raising rates several times. Rate increases exceeded 20 percent on some individual and family plans. HCSC segments its market into small pieces so that it can impose differing rate increases on different groups of plans (hence the variation in rates). HCSC rate increases in other states were also robust. For example, some plans in New Mexico saw an annual increase of more than 20 percent. Given the surpluses generated, such rate increases are of questionable necessity.

Gavin Magor, a senior financial analyst at Weiss Ratings, expects more health insurance mergers and acquisitions to take place this year, but he warns, “2013 will not be the year that the rising cost of health insurance is finally addressed, but it will certainly become part of the conversation.” In Montana, some people will be drawn to the acquisition of BCBSMT by the HCSC network due to the larger scale, which could lead to rate stabilization or reduction, but the HCSC history in other states doesn’t lead to much confidence in that result.

Montanans would be well advised not to make decisions today that preclude cost savings in healthcare coverage when the Affordable Care Act gets fully implemented, starting in 2014. There is also the question of what shifting to a behemoth out-of-state carrier may or may not do in terms of BCBSMT’s past responsiveness to ancillary health needs of Montanans—needs addressed by BCBSMT as the claim administrator for the Healthy Montana Kids program and as a participant in the InsureMontana program, for example.

If the guiding market theory of the HCSC acquisition is that Blue Cross Blue Shield of Montana can’t compete because of issues of scale, what does a merger mean for the development of the nonprofit Montana Health CO-OP? The CO-OP was meant to be a consumer-governed nonprofit health plan and was established to “help drive cost savings, enhance competition in the newly-created state-based competitive health insurance marketplace (also known as an exchange), and provide choice in markets traditionally dominated by one or few insurance companies.” It would seem that the absorption of BCBSMT by HCSC goes completely against the grain of the Affordable Care Act’s intention of creating more competition and avoiding the dynamic of a small state succumbing to the oligopolistic dominance of an out-of-state insurer like HCSC.

Is anyone at the hearing going to raise the counter to the HCSC argument on scale to suggest that HCSC’s acquisition of BCBSMT might lead to less competition, higher insurance premiums? Will anyone make the argument that the acquisition might undermine the development of the new nonprofit health insurance cooperative that is supposed to start enrollment in October of this year for start-up coverage beginning in 2014?

On the announcement of the merger plan, which occurred only in September, BCBS of Montana President and CEO Mike Frank said that there would be no immediate changes for BCBS customers as a result of the HCSC deal, but tomorrow’s hearing concerns both short term and long term issues. Will services change as the Montana-focused BCBS becomes a component of the Chicago-based insurer? Will the shift from a nonprofit BCBS to a mutual benefit company form mean that BCBS’s operations in the state will be less nonprofit-like? For that matter, there is the question, raised by Montana Gov. Brian Schweitzer shortly after the acquisition announcement, of whether the mutual form is really but a step toward the conversion of BCBSMT to a for-profit structure with large payouts for BCBSMT executives.

Advocates such as John Metz, chairman of JustHealth, a California-based watchdog group, warn that, “With larger insurers taking more control, they tend to be even less accountable…[and] we see that consumers are frequently having benefits, to which they’re legitimately entitled to, being delayed or denied with no redress.” Others, such as Marc Steinberg of Families USA, express concern that mergers and acquisitions among health insurers could lead to higher premiums simply because of fewer options on the market. It would seem to us that if the hearing generates serious questions about the future healthcare of Montanans regarding cost, coverage, and accountability, additional review and approval of BCBSMT customers—opposed, by the way, by the current BCBSMT management—might be warranted.

Conversion Foundation Questions: What Would Become of Blue Cross Assets?

If this deal goes through, it would come with the creation of a new health conversion foundation, and in a state with a small population like Montana, the creation of such a foundation is big time stuff. The BCBSMT/HCSC application calls for the creation of a foundation to be capitalized with $17.6 million from HCSC assets, later to be supplemented by additional moneys from the wind-down of all BCBSMT activities. There would be “an estimated total funding to the foundation of more than $120M…for use as close as possible to the mission of BCBSMT, that is, to provide financial support to improve the quality, availability, and awareness of healthcare programs and services for Montanans.”

Behind all other foundations, large or small, there are donors who gave money and other assets to be dedicated to a charitable purpose. In the case of health conversion foundations created from the acquisitions or mergers of not-for-profit entities such as the Blues, there is no individual, family, or corporate donor. The assets of health conversion foundations are truly public assets meant to be managed and overseen in the public’s interest. A 2009 survey conducted by Grantmakers in Health counted 197 foundations (or other kinds of public charities) that were created as a result of the sale, merger, or some other transfer of assets of nonprofit healthcare organizations. Among the largest were California Wellness, the California Endowment, Colorado Health Foundation, California HealthCare Foundation, and the Missouri Foundation for Health.

For the 100 conversion entities specifically identified as foundations by the Foundation Center, total grantmaking (excluding loans and PRIs) in 2010 was $452 million out of total assets of $11.416 billion. Nonprofits often get excited by the prospect of a new philanthropic entity, especially in one of the “philanthropic divide” states where foundation assets are scarce, but is the tradeoff a good one for residents who used to be covered by the nonprofit health insurance provider?

The first question is whether the valuation of the nonprofit assets to be shifted to the new proposed foundation is accurate and reliable. HCSC and BCBSMT claim that the amounts they predict going to the new foundation have been established by “independent valuations performed by Actuarial and Financial Modeling, Inc.,” but the arrangement feels like a housing appraisal situation. Without casting any aspersions on the professionalism and integrity of the consulting firm, one might ask whether, having been hired by the health insurers, its results can be relied upon as objective and unbiased. In other states, the issue of valuation of nonprofit assets to be preserved and converted to foundation use has been subject to contention and reevaluation. Montana would be well advised to do some major due diligence on the value of BCBS’s nonprofit assets before it accedes to the HCSC evaluation.

Similarly, there is the question of what the new health conversion foundation would actually do. The two merging insurance entities promise that the governance will be independent of both corporations, but that doesn’t determine the philanthropic role of the foundation in the state. How will the new foundation carry out a mission of protecting the healthcare needs and outcomes of Montanans, especially given the turbulence of a new national health insurance reform environment plus the merger of its in-state Blue Cross insurer with an out-of-state group? How will the new foundation be accountable in delivering on its healthcare mission to the public while avoiding getting sucked into the trap of concerning itself primarily with preserving its assets and minimizing its risk, much like some other private foundations? How would Montanans ensure that it doesn’t become an instrument of the state government to fund activities that the state ought to be—and would have been—doing with public money but for the advent of this new money source? Such an arrangement comes with concerns, as we saw in the case of Wisconsin’s plan to use conversion assets to fund the state university’s medical schools.

If the sale/merger/acquisition/alliance is going to happen, Montana might benefit from reviewing the experiences of the other health conversion foundations created from the assets of the Blues to determine how to do it right. As with the potential healthcare consequences, plunging ahead without serious thinking about the philanthropic consequences of the “alliance” of BCBSMT with HCSC would be an injustice to the citizens of Montana.

Will Health Insurance Mergers Undermine Upcoming Affordable Care Act Reforms?

Let’s remember the reason why there is—or was, in some cases—a network of local Blue Cross Blue Shield insurers in the first place. A paragraph from a fact sheet prepared by Legal Services of Eastern Missouri about a proposed conversion in 2000 is clear and succinct:

“Blue Cross and Blue Shield plans were established during the Great Depression. At the time, health insurance was virtually nonexistent and the inability of many Americans to pay for medical care had placed a financial strain on the country’s voluntary hospital system. Blue plans sought to address the crisis in health care access by offering ‘affordable coverage to all individuals, regardless of health status.’ The plans were organized on a not-for-profit basis and were dedicated to fulfilling a community service role. Based on their community service role, state legislation typically exempted Blue Cross plans from state taxes and insurance laws and gave them status as charitable and benevolent organizations.”

Embedded in that statement is the rationale for the nonprofit sector—advocates and service deliverers alike—to view the BCBSMT/HCSC “alliance” as an important venue to weigh in on the needs of the nation’s poor people. Will the absorption of Montana’s single-state insurer by a much larger, multi-state entity protect the interests of people in need of health insurance coverage by providing “affordable coverage to all individuals, regardless of health status?” Will the disposition of BCBSMT’s nonprofit assets be used to further the interests of Montanans in securing affordable health care coverage? Is the public interest being best served by the specific elements of the BCBSMT/HCSC transaction and by the general juggernaut of large-scale conglomerates wiping out smaller entities?

Given the nonprofit attributes of BCBSMT, Montanans should weigh in on this acquisition. Particularly during the turbulence of the earliest days of the Affordable Care Act, the nonprofit sector should be responding with commentary and mobilization for tomorrow’s hearing in Helena, Mont. More broadly, the sector should be preparing to weigh in with analysis and, where needed, criticism if and/or when health insurance acquisitions appear to be undermining what should be the benefits of national health insurance reform.


Disclosure: A staff member of Consumers Union, an organization that publishes Consumer Reports and that has issued statements about the BCBSMT/HCSC deal, is a member of the Nonprofit Quarterly board of directors, but he did not see this article in any form prior to publication.