Wednesday, December 16, 2020

NJ legislature rushing to enable de facto for-profit conversion of Horizon Blue Cross Blue Shield

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After 25 years of trying, Horizon Blue Cross Blue Shield of New Jersey, which provides health insurance to more than a third of the state's residents, is on the brink of pushing through the legislature a bill (S3218/A5119) enabling de facto for-profit conversion, or at least a stepping stone to such conversion. The bill has passed through key committees and is scheduled for a floor vote tomorrow (Dec. 17).

The complex bill, obviously written by Horizon executives, reorganizes the current nonprofit established by statute as a nonprofit -- but not charitable -- mutual holding company, with the insurer becoming a for-profit subsidiary, and the holding company empowered to create more for-profit subsidiaries, all of which can sell stock to investors. Horizon would pay $600 million up front to the state as compensation for a favorable change in its tax status, with a dubious commitment to contribute another $650 billion over nearly two decades, dependent on its degree of profitability. That money will go into the state's general fund -- not into a health foundation as in other states that have authorized conversion. Horizon has an estimated $7 billion in assets that as of now belong by statute to the people of New Jersey.

The state's dominant Democratic party is behind this legislation -- whether because of Horizon's powerful position in the state, credence lent to the company's happy talk about investment in new technologies and its existing charitable programs, or desperation for cash in the wake of the pandemic's devastation. 

The bill is opposed by many member organizations of NJ for Health Care, a broad coalition of state advocacy groups spearheaded by New Jersey Citizen Action. NJCA's Maura Collinsgru has eloquently opposed the rush to passage of a complex corporate restructuring that almost no one in the legislature understands. A brief by Brittany Holum of New Jersey Policy Perspectives provides further background.  Renee Steinhagen of NJ Appleseed has dissected the bill's loopholes enabling de facto privatization in a detailed analysis. SOMA Action, an advocacy group based in bill sponsor Assemblyman John McKeon's district (SOMA = South Orange/Maplewood, NJ) sent McKeon a sign-on letter, signed by 220 members, opposing the rush to passage. The letter is co-signed by BlueWaveNJ, NJ 11th for Change, and Our Revolution Essex County.

Testimony that I delivered to the state senate's Commerce Committee on Dec. 14 on behalf of BlueWaveNJ is below.


Before the Senate Commerce Committee

Re: S3218, Permitting Reorganization of Horizon Blue Cross Blue Shield of New Jersey

Chair Pou, Vice-Chair Cryan and Members of the Committee:

I am here to express my concern about the rush to nullify existing statutory conditions governing any reorganization of Horizon Blue Cross Blue Shield of New Jersey.

Horizon, a health services corporation created for the benefit of New Jersey residents, has amassed an estimated $7 billion in assets, devoted by statute to benefit the general public. S3218, even as amended this weekend, opens a conduit by which new for-profit subsidiaries of a nonprofit (but not charitable) mutual shell company can transfer some or all of those assets to shareholders or acquiring companies without adequately compensating the people of New Jersey, contravening existing New Jersey law.

The 2001 conversion law set out prudent and reasonable terms for any Horizon restructuring, ensuring that Horizon’s assets are preserved for the benefit of New Jerseyans and that any proposed restructuring be subject to the attorney general’s oversight. These core controls must be maintained in essence if adjusted in detail. 

If an amended version of this legislation is to become law, it must include provisions ensuring that the new mutual holding company holds all the capital stock of new for-profit subsidiaries and that any transfer or sale of Horizon assets from new for-profit subsidiaries triggers a commensurate charitable trust payment to the state. As under current law, the signoff of the Attorney General must be required before any restructuring is approved. That signoff should be contingent on a detailed conversion application, an independent assessment of the company’s market value, an independent health impact analysis, and multiple public hearings – none of which are mandated in S3218.

To justify the desired restructuring, Horizon executives speak gauzily of technological innovations that require investment. As a Horizon plan member, I personally am not enticed by the prospect of being connected to my doctor or insurer via Apple Watch.  I would prefer that the company direct its energies to reducing growth in my premiums and out-of-pocket costs.  I’d also like to see a greater portion of the company’s assets devoted to reducing the state’s uninsured population and otherwise improving access for the underserved to quality care.

If Horizon needs access to more capital for investments that benefit its policyholders, that can be enabled by less drastic means, such as authorizing a larger draw on reserves. But history demonstrates that de facto conversion into a for-profit insurer will not benefit plan enrollees. A 2013 NBER paper by Leemore Dafny finds that when the converting Blue has market share in excess of 20%, as Horizon does, conversion leads to a market-wide increase in premiums among fully insured employer plans.

When state Blue conversions do occur, they should follow the model established by California in the mid-90s. When Blue Cross of California proposed distributing $100 million of its assets to a charitable foundation, regulators rejected that figure as failing to protect BCC’s charitable assets. BCC ended up contributing all of its assets, $3.2 billion, to two health foundations, The California Endowment and the California Health Care Foundation. Today the California Endowment has more than $3 billion in assets, and the California Health Care Foundation has $741 million.

We urge the legislature to slow down, consider with due deliberation the likely impact of Horizon’s proposed reorganization under the terms set forth in this bill, and reject this attempt to circumvent the prudent conditions and oversight mandated by current New Jersey law with respect to any such reorganization.

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1 comment:

  1. It was useful of you to report that issue of possible stepping-stone increment to for profit. (Especially useful, embedded within the column, the link to the 2013 NBER paper discussing some consequences of such a change.)

    I presume you, and most readers, are fortunately not susceptible to the notion that "not-for-profit" structure saves us much from the problems of our health insurance systen.

    In MA, the insurers and hospitals are both organized as non-profits.

    They seem to act for the benefit not of shareholders (which don't exist), nor the people with and needing health insurance (which do exist), but for the benefit of the executives and the employees, as well as the for the benefit of the general concept of inertia. They consolidate, and avoid competition and creative destruction.

    (MA has the highest health care costs in the country. The non-profits won't even do the basic decent thing, and set up between themselves a system in which they don't stick poor helpless patients with surprise uncovered out-of-network bills, even for emergencies at in-network hospitals.)

    The U.S. is perhaps best characterized as a giant agglomeration of special interests, and non-profit organizations are among those special interests.