Premera Blue Cross's Proposed Conversion to For-Profit Status

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with” as a result of the conversion (e.g., provisions for stockor stock options, expected changes in annual and long-termincentive plans or in retirement plans).Towers Perrin (TP), Premera’s consultant, countered that thetotal direct compensation for executives was at or below themarket median in aggregate and individually in all but a fewcases. TP also disagreed that the executive severanceprotection was above market and that post-conversioncommitments were unreasonable or too generous comparedto those in other IPO transactions. In presenting therationale for its positions, TP criticized PwC’s analytictechniques (i.e., using only Blues plans as the comparisongroup and not factoring in Premera’s lack of a COOposition, the duties of which were shared among severalPremera executives).Fundamental Nonprofit Versus For-Profit Orientation:The consultants engaged by the coalitions concerned with theconversion felt strongly that a change from nonprofit to for-profitownership would fundamentally change the inherent valuesand motivations, and consequent behaviors, of the organization,with potentially significant adverse impacts (including reducedcommunity benefits) on providers, policyholders and the public.• Steven Larsen contended that, while there are certainsimilarities in how both types of organizations operate,including when necessary withdrawing from lines ofbusiness and raising rates, nonprofits take these actions in abroader context and with the ultimate objective of servingthe nonprofit mission, not maximizing value for outsideinvestors or owners. He stated that this distinction inmission provides the nonprofit with greater flexibility to actin a way that lessens or ameliorates potential negativeimpacts on its stakeholders.• HPAP, noting that the community benefits provided byhealth plans are often informal and difficult to measure,nonetheless found that “available information suggests thatnonprofit health plans are more likely than for-profits toprovide benefits to the community, including safety netservices, targeting programs to low-income neighborhoods,and providing more charitable contributions”. While havingno access to information about Premera’s current level ofcommunity benefits, HPAP cited examples of views similar toSteven Larsen’s from its own interviews and thoseconducted by other consultants in the 10 cases:o “When we were dealing with BCBS (of Maine), the plansupported things like community rating, but now it is aconstant fight. When you keep a plan nonprofit, you’rekeeping the values viable.”o “For 9 out of 10 decisions…they’ll (nonprofits and forprofits)decide the same thing, but the issue is what is theimpact of the 1-in-10 decision where they will differ?”o Some experts interviewed about the North Carolina casesaid that it is “easier to regulate nonprofits and to getthem to work for the public good since you can ask moreof them regarding pricing and access for vulnerablepopulation groups”.One of Premera’s consultants, National Economic ResearchAssociates (NERA), stated that Premera would not behaveany differently following conversion regarding pricing,product design, lines of business or geography becauseit is competition, not ownership status, that shapes andconstrains a health insurer’s actions.Medical Loss and Administrative Cost Ratios:• Supplementing its findings on the more intangible, inherentvalues of nonprofit ownership, HPAP stated, based onempirical comparisons of nonprofit Blues with for-profitBlues and commercial insurers, that “a converted Premerawill likely reduce its medical loss ratio…and increase itsadministrative cost ratio in order to attain and maintainadequate profit margins”. HPAP projected that as much as10% of Premera’s revenues ($200 million annually) wouldbe shifted from payment for actual health care to otherpurposes. HPAP noted that for-profit health insurers typicallyseek underwriting gains of 2–3 percent. Those gains mustcome from lower medical payments or lower administrativecosts, yet for-profit insurers typically have higheradministrative costs. With average medical loss ratios of74% and 80% respectively for for-profit Blues and for-profitcommercial insurers, compared to 84% for nonprofit Blues(Premera’s was 85% in 2002), HPAP stated that unless thefor-profits were managing care much better to account fortheir higher administrative costs, of which there was noevidence, then their higher administrative costs were “likelyto include profits and their distribution to shareholders”.4
Access to Insurance:The following consultants engaged by the InsuranceCommission and the coalitions expressed concerns aboutreductions in access to insurance:• PwC stated that as a public company Premera “would beexpected to reach target operating margins over time foreach line of business, whereas currently some appear tobe subsidized.”• HPAP found a “mixed picture” of the effects of conversionon insurance access, noting that in four cases the convertedBlues plans continued to cover their entire geographic regionsand individual as well as group markets. HPAP also foundno evidence that the converted plans had exited publicprogram business to any greater degree than the nonprofitplans. Ultimately, however, HPAP concluded that the overallweight of the empirical evidence across the 10 cases fell onthe side of negative impacts on insurance access. Accordingly,it expressed the same concern as PwC, as well as noted theincreased likelihood that a converted Premera would becomemore aggressive in benefit design and underwriting practices,especially impacting the individually insured and peoplewith greater medical needs. Also, while noting thatempirical research from publicly available information hadnot been conducted to verify predictions of premiumincreases, HPAP also cautioned that Premera mightselectively employ this practice.• Steven Larsen contended that Premera’s dominance in theindividual market in certain areas gave it market powerover both purchasers of health insurance and providers inthose areas, and that such market power would inevitablybe exploited more aggressively by a for-profit Premera.One Insurance Commission consultant, however, Keith Leffler,did not feel that Premera, even in Eastern Washington whereit had substantial market power, could or would use it toraise premiums more dramatically if converted.Premera’s consultants reported that there would be nonegative impacts on insurance access:• NERA stated that Premera had already been focused onthe bottom line and offered only products makingcommercial sense because of competitive and legalconstraints, such that nothing different would occur in itspractices following conversion.• Milliman USA projected no increases, and perhaps aslight decrease, in Premera’s premium rates as a resultof conversion.Provider Rates and Relationships:The findings and conclusions of the consultants engagedby the Insurance Commissioner and concerned coalitiongroups included some selective concerns about provider ratesand relations:• HPAP stated that while there was information from the 10case studies that conversions could increase tensions inrelations with providers, other factors, such as the Blues’historical dependency on broad provider networks, couldmitigate against a converted plan taking a more aggressivenegotiating stance. In addition to business strategy, HPAPfound that market share, more than the corporate form ofthe owner, might well be the primary factor impactingrelations, noting Premera’s significant market power inEastern Washington and in Alaska.• PwC noted Premera’s dominance in Eastern Washington andthe potential negative consequences for providers of aconverted Premera facing increased earnings pressures.• Keith Lefffler, noting an 80% market share in 8 countiesof Eastern Washington, and 70% overall in that region ofthe state, found that Premera had already used itsnegotiating power in provider fees and “could change itspayment and contracting procedures to more fully exploit itsmarket power”.NERA, one of Premera’s consultants, argued that Premera’sstrategic need for a broad provider network, even in areaswhere it had greater market share, would preclude it fromrelating differently with its providers post-conversion. NERAstated that its data analyses showed no statistical relationshipbetween high market share and lower rates provided byPremera, with physician fees in Eastern Washington notsignificantly lower than in Western Washington. NERA alsonoted that rural hospitals in Eastern Washington werepermitted to negotiate collectively with Premera.5
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Premera Blue Cross's Proposed Conversion to For-Profit Status

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