State urged to reject Premera's conversion

Consultants hired by the Insurance Commissioner's Office have advised the state to reject Premera Blue Cross' conversion to a for-profit insurer, saying the move is not in the best interest of consumers.

The experts raised serious concerns about Premera's proposal, including:

• The possibility that the company would raise premiums to satisfy investors.

• The prospect that potential financial gain for Premera's executives spurred their decision to seek the conversion.

• Doubts about whether Premera, as part of its conversion, would transfer the full fair market value of the company into a new nonprofit foundation as required by law.

The concerns, raised in reports by three consulting firms, may well doom Premera's tempestuous 14-month quest to shed its nonprofit status. Insurance Commissioner Mike Kreidler will rely on the experts' analysis in ruling on the plan sometime between now and March 15.

Foes of Premera's conversion were elated at the possibility that the deal might be dead. A broad coalition of patients, doctors, hospitals and consumer-advocacy groups opposed the plan. The Washington State Hospital Association filed suit seeking to block it.

"Chances of approval appear very remote," said Cassie Sauer, a spokeswoman for the hospital association.

Scott Forslund, a Premera spokesman, said the company's own expert reports failed to show any negative effect on premiums and payments to providers and, in fact, could have a "favorable impact" on premiums.

Forslund added that Premera's proposal does transfer the full value of the company to the new foundation. And he said executive compensation "simply was not a central reason for proposing this conversion."

Premera thinks its application is still viable and can now be fully debated publicly.

Kreidler has scheduled four public forums next month, starting Dec. 2 in Spokane.

Indications of trouble with Premera's plan surfaced last month when Deputy Insurance Commissioner Jim Odiorne disclosed in an e-mail to the insurer's lead attorney that the insurance commissioner's staff could not endorse the application. Although Kreidler is acting as an independent judge on the matter, it's unlikely that he'd rule against the recommendation of his staff members and the consultants.

Separately yesterday, the state Attorney General's Office notified Premera that the insurer's proposal would allow Premera to retain too much control over the new nonprofit foundation, which would receive shares in the new publicly traded Premera.

By restricting when and how many of those shares the foundation could sell and by imposing other conditions, Premera could potentially diminish the value of the foundation's holdings, argued Robert "Rusty" Fallis, an assistant attorney general who has been leading the Premera foundation review.

The Attorney General's Office is ruling separately on the foundation matter and could derail the conversion even if Kreidler rules in favor of it.

State law requires that when nonprofit corporations dissolve, their assets must be preserved to carry out the original nonprofit mission. In Premera's case, that would be serving the health-care needs of residents.

"If I were to have to make a recommendation to the attorney general now, I would have to recommend that it not be approved," Fallis said. "It remains to be seen whether Premera chooses to make changes to it."

Premera is the state's largest health insurer and has 1.2 million members. Its biggest competitors, Regency BlueShield and Group Health Cooperative, are both nonprofit.

Conversion attempts by nonprofit health insurers elsewhere have been rocky. Regulators in Kansas and Maryland successfully blocked attempts by their nonprofit Blues plans to merge with for-profit insurers.

This summer, Blue Cross and Blue Shield of North Carolina withdrew its conversion application, and Horizon Blue Cross and Blue Shield of New Jersey abandoned its plans even before filing the application. Critical consultants' reports came into play in both Kansas and Maryland.

In Washington state, three consulting firms examined various aspects of Premera's conversion plan. Cantilo & Bennett, a law firm based in Austin, Texas, handled legal matters such as whether Premera's application was complete and whether the deal was economically viable.

The Blackstone Group of New York provided investment-banking advice, including determining Premera's worth. And the accounting firm of PriceWaterhouseCoopers assessed the economic impact of Premera's conversion.

The consultants flagged potential problems with virtually every aspect of Premera's proposed deal. They challenged Premera's premise that by becoming a publicly traded company, it could more easily raise money and improve its financial health.

The consultants said that if Premera made all the changes necessary to satisfy their concerns, the revised plan would differ so fundamentally from the original one that it would amount to a whole new application.

Kyung Song: 206-464-2423