HELENA — State insurance officials said this week that they’re not yet convinced the proposed merger of Blue Cross Blue Shield of Montana with an Illinois health insurance giant is good for Montana consumers — and are asking the companies for commitments that might lead them to change their mind.
“Our concern is, how does this benefit the consumer?” said Jesse Laslovich, chief counsel for State Auditor Monica Lindeen, Montana’s insurance commissioner.
While the companies have stated how they think the merger would strengthen Blue Cross and thus indirectly benefit customers, Lindeen’s office wants more assurances of direct benefits for consumers, he said.
Greg Thompson, spokesman for Health Care Service Corp. (HCSC) in Chicago, said Tuesday that the company fully expects Lindeen’s office to ask tough questions about the deal’s effect on consumers.
“That’s exactly what they are doing, and we are very encouraged by that,” he said.
HCSC is proposing to buy Blue Cross of Montana for $17.6 million, a purchase that would make Montana’s largest private health insurer a division of a company that has 50 times as many customers and almost 100 times the revenue.
But before the merger can occur, Montana Attorney General Tim Fox and Lindeen must decide it’s in the public interest, as defined in state law.
On Friday, the auditor, attorney general and the companies will submit written recommendations to hearings officer and former state Supreme Court Justice William Leaphart on whether the merger should go forward.
Leaphart then will make his own recommendation, after which Lindeen and Fox make their final decisions.
Company and state officials, who’ve been negotiating for the past week, wouldn’t discuss details of their talks. But some of the sticking points are known.
Here’s a closer look at key issues in the prospective deal, which was proposed formally last November.
Benefit to consumers: This issue is certainly a point of contention, for neither Blue Cross nor HCSC has made any concrete commitment on how the merger will benefit Montana health insurance consumers.
Blue Cross has had a historical underwriting return – industry lingo for profit on its health insurance business – of 1 percent to 2 percent. HCSC’s actuary testified at a March hearing that its underwriting returns have run 3 percent to 6 percent – substantially higher.
When asked how the merger will benefit Montana consumers, Frank Cote, chief sales officer for Blue Cross, said it will allow the Montana company to spread its costs among a greater pool of customers, because HCSC has 13.2 million customers, compared to Blue Cross of Montana’s 250,000.
“I believe our premiums as a division of HCSC would be lower than if we were to remain a standalone company, under Blue Cross of Montana,” he said.
Yet neither Cote nor HCSC will say precisely how HCSC plans to make money on its investment of perhaps $40 million, or more, for purchasing Blue Cross.
Thompson, the HCSC spokesman in Chicago, said last week that Montana consumers shouldn’t worry, because the new federal health care law limits what health insurance companies can make.
He also said making any commitment on future rates is unwise, because of the unknowns of health care reform, which takes full effect next year, and other variables in the market.
HCSC enjoys “a very, very thin operating margin,” by offering competitive products spread across a large customer base, which should translate into affordable insurance products for Montanans, he said.
HCSC posted an underwriting gain of nearly 5 percent in 2012, according to its annual report.
Price paid for the company: Whatever money HCSC pays for Blue Cross of Montana goes into a new nonprofit foundation that will be managed by an independent board, under state supervision. The foundation must spend that money on health improvement initiatives.
The companies proposed that HCSC pay $17.6 million to acquire Blue Cross’ core business and a few other assets and liabilities. HCSC later agreed to increase that amount to $40.2 million, but that agreement with the Attorney General’s Office expired March 30.
The initial $17.6 million price comes from an analysis by a consultant hired by Blue Cross. State insurance officials note that the analysis based its number on the averaging of many future market factors, such as the percentage of income Blue Cross would pay in claims (the medical loss ratio).
If the ratio turns out to be just a percentage point lower, the value of the business goes up by $24 million, the consultant testified in March. And if it turns out to be the lowest allowed by federal law, the value is $72 million higher.
While HCSC’s agreement to pay $40 million has expired, Assistant Attorney General Kelly Hubbard said last week the company has made no indication that it’s backing away from that amount.
Hubbard said $40 million was the company’s third offer during negotiations in February and March, and that the amount is within the range estimated by an independent consultant hired by the attorney general to estimate the value of Blue Cross.
“Any way you cut it, we’re within the range of value expressed by our independent expert,” she said.
If the state insists the price should be higher, “the transaction could be in jeopardy,” Cote said.
The foundation: Blue Cross has said the foundation eventually will receive $100 million to $120 million. The price paid by HCSC goes to the foundation, as do the proceeds from other assets that Blue Cross has sold or will sell, and that don’t go to HCSC.
Among the proceeds are the $65 million that Blue Cross received for selling its for-profit insurance agency, Western States Insurance, last year. Blue Cross sold Western States without state approval or review, although an expert hired by the state determined that the valuation method used by Blue Cross and the buyer, Payne Financial Group, was reasonable.
State insurance experts have indicated they think foundation proceeds possibly should be higher than $120 million.
Nonprofit: HCSC calls itself a “not-for-profit” health insurer, because it has no shareholders and puts any profits back into the company. Blue Cross of Montana officials also say they hope to continue to operate as a nonprofit here, as they do now.
State officials say they believe the merger means Blue Cross technically becomes a for-profit company, and should be regulated as such – which means they would pay a 2.75 percent premium tax, from which they are currently exempt.
HCSC and Blue Cross officials have said the issue of premium taxes and for-profit status isn’t settled, although it appears they don’t want to pay premium taxes.
“We’ve not done a full analysis of which taxes we’d have to pay in Montana,” Thompson said. “We think that Blue Cross (of Montana) would pay the same taxes that it pays today.”