Blue Cross plans in NC, NJ form separate holding companies

Blue Cross and Blue Shield plans, facing increasingly diverse and growing for-profit competitors, are experimenting with new corporate structures that they hope will give them capital and flexibility activities they need to stay competitive.

North Carolina’s Blue Cross and Blue Shield is the latest example, with the nonprofit carrier receiving state approval this month to transfer part of money, property and other investments to a new parent company run by the same executives. Horizon Blue Cross Blue Shield of New Jersey transformed into a similar nonprofit mutual stock company late last year.

The reorganization allows the North Carolina and New Jersey Blues to operate more like their for-profit rivals by creating new nonprofits that are not subject to reserve, investment, and status regulations. state of the company that governs their insurance activities.

The companies testing these models aim to invest in new technology and doctors’ practices. Both nonprofit service providers believe the reorganization is necessary for them to better compete with large for-profit insurers and negotiate with large providers, which will help reduce health care costs.

Their arguments can cause a feeling of déjà vu. In the 2000s, several Blues schemes made similar arguments to justify a corporate reorganization. Mergers between Blue Cross and Blue Shield companies, issuing shares and establishing new parent companies have generally resulted in financially stronger companies.

But the moves by Blue Cross and Blue Shield of North Carolina and Horizon Blue Cross have sparked debate over whether the Blues’ plans uphold the philanthropic mission mandated by federal tax code. .

“If it’s for profit, then there’s no problem. Their mission is to make money,” said Ge Bai, a professor of accounting and health policy at Johns Hopkins University. “But since it is a non-profit organization, there is a tax subsidy involved. When you are involved with tax subsidies, taxpayers and the government want to make sure that the tax subsidy is reasonable. They will be more suspicious of a blatant, for-profit behavior.”

Blue Cross Strategy

Blue Cross and Blue Shield of North Carolina, Horizon Blue Cross and other Blues have responded to market challenges, including mergers between competitors and suppliers, by forming holding companies part that allows them to access free-flowing capital to diversify their investments. At least 30 other Blues plans operate under a similar structure, a spokesperson for Blue Cross and Blue Shield of North Carolina wrote in an email.

The Republican-majority North Carolina General Assembly and Democratic Governor Roy Cooper approved the Blues carrier’s plan to create a separate, nonprofit holding company despite the Commissioner’s objections. Mike Causey Insurance (right). “The law ensures that Blue Cross NC can continue to provide competitive services to its members and adhere to the same rules as out-of-state large for-profit insurers that are not bound by the regulations. similar,” the spokesperson wrote.

Blue Cross and Blue Shield of North Carolina can contribute up to 25% of their assets to the new entity under the terms of their settlement with the state. According to its most recent financial report, the insurer reported net income of $36.2 million on revenue of $10.9 billion in 2022. The company said it paid $25.7 million federal, state, and local taxes.

In New Jersey, Horizon reorganized in December to form a nonprofit mutual stock company. Blue Cross and Blue Shield spokespersons in 18 other states operate under a similar structure, a spokesperson wrote in an email.

By reorganizing, Horizon will be able to invest more in non-insurance services, such as home healthcare, and face a lower tax burden, said Jennifer Velez, vice president of network solutions and health, told the New Jersey Department of Banking and Insurance in October. Velez has demonstrated increasing competition from for-profit insurers and retail chains makes reorganization necessary, citing CVS Health’s $8 billion buys home healthcare provider Signify Health.

“Many major hospital systems in New Jersey see companies like Signify as competitors in terms of their patients and revenue,” says Velez. “Horizon will benefit from being able to jointly invest in the creation of seamless home healthcare solutions tied to its own telehealth and population health digital tools.” we.”

Horizon agreed to 11 conditions to secure state approval, including paying New Jersey $1.25 billion over 25 years to offset the expected loss of tax revenue. The state also restricted Horizon from investing $300 million in the venture and required the company to wait three years before using the money to pay dividends.

Horizon Blue Cross does not disclose its earnings and does not respond to requests for financial statements.

The activist group Citizens of New Jersey and the Allied Staff and Health Professionals labor union sued New Jersey in December to block the new deal. The plaintiffs argued that regulators had not fully assessed the impact on premiums. The case has failed so far, and the plaintiffs are awaiting information on whether the New Jersey Supreme Court will hear the appeal.

Research on the effects on costs and coverage when a Blues plan changes its corporate structure is limited, but the data available shows that how Blues plans are organized is important. According to a study published in the American Economic Journal in 2019, as dominant Blues carriers convert to for-profit operations, full premiums increase by an average of 13% and auto-premium premiums increase by an average of 13%. insurance increased by 4%, and competitors responded by raising their own fees.

Blues Construction

Blue Cross and Blue Shield insurers arose during the Great Depression in the 1930s, and these nonprofit insurers were known as “the insurers of last resort” because they often sold policies. Health insurance for people in for-profit markets shun insurance companies. heritage has helped these companies develop and maintain strong brands and large market shares in most states.

In the early 1980s, for-profit insurers lobbied the IRS and Congress to revoke full tax-exempt status for nonprofit Blues programs by arguing that they functioned no differently. competitors.

Congress and President Ronald Reagan created a special tax for the Blues programs whereby they pay federal taxes but also receive a Substantial corporate deduction Elizabeth Plummer, an accounting professor at Texas Christian University who specializes in federal taxes and health care, says 25% for some claims and expenses exceed their surplus. The Treasury Department calculates that waiver will be worth $4 billion over the next decade.

“It’s really just a conjecture because it’s not tied to anything. It’s not like a cash outlay,” Plummer said. “It was like, ‘Oh, you’re the Blue Cross Blue Shield, we’ll deduct you again.’ That has been revisited over the years. People will say, ‘Why did they get this?’ But it’s still there.” And, because most Blue Cross programs operate as a nonprofit, they’re generally not subject to state taxes, she said.

After the IRS updated the tax code, the Blues plans began to reorganize. The Blue Cross Blue Shield Association revised its regulations in 1994 to allow affiliates to convert into for-profit corporations. That year, the nonprofit Blue Cross of California organized a stock sale from its new for-profit subsidiary WellPoint Health Networks.

Anthem, now Elevance Health, 2001 switch from mutual insurance company for a for-profit, publicly traded company, and bought WellPoint three years later. Elevance Health operates Blue Cross and Blue Shield insurers in 14 states and is the largest US insurer by members. Elevance Health still wants to buy Blues: In January, the company proposed acquisition of $2.5 billion of Blue Cross and Blue Shield of Louisiana. If regulators approve the deal, Blue Cross of Louisiana will convert to profits.

Elevance Health and Blue Cross and Blue Shield of Louisiana did not respond to requests for interviews.

The new push to retool the corporate structure is partly related to a change the consequential rule The Blue Cross Blue Shield Association was formed following a landmark $2.7 billion antitrust settlement. Under the agreement, the Blue Cross and Blue Shield companies are no longer required to generate at least two-thirds of their revenue from Blue-branded businesses. That opened the door to other types of investments.

The competitive landscape is changing

The overall state of the health insurance market has also been a factor in the recent restructuring. Insurance companies are preparing to pass the most difficult financial year Since the start of the COVID-19 pandemic, inflation, rising medical costs and tighter oversight of government health programs have caused obstacles, Bai said. Other non-profit insurance companies such as SCAN Team and CareOregon such as having banded together to help weather the storm.

Hospital chains are also increasingly consolidating into large, multinational health systems, giving them greater negotiating leverage with health insurers. For example, North Carolina is one of the least competitive hospital markets, according to the Health Care Cost Institute, a nonprofit research organization.

Plummer said CVS Health and other companies that own for-profit health insurers are investing heavily in physician groups, which further affects the market leverage of Blue Cross and Blue companies. Shield. CVS recently beat out Blue Cross and Blue Shield of North Carolina when CVS subsidiary Aetna won the contract to manage a public employee health plan, a program the Blues have run for more than 40 years. North Carolina expects the Aetna deal to save $140 million over five years. Blue Cross and Blue Shield of North Carolina sued to block the deal.

“They start to see their gains or their market starts to shrink,” says Plummer. “If I were an entrepreneur, I would be a little nervous.”


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