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Blue Cross and Blue ShieldFeatured Health Business Daily Story Jan. 8, 2010
Not-For-Profit Blues Plans May Embrace For-Profit Subsidiaries Reprinted from The AIS Report on Blue Cross and Blue Shield Plans*, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans. *Not Affiliated with BlueCross BlueShield Association or its member companies. Don’t expect more not-for-profit Blues plans to attempt to convert to for-profit status anytime soon, say industry experts. However, not-for-profit Blues plans increasingly may operate like for-profit plans: They will buy or start for-profit subsidiaries to expand into new markets and maximize payback to the parent company while retaining their not-for-profit status. Tom Wilson, president of executive consulting firm The Wilson Group, tells The AIS Report that “I don’t think there’s going to be a movement toward publicly traded conversions.” But he contends that not-for-profit plans will likely adopt more complex organizations where a not-for-profit Blues plan holds a for-profit subsidiary. He says not-for-profits and for-profit insurers alike are under intense regulatory scrutiny, but not-for-profits don’t have to report as much about their for-profit subsidiaries. He also asserts that having for-profit subsidiaries allows the plans to capitalize on both their “mission and margin.” Joseph Marinucci, a director in the financial institutions ratings group at Standard & Poor’s, tells The AIS Report, “I think [not-for-profit Blues plans] always acted like for-profit companies. They are businesses.” He explains that the not-for-profit status allows them to be tax-exempt in the marketplace. That and the “issue of being non-investor-owned perhaps affects some of their strategies in the marketplace. But for the most part their competition in large extent is for-profit” — and Blues plans have to compete with that. John Mancuso, managing director of The Bostonian Group, says that Blues plans will “create a for-profit management company subsidiary, then lease management services back to the nonprofit subsidiaries of the broader organization and often to organizations outside the network.” Marinucci says that Blues plans have used for-profit subsidiaries to conduct business because of the flexibility such arrangements allow. The units can allow them to form joint ventures with other Blues plans, he explains. Prime Therapeutics, the pharmacy benefits management company owned by 11 Blues plans, is an example of such a venture. For-profit subsidiaries, Marinucci says, also could allow a plan to move into a new market or enhance its product line. If a plan is structured as a not-for-profit HMO and wants to enter the PPO market, implement a blended product structure or offer life insurance, it might make sense to open or purchase a for-profit subsidiary, he says. Such a subsidiary would allow the plan to extend its product segments. What’s more, underwriting rules could differ between the PPO market and HMO market, making a for-profit subsidiary the best choice. Blues plans “are kind of like fiefdoms,” says Marinucci. He says that most often, “a not-for-profit Blues plan will start up or buy a for-profit subsidiary to buy into a new part of the market.” However, when Blues plans create a non-Blues-branded subsidiary to compete in a market occupied by a fellow Blues plan, they typically don’t work out, he says. Looking forward, Marinucci says, the pace of Blues plans purchasing or starting for-profit subsidiaries is likely to remain consistent with historical trends. He observes that “there might be potential for deal-making going forward.” Some companies, according to Marinucci, have placed a lot of attention on leveraging their for-profit subsidiaries. He also predicts plans may buy unregulated “companies in the marketplace to enhance value.” Such companies could include payment processors or units that serve similar marketplaces, which offer some diversity and core competency enhancements, he says. Operating a not-for-profit plan with a for-profit subsidiary could facilitate conversion to for-profit status in the long term, according to Marinucci. “You could eventually use those downstream for-profit subsidiaries to effect conversion.” |
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