Guest columnists
Insurance commissioner should deny Premera's for-profit bid

By Annette Clark, Pat Kuszler and Arthur LaFrance
Special to The Times

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Insurance Commissioner Mike Kreidler is to decide Monday whether Premera Blue Cross can go "for profit," issuing stock and raising $100 million to $150 million in capital. Premera has over 1 million subscribers in the Pacific Northwest. There is a danger Kreidler will allow the conversion, an outcome that should concern every person in the Northwest.

In 2,000 pages of testimony and 2,000 pages of exhibits, considered over two weeks in June by Kreidler, one single fact from the Tumwater hearings stands out:

When Blue Cross or Blue Shield companies go "for profit," the amount of their income they pay to doctors and hospitals drops from 85 percent to 75 percent.

With Premera's income at $2.8 billion a year, that's a loss of $280 million to doctors, hospitals and patients. Other insurers will have to pay more, or cut coverage to patients, or raise their premiums. Medicare and Medicaid will be impacted: In fact, Premera dumped those patients over the past two years. The ripple effect will reach employers and employees throughout the Northwest.

If the conversion is approved, Premera doubtless will be scooped up by the interstate conglomerate Anthem/Wellpoint, which has picked up "Blues" in more than a dozen other states. A July 4 article in The New York Times concluded that Anthem/Wellpoint's merger will be good mainly for its executives: a dozen will share $200 million.

Now Premera wants to participate in this high-stakes game, through conversion from its nonprofit status. According to witnesses at the insurance commissioner's hearing, Premera's executives are paid well above industry standards; Premera's CEO has already bumped his salary from $600,000 to $1.2 million over the past four years. If Premera "converts," especially if, and when, it merges with Anthem/Wellpoint, the executives will be eligible for even more spoils, including stock options over the next few years.

Beyond self-enrichment, there is no point to Premera's application.

Premera's witnesses said the company needs capital. But its witnesses were unclear as to how much would be raised, or how the money would be used. The business case was so weak that Premera's witnesses could only say that maybe $100 million would be raised; perhaps more, perhaps less. Premera is very proud of spending millions to roll out new product lines and improve its computing capacity, all on existing income. Premera has already wasted over $30 million of existing income on this proceeding.

Premera's witnesses said its reserves were low, but those reserves are nowhere near the danger point set by law for insurance companies. Plus, Premera has been — and can keep — building reserves from income. It has been increasing premiums at twice the rate of inflation.

Premera also said it would transfer all its assets to nonprofit health-care foundations if allowed to become a for-profit company. But it would appoint the foundation boards, it would control their missions, and the assets would consist of new Premera stock which the foundations would not be free to sell or vote.

At a minimum, if the application is approved, it is critical that the public vigilantly scrutinize the foundations, which may receive more than $500 million. The law schools at the University of Washington, Seattle University and Lewis & Clark College in Portland have offered to use 5 percent of that money for oversight by the Pacific Northwest Center on Health, Law & Policy, a joint venture of the three law schools and based at the UW School of Law. That proposal was in the amicus brief submitted by the three law schools, and rejected by Kreidler.

Why fear that Kreidler will make the wrong decision? There are several reasons, chiefly in the way the hearings were run. Kreidler divorced himself from his staff, and made them a "party," limiting their advice and input. Interveners in opposition were limited, then grouped together, and ultimately submitted only a single brief. Indeed, the most powerful intervener, the University of Washington Medical School, withdrew midway. Neither the Washington State Medical Association nor the Washington State Hospital Association submitted separate briefs.

The most comprehensive brief was our amicus brief, at 47 pages; Premera must feel confident in that its brief — in a billion-dollar case — was only 17 pages long, plus four exhibits.

In addition, Premera succeeded in withholding or limiting materials it deemed "confidential" or "business secrets." Insurance is a heavily regulated industry, of course, unlike, say, that of Microsoft, so there are few true "trade secrets." By Washington law, Kreidler had discretion to order full disclosure, but he didn't. So, material was withheld from the public, some from the parties.

Important material was kept from consultants, hired by the commissioner himself. Indeed, a major tax opinion, prepared for Premera by Ernst & Young and running dozens of pages, was only made available by Premera several days into the hearing.

Many are predicting that Kreidler will deny Premera's application. Still, we worry that he may do so for the wrong reasons, urged by the opponents: that Premera might discriminate between Eastern and Western Washington; that, by law, Premera's assets belong to the public; and that in making his decision the commissioner should ignore the risk that Premera will lose the Blue Cross trademark, a major business asset. In our view, each of these arguments is in legal error, and would likely lead to reversal on appeal.

Instead, the commissioner should deny the for-profit conversion simply because Premera has not shown it will improve service to consumers in the Northwest, because Premera does not need the money, and because conversion would harm health care in the Northwest.

Annette Clark is a professor at the Seattle University School of Law. Pat Kuszler is associate dean at the University of Washington School of Law. Arthur LaFrance is a professor at Lewis & Clark Law School. All three universities are purchasers of health insurance for their staff and faculty.