N.J.'s biggest insurer may turn for-profit

By Jonathan Tamari and Stacey Burling
http://www.philly.com

TRENTON – Horizon Blue Cross Blue Shield, New Jersey’s largest health insurer, filed yesterday to become a publicly held for-profit company, a move that could bring the state a $1 billion windfall for health care but that comes with concerns about how the change could impact consumers.

The Newark company covers 3.6 million people, roughly four out of every 10 New Jerseyans.

Horizon’s president and chief executive officer, William J. Marino, said converting to a for-profit company would help raise capital and allow competition with other insurers as he anticipates broad health-care changes. The value of the insurer on the open market, which Marino estimated was at least $1 billion, would go to a charitable foundation that, under current state law, would aim to provide health care for the needy.

Marino said that as a for-profit company Horizon would have more access to capital markets to make needed investments.

The health-care foundation could also boost a cash-strapped state where Gov. Corzine and Democratic lawmakers dream of providing universal health coverage but haven’t found a way to pay for it.

“We’re optimistic that the benefit of creating a foundation of $1 billion or more and the benefits that that can provide the underserved population – in other words, the good that that can do – will be easily understood,” Marino said in a conference call with reporters.

The application will be reviewed by the state Department of Banking and Insurance, which must hold a series of public hearings on the plan. Marino hopes for a decision within the first half of 2009.

Horizon’s filing will provoke debate in New Jersey that is matched in Pennsylvania, where the proposed merger of IBC and Highmark is being weighed.

Corzine has hinted that converting Horizon to for-profit status could help pay for expanded health-care programs, but a spokesman declined to comment on the issue yesterday.

Paul Penna, a spokesman for the Department of Banking and Insurance, said only that the department would review the application.

The 76-year-old Horizon has flirted with a conversion for years, having been authorized in 2001 to file an application to make the change. It is trying to follow in the footsteps of 13 other Blue Cross Blue Shields that have turned into for-profit entities, Marino said.

In many cases the changes happened much as they likely would in New Jersey: the value of the company went to a charitable foundation and the insurer reaped the benefits of turning for-profit. In some cases the former nonprofits were gobbled up by other companies, most prominently WellPoint, an Indianapolis insurer that is a Blue Cross or Blue Shield licensee in 14 states.

Mark Pauly, a health economist at the Wharton School of the University of Pennsylvania, said nonprofit insurers were generally interested in converting to for-profit status if they wanted to expand, although Marino said he had no plans to compete nationally.

For-profit companies can offer better pay packages, including stock options, to top executives, Pauly said.

California, which created two foundations to pay for research, education, and other public health projects with the money from a conversion, is often cited as an example of how the projects can help the public.

“California is a great example of a process that led to the establishment of charitable assets that are now being used productively to provide health care,” said Joel Cantor, director of the Rutgers University Center for State Health Policy, who wrote a paper in 2003 on such conversions.

But in other instances the process has not gone so smoothly, or has been rejected outright.

In New York, for example, the conversion of Empire Blue Cross Blue Shield was tied up in years of litigation and 95 percent of the state money from the conversion was poured into raises for the influential hospital workers’ labor union.

Regulators in Kansas and Washington rejected proposed conversions, saying the changes could lead to a spike in premiums. Maryland officials shot down a conversion amid concerns about fat payouts for top executives.

Michael Kornett, chief executive officer of the Medical Society of New Jersey, said the conversion likely would lead to significant changes in Horizon’s board and its goals.

“The emphasis will go from patients and employers right to the shareholders,” he said. “Their whole mission is going to change.”

Cantor said that Horizon was the largest insurer through New Jersey’s Medicaid program and that it also participated in a program that helps cover uninsured children at lower prices. He said some people may worry that a for-profit that merged with an outside company would lose its New Jersey focus. He added, however, that he had not seen significant price changes from other conversions.

Marino said Horizon prices would not be affected by a change in status.

“You’ve got to have the right products and those products have to be priced competitively,” he said.

Marino said state law barred Horizon officers and directors from benefiting from the conversion for one year after the initial public offering.

He said other offerings may follow the first stock sale.

Horizon took in $7.5 billion in revenue in 2007, including $2.5 billion from for-profit subsidiaries, and has roughly $1.6 billion in reserve.

The surplus has raised eyebrows among some lawmakers who question how a nonprofit built such a cushion.

Subscribers likely would not notice any changes from a conversion, although investment in technology could lead to better service quality, Pauly said.

Pauly, of Wharton, said the Blues’ reserves, which are sometimes “quite enormous,” are often an issue in conversions. That money rarely ends up benefiting policyholders directly, he said.

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