Blue Cross NC seeks less regulation, more flexibility, but would it affect customers?

Blue Cross Blue Shield of North Carolina is looking to cut state regulations and supervision on its operations through a new proposal in the North Carolina legislature.

Blue Cross NC says that move would allow it to compete with other large health insurers, often national and out-of-state, which are not subject to the same state regulations.

The proposal comes after Blue Cross NC lost its state contract as administrator of North Carolina’s State Health Plan to one of those national insurance companies, Aetna.

Critics say the bill would lead to too little regulation and oversight of Blue Cross NC, which as an insurance provider already holds a large market share and presence in North Carolina.

Now powerful North Carolina politicians are lining up on both sides of the debate. Insurance Commissioner Mike Causey warned Friday that the bill has the potential to raise health insurance premiums.

Less oversight and more flexibility

The bill was filed jointly in the House and Senate last week and dubbed the “Reorganization & Economic Development Act.” It would allow Blue Cross NC, which is considered a nonprofit medical service corporation, to create a new nonprofit holding corporation, to which it could transfer its assets.

This holding company would be “the ultimate controlling person” over the insurer, according to the bill, and would be exempt from many regulations. This would allow the holding corporation and its subsidiaries to move assets, invest and spend with much greater flexibility than allowed under the current structure.

Assets housed under the Blue Cross NC insurer flagship would remain subject to the current state regulations, including those from the Department of Insurance, one of its main regulatory agencies.

This reorganization, said Adam Searing, an associate professor at Georgetown University and former lobbyist, would allow Blue Cross NC to move its assets out of the flagship company, leave a “shell,” and with the new holding company act much like a for-profit: cut deals with for-profits, buy out companies and transfer nonprofit value to for-profit use with little supervision.

Under the reorganization bill, Blue Cross NC would also be able to avoid triggering the state’s 1998 conversion law.

If Blue Cross ever sought to go for-profit – a structure that has fewer restrictions on how an organization can spend money – the conversion law requires it to leave the value of Blue Cross NC in a nonprofit charitable foundation created to promote the health of North Carolinians.

To trigger a conversion, the threshold for Blue Cross NC’s for-profit involvement is 40% of its total assets and 10% of assets in any one transaction, among other regulations.

Reduce health care costs, or raise premiums?

The state insurance commissioner announced Friday he opposes the bill.

Causey, a Republican, said in a written statement that he supports Blue Cross’s mission to provide accessible and affordable coverage. “However, I do not support this bill in its current form because I believe it will harm consumers and has the potential to raise health insurance premiums in the future,” he wrote.

“I further believe this is a backdoor route to get around the conversion statutes the General Assembly passed in the 1990s and undermines the ability of the Department of Insurance to regulate for the public interest,” Causey wrote. “The Department of Insurance must maintain adequate oversight to protect consumers. It is my opinion that we should slow this process down, put this bill before a study committee, and see what changes are needed to best protect the interest of consumers.”

Darcie Dearth, a spokesperson for Blue Cross NC, said in a written statement that under the bill the state’s insurance department would “retain visibility into the financial condition of the entire holding company system” and that the nonprofit holding corporation would be subject to certain reporting requirements.

She also wrote that the insurance company would remain under existing oversight and regulations that “ensure the insurance business remains solvent and is serving the best needs of customers” such as surplus and reserve requirements, rate approval and consumer protection laws.

“The health care and business environment has changed dramatically in recent years. We support legislative proposals that would allow any hospital service corporation, including Blue Cross NC, to modernize its structure for greater flexibility and responsiveness to meet the critical needs of customers and communities,” Dearth wrote.

“By modernizing our structure and outdated regulations for the first time in decades, Blue Cross NC can operate more efficiently, maintain its not-for-profit status, and better meet the needs of its members by investing in solutions that improve access and make health care more affordable.”

Martin Eakes, former co-chair of the Coalition for the Public Trust and CEO of Durham-based Self Help Credit Union, which pushed for the conversion law in the 1990s, said that with this reorganization bill lawmakers would be “basically exempting Blue Cross from the consensus public policy that’s been in place for 25 years.”

Regardless of the intent behind this reorganization, Eakes said, “the legal effect of what (Blue Cross NC is) doing is transferring the assets out of this protected, legislatively determined trust.”

“We shouldn’t be taking billions of dollars and deregulating it when we have the health concerns of North Carolina policyholders at stake,” he said.

The conversion law is specifically tailored to Blue Cross NC and applies to few if any other nonprofit organizations in the state, Eakes and Searing said.

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In a briefing document obtained by The News & Observer, Blue Cross NC wrote that the law limits its ability to “make meaningful new investments in subsidiaries/affiliates without” approval from the Department of Insurance, while “competitors are not constrained by these requirements because of how they are structured.”

Eakes said that this was not a fair comparison as Blue Cross NC is “so much bigger than any other player in North Carolina that it is not even funny. They’re huge.”

He said Blue Cross NC is also part of a large network with connections across the country, which puts it on a level playing field with other national health insurers.

Cynthia Charles, a spokesperson for hospitals’ lobbying group, the North Carolina Healthcare Association, wrote that the group did not “ have a position on this bill” but that “we support flexibilities, which this bill provides, that would allow Blue Cross Blue Shield to make operational decisions and investments that will enable them to be better partners with their provider network and to better serve their subscribers.”

“That being said, HB346 should not grant BCBS the ability to invest in competing clinical services that would disadvantage their current provider network, including physicians and hospitals,” Charles wrote.

People’s money?

In the 1930s, during the Great Depression, Blue Cross NC was founded as a charitable nonprofit to provide health insurance – a new idea nationwide at the time, as selling health insurance was not yet a lucrative business. This charitable status allowed Blue Cross NC to get tax breaks.

Today, Blue Cross NC is still a nonprofit, but it is taxed.

In the 1990s, the Blue Cross and Blue Shield Association, the national association of 34 Blue Cross Blue Shield companies, voted to allow its nonprofit members to become for-profit corporations. Following this, Blue Cross NC sought to become for-profit and move assets into this new structure. But advocates, led by Searing and Eakes, pushed against this change and argued successfully that Blue Cross NC could not take these funds as they were built on earlier tax breaks and should, if the company becomes for-profit, be put in a fund to improve health care in North Carolina. That’s how the conversion law originated.

“One of the main reasons Blue Cross NC is so big today and has such a large market share is not because they were geniuses at the helm. It was that they were a nonprofit,” Searing said. “Part of that deal is when you set up that nonprofit, if you’re wildly successful like Blue Cross has been, you can’t go, ‘oh, well I’m gonna take that extra $100 million and give some gigantic bonuses to all the top executives and the board members.”

Blue Cross NC was “built on the premiums of North Carolina citizens, and those are not owned by any private shareholder,” Eakes said. “So even if it was in the early phase they had tax benefits, in the later years, taxed or untaxed, it’s all built up by North Carolina citizens and shouldn’t be then permitted to be sent to (invest) in a Blue Cross in South Carolina,” he said.

Republican State Treasurer Dale Folwell said he was concerned that Blue Cross NC “is not comfortable with just trying to be the best insurance company that they can be.”

“They basically have a monopoly in North Carolina and if they can turn their attention to just being the best insurance company they can be, and lower their premiums, I think that’s a much better use of their time then trying to pass legislation that makes what they do darker and more secretive,” Folwell said.

“Anything that would bring less sunshine and more secretive things to their structures is not good when you’re a monopoly,” he said.

Likelihood of passage

Blue Cross NC has a strong team of lobbyists including former House Speaker Harold Brubaker, former Raleigh Mayor Tom Fetzer and UNC Board of Governors member David Powers.

The bill also has some influential sponsors and bipartisan support.

The primary sponsors of the bipartisan House version of the bill are Reps. John Bradford and Mitchell Setzer and the majority and minority leaders of the chamber, Reps. John Bell and Robert Reives.

The Senate version’s primary sponsors are Republican Sens. Todd Johnson, David Craven and Dean Proctor.

Both the Senate and House version have many other legislative sponsors including two Democratic senators, Mike Woodard and Natalie Murdock, who represent Durham County, where Blue Cross NC has its headquarters.

None of the primary sponsors could be reached for comment by The N&O.

Asked by The N&O if the reorganization bill had traction, Senate leader Phil Berger said he’s “had some conversations with people about a request to kind of level the playing field between Blue Cross and other health insurers. I’m generally sympathetic for actors in the economy to have to work from the same platform, but as far as the specifics, we’ll have to see how the members feel about it.”