Insurance - Summary of Blue Cross Blue Shield of Maine/Anthem Transaction

Summary of the Blue Cross Blue Shield of Maine/Anthem Transaction

I. Introduction

Blue Cross Blue Shield of Maine (Blue Cross) is a nonprofit corporation and has been a licensed nonprofit hospital and medical service organization in Maine since 1939. Blue Cross is both a charitable corporation and a health insurer. Blue Cross is also the largest health insurer in Maine. In recent years, Blue Cross has suffered substantial financial losses and, as a result, its Board of Directors began to seriously consider viable options for Blue Cross's continued business. This process began in the fall of 1998.

The Board of Directors hired expert consultants to help it evaluate the business of Blue Cross and to help develop possible solutions to Blue Cross's financial problems. The initial options considered by the Blue Cross Board ranged from obtaining loans or investments from outside sources to affiliating with a larger financially stronger company. By the spring of 1999, it became apparent to the Board of Directors that Blue Cross would require more than a simple loan. The Board asked its consultants to seek out potential partners with which to affiliate. The Board wished to find an interested party who had experience operating Blue Cross Blue Shield plans, who would be committed to Maine and who had the financial stability to protect Maine policyholders in the future. After considering other options, the Board determined the best solution for Blue Cross was to affiliate with Anthem Insurance Companies, Inc. (Anthem).

Anthem is a mutual insurance company headquartered in Indiana. Anthem, one of the largest health insurers in the United States, owns and operates Blue Cross Blue Shield plans across the United States, including New Hampshire and Connecticut. In an agreement dated July 13, 1999, Anthem agreed to buy the business of Blue Cross and to continue operating this business through a new Maine Corporation under the Blue Cross Blue Shield name and trademark.

II. The Transaction

The structure of the transaction between Blue Cross and Anthem consists of a series of separate but related steps, all of which were required to be reviewed by the Superintendent. First, in accordance with a law passed by the Maine Legislature in 1997, Blue Cross will change its organizational form from a nonprofit hospital and medical service organization to a for-profit stock health insurer. In order for Blue Cross to undergo this conversion, it must establish a charitable trust, Maine Health Access Foundation, Inc. (Charitable Foundation), to continue its charitable mission. After conversion, the Charitable Foundation will own 100% of the converted Blue Cross company. During this time, Anthem will set up a new Maine company, Anthem Health Plans of Maine (Anthem Maine), that will become a licensed health insurer.

Once these steps are accomplished, the converted Blue Cross company will sell virtually all of its assets and liabilities to Anthem Maine. The sale proceeds will then be transferred to the Charitable Foundation followed by the payment of certain costs and expenses. Under the conversion law, the Charitable Foundation must receive at least the fair market value of the aggregate equity of the converted Blue Cross company. After the Charitable Foundation is funded, the converted Blue Cross company will set up a trust to wind up its business and dissolve in accordance with Maine law. The former Blue Cross health insurance business, therefore, will continue in Anthem Maine. Under the sale, all of the former Blue Cross policyholders will immediately become policyholders of Anthem Maine with the same benefits and coverage. The charitable mission of the former Blue Cross will be continued by the Charitable Foundation.

III. The Regulatory Process

The Superintendent of Insurance is the chief insurance regulatory official in Maine and regulates the health insurance activities of Blue Cross. The Attorney General in Maine is responsible for overseeing all charitable organizations in Maine, including the charitable activities of Blue Cross. Under the conversion law, the Superintendent must find that the conversion of Blue Cross to a stock company complies with Maine law. Similarly, the Attorney General (in conjunction with the Superior Court) is charged with ensuring that the creation of the charitable trust complies with Maine law. The Superintendent is also charged with finding that the Anthem related transactions comply with all applicable laws in Maine.

The Charitable Trust Plan was reviewed by the Attorney General, and the Conversion Plan was reviewed by the Superintendent. For the Charitable Trust Plan, the Attorney General held a series of public meetings, recommended certain changes to the Plan and submitted these recommendations to the Kennebec County Superior Court for approval. The court adopted the Modified Charitable Trust Plan with the Attorney General's recommendations on December 27, 1999.

Blue Cross submitted the Conversion Plan and, together with Anthem, submitted other required filings for the related transactions, to the Superintendent in September of 1999. Given the extreme complexity of the proposed transaction, the staff at the Bureau began reviewing documents and researching laws related to the transaction before the Charitable Trust Plan was officially approved by the court. Early in the process, several parties, including the Attorney General, petitioned for, and were granted, the right to intervene in the proceedings. Over the past several months, the Superintendent directed his staff to engage in extensive discovery and to review hundreds of filings to ensure that all aspects of the proposed transactions comply with Maine law. In order for the transactions to be approved, at least twenty-six separate statutory standards are required to be satisfied.

During the Bureau's review, the Superintendent sought public input in several locations throughout the state in late January of 2000. In addition, an unprecedented number of documents related to the transaction were regularly added to the Bureau's website. The Superintendent continued the public hearings in the week of April 3, 2000, where the parties submitted documents and testimony in support of or against the Conversion Plan and related transactions. Furthermore, the Superintendent set aside an additional day solely for the purpose of receiving additional public comment. The record for the proceeding was held open until April 28, 2000, in order to allow interested persons further opportunity to review documents or submit any additional written comments. By law, the Superintendent is required to render a decision regarding the Conversion Plan and related transactions within thirty days of the close of the record.

IV. Decision and Conditions

Based on all of the evidence submitted as part of the public hearings in January and April, the Superintendent has rendered his decision to APPROVE the Conversion Plan of Blue Cross and the related sale of its assets to Anthem Maine with 35 express conditions including the following:

At least $81.69 million of the sale proceeds paid for the business of Blue Cross must be immediately transferred to the Charitable Foundation as soon as the sale is complete.
The Charitable Foundation may not be subject to any tax or residual liabilities of the former Blue Cross after the transaction is complete. Instead, Anthem must assume any unanticipated potential liabilities.
The trust created to wind up the business of the dissolving company (the converted Blue Cross company) may only be in existence for a limited period of time and must file financial reports with the Charitable Foundation, the Attorney General and the Superintendent. After all of the debts of the dissolved company are paid, any remaining money in the trust must be given to the Charitable Foundation.
Anthem must maintain the capital level of Anthem Maine at a level set by the Superintendent in accordance with Maine law.
Anthem Maine must provide at least 30 days notice to the Superintendent prior to making any capital contribution to an affiliate and must promptly notify the Superintendent when it receives a capital contribution.
Anthem Maine may not pay any dividends within five years of the closing without the approval of the Superintendent.
Anthem Maine and Anthem East (Anthem Maine's direct parent company) must file quarterly financial reports with the Superintendent, and senior management must meet regularly with the Superintendent.
Anthem Maine must continue Blue Cross's practice to provide periodic payment plans to hospital providers in Maine.
Anthem Maine must make all commercially reasonable efforts to maintain the same state-wide provider network as Blue Cross, including primary care physicians, specialists, hospitals and rural health centers.
Anthem Maine must file a withdrawal plan with the Superintendent prior to ceasing to offer any current product of Blue Cross and prior to making any change to its geographic service area.
Anthem Maine's local medical director and local mental health director must be a Maine licensed physician and psychiatrist respectively.
A copy of the Decision and Order is available for viewing at www.maine.gov/insurance.