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Central Maine Partners Health Plan, a joint venture of Blue Cross Blue Shield of Maine and Central Maine Healthcare Corporation in Lewiston, has applied for licensure as a health maintenance organization. Another similarly structured HMO, Maine Partners Health Plan, is a joint venture of Blue Cross and Maine Medical Center in Portland, and its licensure application is the subject of a separate but related proceeding, No. INS-96-11. A third proposed "Community-Centered Health Plan," as Blue Cross refers to them, would involve Eastern Maine Medical Center in Bangor.

There has been widespread interest in this innovative proposal by Blue Cross, a Maine nonprofit health insurer, to write much of its future managed care coverage through for-profit subsidiaries. The public hearings held in these two proceedings have drawn by far the highest attendance of any hearings held by the Bureau.

The proponents of the community-centered concept have praised the ability of Blue Cross and the hospitals to respond to changing times and develop a new Maine-based, physician-centered alternative to a trend toward depersonalization of health care and absentee ownership. Others have questioned whether Blue Cross’s choice of particular hospitals as its "Partners," joining the State’s leading health insurer and two of the State’s leading hospitals, might limit consumer choice or unfairly discriminate against other hospitals. In addition, many consumers and health care providers spoke of the hardships of their personal experiences with managed care.

For the reasons set forth more fully below, I have determined that this application cannot qualify for approval in its present form. However, because the application can be modified so as to bring it into compliance with the applicable legal requirements, a conditional approval is warranted rather than an outright denial.

A serious deficiency is a lack of appropriate safeguards to make sure that Blue Cross’s sworn commitment – to operate these for-profit subsidiaries only in support of their owners’ nonprofit mission – can and will be kept in the future. The need to make this commitment more binding is demonstrated by Blue Cross’s troubling declaration in this hearing that it is not a charitable organization, which contradicts its charter, its enabling law, and its half-century and more of distinguished service to the people of Maine.

Therefore, the licensure of these joint ventures must be conditioned on an obligation to operate them only for the same "nonprofit health plan" purposes as Blue Cross itself, with restrictions on the transfer of stock from its current charitable ownership. Additional financial regulatory conditions will also be established, consistent with the regulatory framework for nonprofit insurers, and these conditions will also help protect against a possible adverse effect on competition in the health care market. With these conditions, however, these plans if successful could be a valuable addition to the range of health coverage options available to the people of Maine.

Factual Background and Procedural History

This is an application for health maintenance organization (HMO) licensure submitted by Central Maine Partners Health Plan (CMPHP), Associated Hospital Service of Maine d/b/a Blue Cross Blue Shield of Maine,¹ and Central Maine Healthcare Corporation (CMHC), the nonprofit corporation which owns and operates Central Maine Medical Center (CMMC), a general hospital in Lewiston. CMPHP, the proposed licensee, is a stock corporation owned 50% by Blue Cross and 50% by CMHC. CMPHP, Blue Cross, and CMHC have all been named as parties to this proceeding and will be referred to collectively as the "Applicants."

¹Variously referred to as "Blue Cross," "BCBSME," "BCBS," and "AHS."

The other parties to this proceeding are St. Mary’s Regional Medical Center and the Maine People’s Alliance, which have been granted permission to intervene, and a Bureau of Insurance Advocacy Panel designated by the Superintendent.² The Maine People’s Alliance is a consumer advocacy group, and St. Mary’s is a hospital in Lewiston. Mercy Hospital in Portland also participated fully in the hearing, but resolved its dispute with the Applicants and withdrew as a party before briefs were filed.³

²It is standard Bureau of Insurance practice for the Superintendent to appoint an advocacy panel in HMO licensure proceedings, Holding Company Act proceedings, and other situations in which a separation of functions is necessary to avoid a conflict between the Bureau’s adjudicatory function and the Bureau’s advisory, investigatory, and enforcement functions. The advocacy panel is given organizational autonomy and is represented by separate counsel. In accordance with the Maine Administrative Procedure Act, 5 M.R.S.A. § 9054–9055, and the Maine Insurance Code, 24-A M.R.S.A. § 216(5), the advocacy panel has the same procedural status as would another state agency intervening in the case, and is subject to the same prohibition as other parties against private communication with the Superintendent and the rest of the hearing panel. The same advocacy panel, under the direction of Deputy Superintendent Alessandro Iuppa, is participating in both this proceeding and the Maine Partners proceeding.

³The other intervenors, which withdrew before the hearing commenced, were York Hospital, Kennebec Valley Medical Center, Mid-Maine Medical Center, the Maine Health Alliance, and Franklin Memorial Hospital. The Maine Education Association Benefits Trust also applied to intervene, but withdrew its application before the parties were designated.

The purpose of this proceeding is to determine whether the proposed licensee satisfies the qualifications for licensure set forth in the Maine Health Maintenance Organization Act, 24-A M.R.S.A. §§ 4204(2-A),⁴ and whether the formation of this new domestic insurance company is in compliance with the requirements of the Maine Insurance Holding Company Act, 24-A M.R.S.A. § 222(7)(A). The substance of these statutory requirements is explained in the body of the decision as they arise.

⁴Pursuant to 24-A M.R.S.A. § 4204(2-A)(A) & (B), the Commissioner of Human Services must also determine whether the proposed HMO either qualifies for a certificate of need, or is exempt from the certificate of need requirement and meets specified quality assurance requirements. On March 17, the Commissioner certified the Applicants’ compliance with these criteria.

Although the Advocacy Panel and hospital intervenors moved to consolidate this proceeding with the Maine Partners proceeding, No. INS-96-11, the two proceedings were coordinated for scheduling purposes but were consolidated only for the purpose of taking evidence on the charitable obligation issues. The need to evaluate separately the other issues in these separate applications was underscored when Mercy Hospital, which had challenged the exclusivity of the MPHP provider agreement, withdrew from both proceedings upon entering into an agreement in principle to participate in the MPHP network. The CMPHP network continues to exclude St. Mary’s and St. Mary’s continues to challenge that exclusion.

The public hearing in this proceeding commenced on January 21, 1997. The first day of the hearing was held in Lewiston and was dedicated to comment and testimony by members of the public. The final day of testimony was January 30, and the record closed on March 18 upon the submission of the parties’ reply briefs.

With regard to the specifics of this application, as noted earlier, CMPHP is a for-profit corporation, the capital stock of which is owned 50% by Blue Cross and 50% by CMHC. CMPHP proposes to operate within Androscoggin and Oxford Counties. BCBS and CMHC have initially invested $850,000 each in CMPHP. Each has committed to an additional $950,000, for a total of $3.6 million.

BCBS has been a licensed Maine nonprofit hospital and medical service organization for many decades and is the largest health insurer in the State of Maine. More precisely, Associated Hospital Service of Maine, doing business under the name Blue Cross Blue Shield⁵ of Maine, is a nonprofit hospital and medical service corporation organized and regulated under Title 24 of the Maine Revised Statutes,⁶ and it holds the largest share of a market that comprises health insurance companies, health maintenance organizations, and Blue Cross.⁷ The health coverage market can also be viewed more broadly, as also encompassing administrative services for self-funded plans and for other insurers. Blue Cross in recent years has acquired third-party administrators that were active in both the health and workers’ compensation markets in Maine, and Blue Cross has also contracted with CMPHP to provide its administrative services.

⁵"Blue Cross" and "Blue Shield" are trademarks used under license from the Blue Cross and Blue Shield Association, based in Chicago.

⁶Insurers and HMOs are organized and regulated under Title 24-A, the Maine Insurance Code. When Blue Cross plans were first established, the coverage that Blue Cross plans and HMOs provided was generally considered to be "prepaid medical services," not insurance. As discussed below in the analysis of Blue Cross’s charitable obligations, the subsequent evolution of the health care and insurance industries and of the governing law has rendered that distinction less significant. Blue Cross is "sufficiently analogous to that of the insurance industry, which is a matter of public interest, to be likewise of public concern" and appropriately regulated by the Superintendent. AHS v. Mahoney, 213 A.2d 712, 717 (1965) (citation omitted).

⁷The only other licensed Title 24 corporations, Delta Dental and Maine Vision Services, do not provide comprehensive health coverage.

BCBS offers a variety of traditional fee-for-service, HMO, Medicare supplement and federal employer plans. As of 1991, BCBS was predominantly a fee-for-service company and insured close to 50% of the overall health insurance market in Maine. Since that time, three trends have adversely affected BCBS’ competitive position. These are the emergence of self-insurance, greater interest by major employers and national accounts in managed care, (redacted). CMPHP Exh. 3, p. 3 (Vangeison testimony); CMPHP Exh. 13C (supp. resp. #34). These three factors have reduced BCBS’s subscriber base from (redacted) as of (redacted) to (redacted) as of (redacted). See CMPHP Exh. 36.

Blue Cross measures its market share as approximately 45%. 1/22/97 Tspt., p. 164 (Foster testimony). However, while maintaining its market share, Blue Cross has also been sustaining operating losses. CMPHP Ex. 13C.

Blue Cross is coming out of its third consecutive year of operating losses. In 1994 and 1995, our operating losses were not as great as they will be in 1996, and they were driven predominantly by ... a decline in our enrollment base. In 1996, we turned that enrollment base decline around, and we actually achieved a modest enrollment gain, but at a significant cost to the company. We will close 1996 with a 20 million dollar operating loss…⁸

⁸Since insurance is a financial service industry, a significant part of insurers’ income is generated by investment of the funds they hold. Therefore, operating losses do not always indicate an unprofitable year, and Blue Cross actually had net gains in 1994 and 1995. However, the 1996 Blue Cross annual report, which was not issued until after the hearing, reveals that in 1996 there was not only an operating loss of $23 million, but also a net loss of $12 million.

1/22/97 Tspt., p. 71 (Vangeison testimony)

Traditionally, health insurance was offered primarily on an "indemnity" basis; that is, the patient would receive treatment, pay the doctor’s bill or the hospital bill, and then be reimbursed for all or some percentage of that bill by the insurance company. Although Blue Cross used direct payment to providers rather than indemnity reimbursement, see former 24 M.R.S.A. § 2301(9), its coverage was also structured on a fee-for-service basis. In recent years, however, HMO coverage and other "managed care" plans have become more common. Managed care has not yet come to dominate the market in Maine in the same way as it has in many other states, but the percentage of the Maine market covered by fee-for-service plans has still declined. Blue Cross has responded to this trend by offering HMO coverage under the "HMO Maine" trademark;⁹ this product line now accounts for a substantial portion of its subscriber base. In the managed care arena, BCBS now faces competition from a number of HMOs licensed to do business in Maine. These include Healthsource Maine, NYLCare, Harvard Pilgrim Health Care, and Tufts Health Plan. All these insurers are large out-of-state companies or Maine subsidiaries of large out-of-state companies. Each of these competitors (or its corporate parent), has significantly more managed care enrollment than BCBS, and far greater financial resources. 1/22/97 Tspt., pp. 71–72. BCBS Chief Operating Officer Keith Vangeison characterized Healthsource and NYLCare as "fairly aggressive competitors" in central Maine. He testified that Harvard Pilgrim is currently most active in southern Maine, but that he expected the company to begin competing in central Maine soon. 1/22/97 Tspt., pp. 136–37.

⁹HMO Maine was originally a separate nonprofit HMO under common management with Blue Cross, but in 1994 merged into Blue Cross after legislation was enacted authorizing nonprofit health service organizations to own HMOs or to provide HMO coverage directly. 24 M.R.S.A. § 2301(3-A)(E).

CMHC is the parent company of Central Maine Medical Center ("CMMC"). Filing, tab 13D. CMMC is a general hospital located in Lewiston, Maine. In addition to the general community care services provided by both CMMC and St. Mary’s, CMMC also provides such specialized services as radiation therapy, neonatal intensive care, and inpatient physical rehabilitation. CMPHP Exh. 6, p. 21 (prefiled testimony of CMHC’s Peter Chalke); 1/27 Tspt., pp. 229–230 (testimony of St. Mary’s CEO James Cassidy). CMHC also has management contracts with two smaller hospitals, Northern Cumberland Memorial Hospital in Bridgton ("NCMH"), and Rumford Community Hospital ("RCH"). CMPHP Exh. 12, pp. 2–3.

CMHC was the catalyst for the formation of physician-hospital organizations at CMMC, NCMH, RCH, and Stephens Memorial Hospital in Norway ("SMH"), initially on a separate basis. In January 1996, under CMHC’s aegis, these four groups formed the Central and Western Maine Regional PHO (the "Regional PHO"). CMPHP Exh. 6, pp. 3–4; CMPHP Exh. 12, pp. 3–4.

The purpose of the Regional PHO is to serve as a contracting and medical management vehicle in a managed care environment. As CMHC’s Peter Chalke testified, "The Regional PHO is poised to contract with existing managed care companies as well as new ones that come into the state. The major advantage that the Regional PHO provides is access to four hospitals and over 200 physicians through one contract. Thus payors are able to offer a broad provider network covering a broad geographic area." CMPHP Exh. 6, p. 4.

Through a series of contracts (the PHO Provider Agreement, CMPHP Exh. 24; the Network Access Agreement, CMPHP Exh. 23; the PHO/Professional Member Agreement, CMPHP Exh. 8A; the Hospital Participation Agreement, CMPHP Exh. 8B; and others) these hospitals, physicians, and other health care professionals "commit and obligate themselves" to provide services to CMPHP enrollees. Marketing, claims processing, administration, and financial accounting functions are to be provided by BCBS as set forth in a Management Services Agreement. Filing, tab 22.

CMPHP proposes to offer two broad types of product. These are the "lock-in" HMO product and the point of service ("POS") product. Under the lock-in HMO, enrollees are limited to obtaining services from the provider network described above unless otherwise authorized by the primary care physician or there is an emergency which makes preauthorization impossible. The POS does not limit enrollees to network providers, but does require payment of a deductible and coinsurance from patients who self-refer out-of-network. CMPHP filing, tab 7A, "Marketing Strategy." See also certificates of coverage contained in tab 10 of the filing. The premium for (redacted).¹⁰ CMPHP Exh. 13H, resp. #17. Although individual policies will be offered as required by 24-A M.R.S.A. § 4204(2-A)(N), the principal target market for CMPHP is employers of 25 or more employees. Filing, tab 27 (actuarial memorandum and rate schedules) CMPHP Exh. 13A, resp. #2 (marketing materials). CMPHP originally projected 13,500 total enrollees by year-end 1999, consisting of 9500 POS and 4000 lock-in. CMPHP Exh. 1, p. 9 (testimony of BCBS senior vice president Karen Foster); CMPHP Exh. 13A, resp. #101. The total enrollment has since been revised upwards to 13,700. (CMPHP Exh. 15 summary page), with (redacted) of sales in the POS and (redacted) in the lock-in HMO. Exh. 15 (CMMC PHO Enrollment Forecast).

¹⁰24-A M.R.S.A. § 4227 requires employers of more than 50 employees that offer a "lock-in" HMO to also offer a product that does not restrict choice of providers, and further provides that a POS option satisfies this requirement.

Of the 13,500 – 13,700 1999 projected enrollment, BCBS anticipates that 6,485 members will be persons currently enrolled in existing BCBS products. More than half of this "migration," approximately 3500, are expected to be current HMO Maine enrollees (1,000 from HMO Maine’s lock-in HMO, 2,500 from the POS). Tspt., 1/22/97, pp. 239–241 (Foster testimony). The 6,485 migrating members will represent (redacted) of existing BCBS fee-for-service members, (redacted) of existing HMO Maine POS members, and (redacted) of existing lock-in HMO Maine members within the CMPHP service area. Exh. 15 (CMMC PHO Enrollment Forecast).

Under the terms of the PHO Provider Agreement, primary care physicians (redacted).

Under the traditional capitation model, physicians and physician groups who participate in managed care programs accept the risk that the cost of services provided (or authorized) by their individual practices will stay within the prenegotiated capitation rate.¹¹ The arrangement with the Regional PHO, on the other hand, (redacted). PHO Provider Agreement, Exh. C, ¶ 3. (redacted).

¹¹No party has raised as an issue in either proceeding whether the proposed global capitation arrangements would result in the physician-hospital organizations acting as unlicensed insurers or health maintenance organizations, and this Decision and Order makes no determination on that question. The record makes clear that a variety of creative risk-sharing arrangements are already in place in the market, and legislative clarification in this area is currently being explored.

As an incentive toward that end, the expectation of BCBS, CMHC and the PHO members is that the hospitals and physicians will actively participate and collaborate in new patterns of practice that will lower healthcare costs. Initially, since such protocols have not yet been developed, they will be using the current HMO Maine protocols.¹² As stated in the CMPHP network access agreement, "CMHC shall arrange and negotiate competitive service agreements with Participating Providers in the Plan’s Service Area, and facilitate and negotiate capitation contracts which provide for a reasonable allocation of risk through aligned incentives and the implementation of utilization review, quality assurance, and other managed care programs." CMPHP Exh. 23, p. 5, ¶ 2.3.1; see also CMPHP Exh. 13, resp. #35.

¹²Mr. Chalke has testified that 22 such protocols are currently in preparation.

The provider panel’s active involvement in developing local treatment protocols for eventual submission to the HMO’s medical director for adoption is integral to CMPHP’s prospects of success. A number of providers feel that CMPHP represents a true opportunity for local input and control that does not currently exist in a managed care environment. E.g., Tspt. 1/22/97, pp. 206–22 (testimony of James F. Kane, CMHC’s director for integrated health care); CMPHP Exh. 6, pp. 8–9, 12–14, 20 27–29 and 1/22/97 tspt. pp. 250–55 (Chalke testimony).

Testimony of Dr. David Stuchiner: "To my knowledge, there is no other health plan or managed care option that provides this degree of local input from local physicians, as well as from patients, to help manage the healthcare needs in this community." 1/21/97 tspt. p. 101.

Testimony of Dr. Gary Hatfield: "The strength of this option, as you’ve already heard, is it would give myself and other healthcare providers a great role in how to take care of patients, and it also would give patients and local businesses some input as well." 1/21/97 tspt. p. 205.

Testimony of Dr. Gregory D’Augustine: "The Central Maine Partners Health Plan allows physicians a share in the risk of the company’s success, thus, the incentive to provide effective but economical care is felt strongly by the care providers." 1/21/97 tspt. pp. 129–30.

The extent to which the Applicants rely on physician involvement for the success of these plans is underscored by the fact that the discount CMPHP negotiated with CMHC is within the range of discounts that the hospital normally gives to other managed care plans. It is not more favorable. Tspt., 1/22/97, pp. 351–353 (Chalke testimony).

The expectation of lowered utilization resulting from physician development of treatment protocols, in tandem with the financial participation of both the hospital and the physicians, appears to be an important element in CMPHP’s strategy for success. See CMPHP Exh. 1, pp. 3, 5; 1/22/97, Tspt. pp. 170–72 (Foster testimony). This differs from the more common HMO practice of negotiating the deepest possible discounts from providers: "Our experience with the underlying health care cost structure in Maine leads us to the conclusion that alternative managed care models which rely on carrier purchasing power, and leveraging physicians against hospitals, will ultimately fail to deliver the long-term price stability and quality standards necessary to ensure a viable health care delivery system in a predominately rural economy." CMPHP Exh. 3, p. 17 (Keith Vangeison testimony); see also Mr. Vangeison’s testimony at CMPHP Exh. 3, p. 4 and Tspt., 1/22/97, p. 86.

The truth of these assumptions will be quickly put to the test. Arthur Andersen consulting actuary Robert Hoyer testified that to achieve the claim cost and medical expense targets on which its rates are premised, (redacted). Adv. Panel Exh. 2, pp. 1-4.¹³ (redacted). Id., p. 4. CMPHP expects that these savings will enable it to offer coverage at a per-member-per-month cost less than the current premium for BCBS’s comparable HMO Maine products.

¹³The prefiled testimony of Arthur Andersen consultants Robert Hoyer and Mark Leicester is in large part a restatement of the text of a report they wrote as consultants to the Advocacy Panel, entitled "Financial Review of Maine Partners Health Plan and Central Maine Partners Health Plan." Adv. Panel Exh. 3.

St. Mary’s Hospital is a 233-bed community hospital located in Lewiston, Maine that provides general hospital care and also offers specialized programs in psychiatric care and substance abuse treatment not available at CMMC. St. Mary’s Exh. 1, p. 1 (Cassidy testimony); CMPHP Exh. 6, p. 22 (Chalke testimony). CMPHP has not included St. Mary’s in its provider network despite St. Mary’s strong desire to participate. St. Mary’s Exh. 1, pp. 2–3 (Cassidy testimony).

The effect of this exclusion is that employees of companies that purchase employee health insurance from CMPHP will be denied admission to St. Mary’s under the lock-in HMO, or will be forced to pay some part of the POS cost out-of-pocket. Additionally, the premium difference between the lock-in HMO and the POS may discourage employers of fewer than 50 employees from purchasing the POS plan, and may possibly lead employers of any size that purchase the POS option to require a greater premium co-pay from employees than under the less expensive full HMO option. It is not possible to predict the exact magnitude of extra cost that this pricing structure will impose on employees who desire continued access to St. Mary’s. However, it is undeniably of great concern to the many members of the public who testified in this proceeding.

CMPHP’s justification for the exclusion of St. Mary’s is twofold. First, CMMC and the other network hospitals currently account for 82% of community care hospitalizations from BCBS’s enrollees in the CMPHP service area. CMPHP Exh. 33; Tspt. 1/24/97, p. 264 (testimony of BCBS vice president for health care networks Jeffrey Buck); Tspt., 1/22/97, pp. 77, 129 (Vangeison testimony); see also Mr. Vangeison’s testimony at CMPHP Exh. 3, p. 7. CMPHP candidly states that its products are not designed for people who foresee obtaining the bulk of their hospital care from St. Mary’s. For these individuals, BCBS maintains that HMO Maine will continue to be available as an HMO without this restriction, as will HMO products from other insurers.

Second, BCBS contends that it is entitled to pick its partner. To support its choice of CMMC alone, BCBS points to the willingness of CMMC and its allied Regional PHO to accept financial risk in the success of CMPHP. BCBS believes that the close relationship of CMMC and the Regional PHO optimizes the chances of achieving meaningful cost reductions. BCBS cites its equity partner’s direct ability to control costs in-house, as opposed to St. Mary’s. BCBS also claims that success of the capitation scheme depends upon the concentration of patient volume in a limited number of providers, that CMPHP will not attract so many covered lives as to require a second major Lewiston hospital to serve enrollees, and that CMHC is the lower-cost of the two hospitals. CMPHP Exh. 1, pp. 10–11 (Foster testimony); CMPHP Exh. 3, p. 6–7 and 1/22/97 tspt., pp. 76–77, 92, 124–25, 321, 324–25 (Vangeison testimony).

St. Mary’s challenges many of these assertions. St. Mary’s highlights its own ongoing efforts to cut costs and achieve efficiencies. St. Mary’s Exh. 1, pp. 3–4 and 1/27 Tspt., pp. 223–25 (Cassidy testimony). Pointing to the overlap of medical staffs at the two hospitals, St. Mary’s also asserts at pages 16–17 of its brief that there is no logical reason why any new treatment protocols developed by the Regional PHO could not be implemented at St. Mary’s as well as at CMMC. But a significant point of contention between the parties is whether CMMC or St. Mary’s is the lower-cost of the two providers. St. Mary’s points to (redacted). Compare CMPHP Exh. 30 with Exhibit D to the PHO Provider Agreement, Filing tab 24. (redacted), 1/23/97 Tspt., pp. 267–68 (testimony of St. Mary’s CFO Carolyn Kasabian),(redacted). 1/24/97 Tspt., pp. 286–288 (testimony of Jeffrey Buck). Such rates could not be offered, BCBS believes, if paid on the volume of patients represented by CMPHP (e.g., "It’s fairly easy to discount heavily on the margin.") 1/22/97 tspt., pp. 322–23 (Vangeison testimony).

(redacted). See St. Mary’s Exh. 3, p. 14 (testimony of Bruce Seaman). (redacted). CMPHP Exh. 33; Tspt. 1/24/97, pp. 263–91 (Buck testimony). (redacted). Although I accept the admissions data contained in Exhibit 33, the comparative cost data is lacking in context and therefore can not be relied upon.

The record indicates that comparative cost considerations were secondary to the other factors noted at pages 7-9 above. The exclusion of St. Mary’s appears to have been driven primarily by the desire of CMHC to capture patient volume and control health care delivery. It seems reasonable to question whether one could expect BCBS to negotiate too aggressively with its equity partner regarding hospital costs while the two partners were also negotiating the BCBS contract for administrative costs. The evidence is not persuasive that pure cost considerations were the primary factor in BCBS’ choice of CMHC as a partner. To the degree that CMPHP considers other new alliances to advance its competitive position, pure cost considerations will be only one of the factors in its success.

The CMPHP board will initially have eight directors, four of whom are to be nominated by each of the two shareholders. By-laws, Art. V, § 1 (Filing, tab 3). A supermajority vote of 75% of the directors is required for most major decisions of the corporation, including changes in service area. By-laws, Art. VI, § 5(xxv).

A separate shareholders agreement executed by BCBS and CMHC (Filing, tab 21) is noteworthy in several respects. First, section 7 of the agreement contains mutual noncompetition and right of first refusal clauses. Both BCBS and CMHC agree not to own or operate a competing HMO in CMPHP’s service area, except for HMO Maine’s existing lines of business, and each has conferred on the other a right of first refusal with respect to any new business products. Section 7 also contains a clause whereby BCBS pledges to "use best efforts to market the Company’s health plan products to enrollees in BCBS’ existing fee-for-service and HMO products who reside in the Company’s Service Area as soon as practicable following the date that the Company obtains an HMO license."

The shareholders agreement permits the sale of CMHC’s stock to "physicians and hospital providers in the Company’s Service Area" (p. 8), (redacted). St. Mary’s Exh. 12 and 15; 1/22/97 Tspt., pp. 185–89 (testimony of Dr. Gary Hatfield), 199-200 (Kane testimony). The agreement also permits the sale of stock to additional investors if approved by 75% of the board of directors. Id. The shareholders agreement also mentions the possibility of a public offering. Id., pp. 3, 7.

General HMO Licensure Requirements

Although the most contentious issues in this proceeding arise out of the innovative features of these joint ventures, this application is first and foremost an application to charter and license a new domestic health maintenance organization. Both the Holding Company Act and the HMO Act, as noted above, enumerate a number of criteria with which the Applicants, like all others similarly situated, must comply in order to ensure, inter alia, that the company has sound financial management and can and will provide meaningful access to quality care within its proposed service area. This application has undergone extensive review and revision since it was first filed, and the Applicants’ compliance with most of these criteria is uncontested. However, certain specific issues remain.

Financial Issues

Pursuant to 24-A M.R.S.A. § 4203(3)(I), applications for a certificate of authority must include a financial feasibility plan. The essential elements of that plan are detailed in Bureau of Insurance Rule 191 and require financial and enrollment projections as well as descriptions of the methodologies employed in the development of those projections. CMPHP has, in Exhibit 1, Tab 26, §§ A–F supplemented by responses to various Advocacy Panel discovery requests, satisfied these financial feasibility requirements and has provided the basis for assessing the economic viability of the proposed HMO.

In their report and testimony, Arthur Andersen consultants Robert Hoyer and Mark Leicester make that assessment and offer a number of conclusions regarding the validity of the projections and the adequacy of the proposed capital contributions. The following excerpts from their report (Adv. Panel Exh. 3) highlight several of those conclusions.

(REDACTED)

It is clearly Arthur Andersen’s opinion that to the extent the applicant’s assumptions err, they will most likely err in a manner which may require greater capital than is presently anticipated. Specifically, the references above all imply faster growth and/or lower margins, which are precisely the cited ingredients for producing the need for additional capital. Recognizing the limitations of projections for performance three to five years hence, it is the Superintendent’s conclusion that CMPHP has satisfied the statutory financial criteria but does so in a manner that warrants ongoing monitoring by the applicant and the Bureau of Insurance. If this plan goes forward, there will be a need for an annual update, as part of its business plan, of its projections including a variance report for the most recent period and an analysis of its prospective capital requirements.

Adequacy of Network/Quality Assurance

The applicant has filed a detailed quality assurance plan as required by 24-A M.R.S.A. §§ 4203 and 4204. The applicant will follow the quality program currently in place for HMO Maine.

The applicant has filed a complaint system as required by 24-A M.R.S.A. § 4203 and will follow the standards currently in place for HMO Maine.

Following execution of the first capitated managed care contract with St. Mary’s, Blue Cross and Blue Shield (HMO Maine) had difficulty in providing timely and useful utilization experience and financial reports to St. Mary’s to assist it in monitoring contract performance and providing patient care. (Testimony of Pauline Cote of Jan. 23 at 29). Timely utilization reports are a requirement of licensure to operate an HMO in Maine. 24-A M.R.S.A. § 4204(2-A)(5).

Access to Behavioral and Substance Abuse Care

An HMO is required to provide, at a minimum, "Basic Health Care Services" to the enrolled population. 24-A M.R.S.A. § 4202-A(10). CMPHP is deficient in failing to provide adequate access to behavioral and substance abuse care. None of the four network hospitals provides this care. The record indicates an assumption that these services would be obtained at St. Mary’s through Greenspring. (Vangeison, Jan. 22 at 115; Chalke, Jan. 22 at 261.)

The record does not reflect any executed contract between Greenspring and CMPHP for provision of behavioral and substance abuse care. Nor does the record indicate that substance abuse and behavioral providers, including St. Mary’s, which have a contractual relationship with Greenspring are bound to provide those services to CMPHP.

The network is unacceptable absent a plan for provision of substance abuse and behavioral care. There was recognition of the importance of access to local care for certain severe behavioral conditions. (See Vangeison testimony of January 22 at 115–116).

Access in the Bridgton Area

The Central Maine Partners Health Plan network includes four hospitals including Northern Cumberland Memorial Hospital in Bridgton in Cumberland County. The service area for the HMO was determined unilaterally by Blue Cross and Blue Shield of Maine, but in consultation with CMHC. (See St. Mary’s Exh. 42). The service area does not overlap with the service area of MPHP. The service areas were created in this manner for marketing purposes. Id.

Information was provided by Blue Cross that indicated that it is likely that a redefinition of the service areas of the two HMOs will be sought in the future in the towns of Bridgton, Harrison and Naples. Those towns would likely be removed from the Maine Partners Health Plan service area and moved to the CMPHP service area for marketing purposes. (St. Mary’s Exh. 43.)

The marketing plan for the two HMOs provides that in each service area one HMO product will be offered to avoid marketing confusion and to avoid having a situation in which Blue Cross is competing against itself.

For employers located in Bridgton, Harrison, and Naples, Northern Cumberland Memorial Hospital (NCMH) will not be a network provider despite the fact that it is a local facility and the provider of choice for many local residents. Those towns as well as the facility are in Cumberland County; however, the facility is part of the CMPHP network. For that reason additional cost sharing will be required to access the facility by employees of employers from Cumberland County.

Employees in the CMPHP service area who are able to access NCMH as a network provider (that is, employees of employers from Androscoggin or Oxford Counties) will not be able to access tertiary services in the Portland area without additional cost sharing and will need to use CMHC for available tertiary services to obtain the highest available level of reimbursement.

As currently proposed, the application fails to demonstrate how this model serves the public interest when residents of the border regions of the county are denied access to their hospital of choice at the most favorable benefit structure. The application contains no plan for responding to this situation through contractual arrangements between the two plans, with the HMO Maine or Blue Cross and Blue Shield networks, or otherwise.

There was testimony that an insurance plan should be structured to accommodate people who live in a community accessing their local hospital (see Vangeison testimony of January 22 at p 103). No determination has been made whether the most effective manner of responding to this situation is to realign the service areas by moving certain towns to the CMPHP service area. However, statistics indicate that most residents of Bridgton and Naples prefer to go to Portland for medical care not available locally. (See Vangeison testimony of January 22 at pp. 109–111) There are a number of ways of addressing this local access issue. All of them assume cooperation between the applicants as a necessary element of the solution. In order to approve this application, it is necessary that the two plans, along with BCBS, coordinate in order to address customer and access concerns.

Evidence of Coverage

The evidence of coverage for the plan has not been approved. For the point of service plan copayments and deductibles must be described. 24-A M.R.S.A. § 4207-A. The forms indicate reimbursement based on a maximum allowance system, apparently contemplating some contractual relationship with providers other than network providers. The nature of this relationship with other providers is unclear and may contemplate arrangements with the provider network of either or both Maine Partners Health Plan or HMOMaine. The specifics of the arrangements need to be addressed.

Subsidiary Question

In its Brief, the Advocacy Panel expresses concern that because Blue Cross only owns 50% of each joint venture, these companies would not be considered "subsidiaries," and would therefore be subject to the investment restrictions of 24-A M.R.S.A. §§ 1156(2)(F) and 1155(2),¹⁴ which limit total equity investments to 20% of admitted assets and any one investment to 10% of admitted assets. According to the Advocacy Panel, the reason these investments must be considered portfolio investments rather than investments in subsidiaries is that Blue Cross in their view is not a "controlling party" within the meaning of the Holding Company Act, 24-A M.R.S.A. § 222(F).

¹⁴Applicable to nonprofit health service organizations pursuant to 24 M.R.S.A. § 2301(9-A)(A).

The Applicants disagree. They adopt by reference an extensive analysis by the Applicants in the Maine Partners proceeding, explaining why they believe that Blue Cross is a controlling party and the joint ventures are subsidiaries, and assert further that the issue is not properly before the Superintendent in the first place because it is not a statutory criterion for approval and was not raised by any party in its designation of issues.

There is no compelling reason to make an exception to the general principle that issues not properly presented should not be decided, because the classification of an investment as a portfolio investment or a subsidiary investment is generally resolved through the Bureau’s regular examination process. There is no urgency in deciding this issue sooner, because the initial investments of Blue Cross in these joint ventures are small enough relative to the overall Blue Cross asset position that the investments do not come close to the 10% or 20% thresholds referenced above.

Due Diligence

The Advocacy Panel has recommended that the application be denied due to the failure of CMPHP’s shareholders to exercise due diligence in the formation of CMPHP. Specifically, the Advocacy Panel charges that BCBS and CMHC failed to give sufficient information to their respective boards of directors to enable informed decisionmaking; that the shareholders failed to fully explore the feasibility of organizing CMPHP as a nonprofit corporation or limited liability company rather than as a business corporation; and that BCBS’s participation in the joint venture represented a significantly greater value to CMPHP than did CMHC’s participation. CMPHP Exhibit 11 is a narrative summary and compilation of BCBS management’s contacts with the board regarding the three community health projects proposed for Bangor, Portland and Lewiston. Much of this material is extraneous, and (redacted).

(REDACTED)

Exh. 11, p. 4.

(REDACTED)

There is no contemporaneous documentation of any focused discussion regarding the corporate form the new entity should assume. BCBS’s transaction counsel had advised the shareholders to "pursue a limited liability company ["LLC"] model." Tspt., 1/22/97, pp. 73–74 (Vangeison testimony). In April, 1996, counsel inquired of the Bureau on a "no name" basis if organization of an HMO as an LLC was permissible. CMPHP Exh. 25 (Stipulation of Facts). The essence of the Bureau’s response was that regulatory ambiguities precluded an easy answer to this question, and that it could have taken up to a year "to finalize the Bureau’s position given the competing priorities of the Bureau at that time." Id. The manner in which BCBS and CMHC assimilated this information is best described in a December 13, 1996 legal memo from the same counsel: (redacted). CMPHP "Exh. 8, p. 2, n. 1.

With respect to the feasibility of organizing the new HMO as a nonprofit corporation, Mr. Vangeison testified that "[c]onsideration was given. On the advice of tax counsel, we were informed that was not a viable proposition for us." Tspt., 1/22/97, p. 74.

Consultant Leicester asserted that there was a lack of board involvement and too hasty a choice of the for-profit corporate form, amounting to a lack of due diligence. See 13-B M.R.S.A. § 716.(redacted)."¹⁵ Adv. Panel Exh. 1, p. 5. Mr. Leicester similarly criticized CMPHP’s shareholders for failing to investigate the possibility of establishing the organization as a nonprofit or LLC, either of which, according to Mr. Leicester, would have eliminated payment of federal income taxes by the new entity and thereby increased the amount of earnings available for distribution to its owners. Id., pp. 6–7.

¹⁵Mr. Leicester was also critical of the CMHC board, but felt constrained by the limited documentation made available to him.

Relying on Arthur Andersen consulting actuary Robert Hoyer, the Advocacy Panel suggests that the 50–50 capitalization of CMPHP undervalues the actual contribution of BCBS to the enterprise. Adv. Panel Exh. 2, pp. 10–13 (Hoyer testimony). According to Mr. Hoyer, the shareholders agreement places no value on the existing BCBS subscribers whom the BCBS pro formas assume will migrate to CMPHP. Mr. Hoyer estimates the resultant net loss of profits to BCBS to be in the range of (redacted). (Adv. Panel Exh. 2, p. 13), and suggests that compensation in this amount is due BCBS. Id., p. 11. This block of business represents an opportunity contribution to the enterprise that BCBS can offer no one other than its equity partner. This is not true of CMHC’s chief intangible contribution, the PHO, which is not offering its services exclusively to CMPHP. Rather, the PHO, which includes the hospital, is willing to bargain with any payor.

BCBS unconvincingly maintains that the assumed loss of customers to the new HMO has no economic value. More to the point, CMHC refused to consider the venture unless capitalization and equity were both shared equally, and both parties perceived their respective intangible contributions to be of equal value. Tspt., 1/22/97, pp. 173–76 (Foster testimony)

The Advocacy Panel denominated the first two concerns — i.e., level of board involvement and choice of corporate form — as "process issues." However, it is the outcome of that process, not the process itself, that must be the primary focus. CMPHP will be granted or denied a certificate of authority based on the application as actually filed, rather than on the quality of the internal planning and decisionmaking which resulted in the application. Certainly, poor planning, bad choices and uninformed decisionmaking can result in a deficient or defective application, but that is not the thrust of the Advocacy Panel’s position. Unless it can be shown that the application itself fails to satisfy any of the criteria in the HMO law , the Holding Company Act, or other applicable regulatory requirements, the process and relative equity issues will not take precedence over the filing itself.

The respective roles of board and management in corporate decisionmaking raise complex issues of fiduciary responsibility which need not be decided in this instance. The due diligence standard on which Mr. Leicester premises his conclusions is nowhere made a procedural requirement of the HMO law or Holding Company Act, either explicitly or implicitly. The degree to which the BCBS and CMHC directors made informed or uninformed decisions falls within the realm of the business judgment rule, as set forth in Rosenthal v. Rosenthal, 543 A.2d 348, 352–54 (Me. 1988) and Central Maine Power Co. v. Public Utilities Commission, 405 A.2d 153, 177–79 (Me. 1979). Absent some indication of fraud or bad faith, neither of which are present here, the Superintendent cannot second-guess either body. Rosenthal makes quite clear that even if the directors had indeed failed to exercise due diligence in approving the transaction, such approvals could only be upset if they resulted from fraud or bad faith. 543 A.2d at 353.

The same principles compel rejection of the Advocacy Panel’s contentions that the joint venturers’ choice of a business organization is fatally flawed. First, 24–A M.R.S.A. § 4214(1) appears to give organizers of a subsidiary HMO considerable latitude in choosing the business form to be assumed by the new company. It also appears dubious that a non-staff-model HMO such as CMPHP, even if it passes the threshold hurdle of Internal Revenue Code ("IRC") § 501(m) that it not be providing "commercial-type insurance" as a substantial part of its activity, would qualify for federal income tax exemption under IRC § 501(c)(3) or (4) if organized as a nonprofit corporation. Sound Health Association v. Commissioner, 71 T.C. 158, 1978), acq. 1981-2 C.B. 2; Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3d Cir. 1993), sub. op. 30 F.3d 494 (3d Cir. 1994).¹⁶ If tax-exempt status were achieved under §_501(c)(4), a further complication would appear to be CMPHP’s inability, as a tax-exempt organization, to distribute any share of its profits back to co-parent BCBS, which is not federally tax-exempt. See IRC § 501(c)(4). Second, there is no evidence that fraud or bad faith underlay the organizers’ rejection of the nonprofit form, bringing that decision within the scope of the business judgment rule as well. It is troubling that the Applicants’ tax research validating the decision not to use the LLC format was conducted only after the choice was made and had been challenged by the Advocacy Panel. However, that fact goes to the quality of the business judgment, not to its legitimacy.

¹⁶See Hyatt and Hopkins, The Law of Tax-Exempt Healthcare Organizations (John Wiley & Sons, Inc. 1995), §§ 9.1–9.3.

The Advocacy Panel contends further that the Board imprudently ignored the value of the existing Blue Cross customer base when negotiating the relative equity contributions of the parties, but that claim is likewise within the scope of the business judgment rule.¹⁷ The relative equivalence of consideration is not a licensing criterion, and the Advocacy Panel’s critique exemplifies the type of after-the-fact review cautioned against in Rosenthal v. Rosenthal: "Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to the directors’ honest and unselfish decision…" 543 A.2d at 353 (emphasis added). The prospect of CMHC starting its own HMO, the restricted choice of large hospitals, and BCBS’s strong desire to partner with CMHC as part of its planned community health system are all factors that could support a good-faith belief that the 50/50 arrangement made good business sense.

¹⁷However, these allegations do also raise questions regarding the stewardship of charitable assets, which will be discussed separately in the analysis of the "conversion" issues.

Impact on Competition

Pursuant to 24-A M.R.S.A. § 222(7)(A)(2), the Superintendent cannot approve an insurance acquisition that would substantially lessen competition in insurance in this State, tend to create an insurance monopoly, or violate Maine or federal laws relating to monopolies or restraints of trade.

Overview of the Issues

According to the Applicants, these applications represent the addition of a new and exciting option to a rapidly evolving market, designed to conveniently deliver quality care at a better price. It is clear we need a more tightly managed HMO product, which delivers high quality and at a lower price in the marketplace in order to be successful" (Applicant Exh. 4, Prefiled Ms. Foster p. 2). According to St. Mary’s, these applications represent a conspiracy in restraint of trade, an alliance between the major players in the relevant healthcare markets and the major player in the relevant insurance markets, designed to provide new leverage to put the squeeze on competitors. Evidence has been presented which is sufficient to demonstrate that both views must be given serious consideration.

The competition inquiry has spawned testimony addressing a wide array of issues, ranging from whether Maine Partners and Central Maine Partners are properly viewed as affiliates under the common control of Blue Cross or as competitors in collusion to divide their market, to whether the Superintendent even has jurisdiction to consider whether these transactions could have a damaging impact on the hospital market. Some of these questions are global in nature, others more concrete, and still others relevant to only one or the other of the two applications.

However, it is possible to trace a guiding thread which can organize the analysis. Can a hospital-based HMO qualify for authorization to do business in the State of Maine? If so, under what conditions? Can Blue Cross be included in such an arrangement?

Community-Centered Health Plans as a Common Enterprise

The analysis is not as simple as either St. Mary’s or the Applicants suggest. The proposed "community-centered health plans" are not unlawful per se under established antitrust principles, but neither are they simply "new entrants into the market" which by expanding the range of choices available could only serve to benefit the consumers. Notwithstanding the modest initial enrollment projections, there is evidence showing that Blue Cross contemplates a network of joint venture HMOs to be the successor to HMO Maine, the existing Blue Cross HMO.

Therefore, these proposals are appropriately viewed not as the introduction of new competitors into the marketplace, but as the introduction of new products by an existing competitor. Blue Cross itself concedes as much when it argues that the allocation of service areas between the two joint ventures should not be viewed as a conspiracy between competitors because both of them are under the common control of Blue Cross.

This theory is valid. It would be futile and counterproductive to approve these applications only on condition that the enterprise be balkanized into three competing parts, since much of the anticipated benefit from these proposals consists in the synergies they hope to create. Furthermore, requiring Blue Cross to restrict its role to that of a passive investor would be inconsistent with its charitable status — the purpose of Blue Cross is to provide health coverage, not venture capital.

St. Mary’s, however, contends that CMPHP and MPHP are not true affiliates because Blue Cross is not the single controlling owner of either corporation, and that both the CMPHP and MPHP applications therefore violate antitrust law as embodying a conspiracy by CMPHP and MPHP to allocate exclusive territories between them. CMPHP’s marketing area consists of Androscoggin and Oxford Counties only. MPHP’s marketing area consists primarily of Cumberland County, although its proposed service area extends outward to York, Sagadahoc, Knox, and Lincoln Counties.

This charge is not borne out by the record. The operating territory of the each HMO was agreed upon by the shareholders of the respective corporations during the organizing stage of each. See the definitions of "Service Area" that appear in the two Shareholder Agreements. That is, BCBS and CMHC agreed that CMPHP would operate in the two central Maine counties, and BCBS and MMC (or MMC-PHO) agreed that MPHP would operate in the five southern-coastal counties. There is no evidence that the two HMOs themselves conspired to divide marketing and/or service areas between them. Rather, BCBS, in its separate negotiations with CMHC and MMC/MMC-PHO, was the driving force in determining what the service area of each would be. The lack of any agreement between affiliated corporations distinguishes these HMO applications from the Copperweld line of cases relied upon by St. Mary’s.¹⁸

¹⁸See pp. 25-28 of St. Mary’s opening brief in CMPHP and pp. 29-32 of St. Mary’s reply brief in the CMPHP proceeding. St. Mary’s makes the same arguments in the opening and reply briefs it filed in the MPHP proceeding.

Moreover, there is no anticompetitive effect stemming from CMPHP and MPHP each operating in discrete areas. St. Mary’s overlooks the fact that the choice of market (or service) area is not determined solely by the HMOs themselves. Rather, approval of the applicants’ market areas lies with the Superintendent. There is no apparent procompetitive benefit in requiring each of the HMOs to compete in the other’s territory.¹⁹ BCBS rightly states that requiring CMPHP and MPHP to sell to the same large group of employers would in effect be tantamount to BCBS competing against itself.

¹⁹The Superintendent’s active supervision of HMO marketing areas and provider access as part of the licensing process brings St. Mary’s claim of anticompetitive conduct by CMPHP and MPHP within the scope of the state action immunity to antitrust liability. See, e.g., Parker v. Brown, 317 U.S. 341 (1943); Southern Motor Carriers Rate Conference v. United States, 471 U.S. 48 (1985). Thus even if St. Mary’s had shown an otherwise unlawful allocation of market areas by competitors, no antitrust violation would exist.

Unlike the competing suppliers of title insurance, eyeglasses, tractors and telephone directories involved in the case law relied upon by St. Mary’s, the health care services offered by CMPHP and MPHP are not fungible. Except for the Northern Cumberland border problem, MMC and MMC-PHO and CMMC and the regional PHO provide community care to different populations that, due to geography and access difficulties cannot realistically choose between one provider network or the other. This inherent limitation on any meaningful competition between CMPHP and MPHP is mirrored by those provisions of the HMO law that require an HMO to provide adequate access to providers within its service area. See 24-A M.R.S.A. §§ 4202-A(10)(D), 4204(2-A)(K)–(L). It is difficult to discern how either of the two HMOs, as currently structured, could qualify for a certificate of authority to operate in the other’s territory.

The "common enterprise" theory is also referenced to justify a variety of other cooperative agreements between Blue Cross and the joint ventures . But Blue Cross cannot have it both ways. The common enterprise analysis makes clear that fears of market concentration must be taken seriously. As discussed above, the Applicants’ claim that the joint ventures would actually reduce concentration in the insurance market exalts form over substance. Furthermore, this is a new development by the dominant insurer in the market. As the applicants have noted, it is not necessarily a bad thing if the dominant market player increases its market share even further upon introducing a new product, if the reason is because the new product provides more value at a better price. However, in this case the joint ventures have the potential to alter the business opportunities of Blue Cross’s competitors in ways that go beyond the direct competitive impact of the new products, and the range of likely consequences in the marketplace must be carefully evaluated.

Structural Issues Relating to Hospital-Based HMOs

According to the Applicants, the innovative features of these plans include increasing the voice given to health care providers, leading to anticipated improvements in quality and efficiency. The restricted provider network, the Applicants maintain, is nothing qualitatively different from the types of arrangements that have already gained acceptance. As St. Mary’s acknowledges, there is a widespread consensus that on balance, such networks can offer significant benefits to the consumer²⁰ — that they are procompetitive, in antitrust terminology; i.e., that they promote competition based on quality and price rather than competition based on coercive and manipulative tactics.

²⁰Since St. Mary’s has also taken steps to develop preferred provider and integrated delivery arrangements, it would be self-defeating for St. Mary’s to maintain otherwise.

In Maine, selective contracting has been expressly authorized by the Legislature, both in the Preferred Provider Act, 24 M.R.S.A. § 2335; 24-A M.R.S.A. § 2672, and in the Maine Health Plan Improvement Act, 24-A M.R.S.A. § 4307(3), which specifically disclaims any intent to "require a carrier to admit to a managed care plan a provider willing to abide by the terms and conditions of the managed care plan." Of course the question is not whether limited provider panels in general are acceptable, but whether the particular arrangement is anti-competitive (Lynk, Testimony of 1/24 at 169).

The premise of selective contracting is that payors such as BCBS will be able to negotiate steeper discounts from providers if they are free to offer their entire patient volume to a limited number of providers. Lower payments to providers should reduce the cost of insurance to customers. Little leverage for such discounts exists if the patient base is spread among all available physicians or hospitals. CMPHP Exh. 7, pp. 6, 10–13 (testimony of William Lynk); CMPHP Exh. 32. (redacted). (Vangeison, Testimony of 1/22 at 309).

Hospital-based HMOs, however, carry the integration of healthcare delivery a quantum step further, and raise new issues in the context of market conditions in Maine, making the analysis considerably closer and more sensitive. The expected consumer benefits from selective contracting flow in large part from the assumption that carrier-provider alliances remain in a state of flux, and no providers or networks achieve entrenched market power from their "preferred" status. The permanent alliance resulting from provider ownership or control of a health carrier closes off certain opportunities for competition.

It may be very difficult, possibly impossible, for a health insurer in the Portland area to succeed without doing business with Maine Medical Center, or for a health insurer in the Lewiston/Auburn area to succeed without doing business with Central Maine Medical Center. By this measure, Maine Medical Center and Central Maine Medical Center already hold substantial — though far from absolute — market power, and this aspect of their market presence is ultimately more significant than the detailed analysis of whether one hospital or another does or does not hold a monopoly for certain particular services.

Considerable effort has been expended by the parties in the attempt to identify which market — a local market, a regional or statewide market, or an interstate market — is "the" relevant market for antitrust purposes. All of them are relevant, each in its own way. It cannot be denied, for example, that the services available in Boston and the way they are marketed can have a significant impact on how services in Maine are delivered, marketed, and priced. On the other hand, it cannot be denied that every hospital in Maine has strong ties to a particular local base, and that it is hard to imagine any realistic scenario in which there could be much of a market for a health plan that required consumers to travel to Boston for most services.

Therefore, the fabric of the market would take on an entirely new texture if a major hospital is permitted to own or operate an HMO. That one insurer may have unique access to information on how its competitors negotiate with that hospital, while at the same time, every other health insurer would become dependent on an affiliate of a major competitor as a key provider of essential services. By the same token, an affiliation between Blue Cross and one of the hospitals in a two-hospital metropolitan area, even if structured in such a way that it did not deprive the other hospital of all access to Blue Cross subscribers, would compel that hospital to choose between going without any Blue Cross business or dealing with an affiliate of its principal competitor.

Moreover, the same structural concerns would still be present if a hospital developed an entirely new HMO, or established an alliance with a health insurer that did not already have a substantial market share. If hospital-based HMOs have some inherent leverage they can exploit, there would be a strong possibility that such an insurer may eventually attain the same key customer status that Blue Cross now enjoys. The involvement of Blue Cross simply brings these problems to the surface more quickly.

One possible response is that hospital-based HMOs are nothing new, that they have been tested for decades and regarded in many communities as providing significant benefits to the public. However, the experience in other states of fully self-contained staff-model HMOs cannot necessarily be applied to Maine. That type of plan is not built around the same hospital that is also its competitors’ primary source, because the defining characteristic of the staff model is that it provides services through its own facilities and practitioners, with the exclusive relationship running both ways. The demographics of Maine and its health care marked would not support a complete alternative structure, so a staff-model plan would only likely work if it were a monopoly.

Likewise, the fact that integration of health care delivery is widely perceived as the wave of the future begs the question — are we better off trying to surf that wave, or trying to build seawalls? From the perspective of the Applicants, this proposal is the logical next step in the evolution of managed care, but every transaction makes sense to its participants. There would be little or no need for antitrust laws if the behavior they seek to prohibit were economically irrational.

Market Concentration in a Rural State

The chief problem with hospital-based HMOs, in an area like Maine, is that a principal counterweight to the possible abuses of selective contracting is the existence of a health insurance market with relatively free entry. If existing insurers are not providing the access to care that consumers are demanding, another insurer would likely be able to fill the gap. However, if hospital-based HMOs are permissible, they will constitute an important sector of the health insurance market, and it is logically impossible for the market for hospital-based HMOs to be more competitive or less concentrated than the market for hospitals. Furthermore, the ability of other types of health insurers to compete effectively with hospital-based HMOs may be vitally dependent on their ability to enter into alliances with competing hospitals.

Consequently, there is no merit in the Applicants’ contention that the Superintendent cannot consider the effects of this transaction on the hospital market because the Holding Company Act only confers jurisdiction to consider the effects on the insurance market. It is unnecessary to decide that question of statutory interpretation, because as a factual matter, if hospitals are allowed to participate directly in the insurance market as the Applicants are requesting an adverse impact on competition in the hospital market would necessarily have a corresponding adverse impact on competition in the insurance market.

In certain respects, the market power of Mercy and St. Mary’s is as important a consideration as the market power of Maine Medical Center and Central Maine Medical Center. The hospital market in the State of Maine is a natural oligopoly, with barriers to entry that for all practical purposes may be considered insurmountable. Therefore, if the evolution of integrated delivery causes the insurance market to look more like the hospital market, this would represent a drastic market constriction even if the hospital market maintains the most open competition possible.

This analysis only demonstrates that there are serious questions about the proposals. Those questions have no easy answer. The parties may disagree, but they also disagree over what that easy answer is. The record does not support a conclusion that it is unlawful per se for a hospital or a physician group to establish an HMO or to enter into a joint venture with a health insurer, only that such proposals require careful scrutiny under a rule of reason.

An important inquiry here, is whether the consuming public will suffer. If successful vertical integration between hospitals and insurers is likely to increase market concentration, we need to ask how and why. The scenario of concern, at its most basic level, is that if a hospital has a permanent affiliation with a particular insurer, then that hospital, and perhaps its affiliated providers, will have an interest in favoring that insurer at the expense of its competitors.

Additional competitiveness issues warrant consideration. Among them is the concern that hospital-based HMOs are likely to transform the market in a way that harms consumers. This concern will disappear if neither the hospital market nor the insurance market undergo any fundamental transformation that changes the balance of power. However, if the hospital or insurer acquires increased market power, and can use its pricing advantages to drive out competitors, the arguable consumer benefits that purportedly flow from such arrangements may be only temporary.

Hospital Market Analysis

This underscores the principle that any significant harm to the hospital market would also endanger the health insurance market. It is therefore necessary to examine more closely the possible "anticompetitive" effects on the hospital market. There are three that warrant consideration: (1) possible discriminatory impact on an excluded hospital if almost all hospitals in a market are included in the network; (2) possible discriminatory impact on competing hospitals if one hospital has an ownership interest in a major health insurer; and (3) possible collusion between Maine Medical Center and Central Maine Medical Center, the two biggest hospitals in the region.

The first addresses horizontal relationships among hospitals, and the second addresses vertical relationships between hospitals and insurers. The horizontal discrimination issue really goes to the heart of whether and to what extent selective hospital contracting should be permitted at all in Maine, given the nature of our hospital market. Furthermore, as Central Maine Partners has repeatedly asserted, nothing in the structure of its plan inherently excludes St. Mary’s.

Central Maine Partners maintains that whether or not to add St. Mary’s to its network is a decision it should have the power to make for itself, in response to the market. St. Mary’s has not proven that Central Maine Partners should be deprived of that flexibility. The Legislature has affirmatively rejected the "any willing provider" concept, and there is no basis on this record to impose an "any willing hospital" requirement through adjudication. St. Mary’s has itself been active with the right to making creative and productive use of selective contracting, and it is not in the public interest to foreclose the range of options open to hospitals and insurers in this regard.

As for vertical integration, it is reasonable to expect that consumer demand for choice will avert any catastrophic impact. Moreover, the effects on the bargaining power of hospitals may cut both ways: it is certainly possible that Blue Cross will give its "Partner" hospitals preferential treatment, but the same competitive forces may lead other insurers to seek out the other hospitals as allies, allowing those hospitals to turn adversity to their own advantage.

The other potential threat to competition in the hospital market is the indirect affiliation between the different "Partners." Many of the considerations discussed above in analyzing the relationship between CMPHP, MPHP are relevant to this issue as well. A further significant factor in determining that the joint ventures would not substantially alter the overall competitive relationship between Maine Medical Center and Central Maine Medical Center is that these hospitals would continue to deal separately with all other insurers, and will also deal separately with Blue Cross for all business transacted outside the joint ventures. Mr. Chalke testified that CMMC would have no incentive to price services to other HMOs on a discriminatory basis because a certain number of procedures have to be performed to remain competitive (applicants’ Exh. 6, Prefiled testimony of Mr. Chalke, p. 23). Because it is limited to one of many payors, and only to a portion of that payor’s business, the de facto confederation resulting from the shared joint venture alliances does not demonstrably impede competition to the detriment of consumers.

This is not to minimize the evidence St. Mary’s has adduced demonstrating that the exclusivity of the CMPHP provider network could significantly reduce St. Mary’s market share. St. Mary’s observes that Blue Cross now has some (redacted) enrollees in the CMPHP service area, and that CMPHP is projected to attain an enrollment of (redacted) over the next five years. Thus, according to St. Mary’s, the expected impact of CMPHP’s exclusivity on St. Mary’s would be roughly equivalent to the impact of losing half of St. Mary’s Blue Cross employee group business.

However, this greatly overestimates the actual impact of CMPHP on the hospital market. Suppose St. Mary’s actually did lose half of its Blue Cross business. (redacted) about 4% of the overall market.

The statistics presented in this proceeding lead to a similar result. (redacted).

The total, (redacted), is just over 5% of the (redacted) Androscoggin and Oxford residents who were covered by standard health insurance (i.e., excluding Medicare and Medicaid) in 1996. Further detail and additional citations to the record are contained in the chart entitled "Market Analysis - Competition Issues" which is attached to this Decision and Order as Appendix B.

Since a significant number of hospital admissions come from sources such as Medicare and Medicaid, where CMPHP does not plan to participate, the actual shift in the overall hospital market, though undeniably significant from St. Mary’s perspective, does not rise to the level of a cognizable antitrust harm in the circumstances of this case. An increase in the dominant participant’s market share is only an indicator of possible problems, not a problem in and of itself. Consumers would hardly benefit from a per se rule prohibiting the dominant participant from trying to increase its market share by lowering costs and improving quality. Moreover, St. Mary’s projections tacitly assume that only the CMPHP referral patterns would change, not the referral patterns of CMPHP’s competitors.²¹ As discussed above, the relationship between CMPHP and CMMC may have repercussions that lead to arrangements in which other payors increase their referrals to St. Mary’s, partially or perhaps even completely offsetting the loss of CMPHP business.

²¹St. Mary’s analysis implicitly assumes that the formation of CMPHP would be the cause of the projected erosion of St. Mary’s Blue Cross business.

I also conclude that St. Mary’s has failed to make the showing of market power necessary under the rule of reason test to sustain the charge that CMPHP will injure competition by substantially depriving St. Mary’s of patients. The 4%–5% of the community care patients that CMPHP may arrogate to CMMC and the other hospitals in the regional PHO falls short of the percentage range in which courts have found that exclusive contracting may lead to an antitrust violation. See American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230, 1252 (3d Cir. 1975) (14.7%); Cornwell Quality Tools Co. v. CTS Co., 446 F.2d 825, 831 (9th Cir. 1971), cert. denied 404 U.S. 1049 (1972) (10%–15%); Mytinger & Casselberry, Inc. v. FTC, 301 F.2d 534, 538 (D.C. Cir. 1962) (61%, .52% or 34.6%, depending on how relevant market was calculated).

More importantly, market share alone is not always indicative of market power. Here, strong HMO competitors have recently entered the Maine health insurance market. These have apparently concentrated their efforts in the presumably more lucrative southern Maine market, yet have the potential to strongly compete with CMPHP in central Maine. Nor are there any barriers to relatively easy market entry by new competitors who can cut their own deals with providers, (redacted). See St. Mary’s Exh. 29 and 30.

Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325 (7th Cir. 1986) is instructive. There the court held that Blue Cross and Blue Shield of Indiana lacked market power where it entered into preferred provider contracts with about half of Indiana’s hospitals. The Blue Cross customers covered by these contracts ranged anywhere from 27% to 80% of insured patients in the state. However, the court held at 784 F.2d 1331 that Blue Cross’ market share was irrelevant, and later in the opinion explained why:

In many cases a firm’s share of current sales does indicate power. Sales may reflect the ownership of the productive assets in the business. Market power comes from the ability to cut back the market’s total output and so raise price; consumers bid more in competing against one another to obtain the smaller quantity available. When a firm (or group of firms) controls a significant percentage of the productive assets in the market, the remaining firms may not have the capacity to increase their sales quickly to make up for any reduction by the dominant firm or group of firms.

In other cases, however, a firm’s share of current sales does not reflect an ability to reduce the total output in the market, and therefore it does not convey power over price. Other firms may be able, for example, to divert production into the market from outside. They may be able to convert other productive capacity to the product in question or import the product from out of the area. If firms are able to enter, expand, or import sufficiently quickly, that may counteract a reduction in output by existing firms. And if current sales are not based on the ownership of productive assets—so that entrants do not need to build new plants or otherwise take a long time to supply consumers’ wants—the existing firms may have no power at all to cut back the market’s output. To put these points a little differently, the lower the barriers to entry, and the shorter the lags of new entry, the less power existing firms have. When the supply is highly elastic, existing market share does not signify market power…

The district court found that each of the factors suggesting that market share does not imply market power is present in the market for medical insurance. New firms may enter easily. Existing firms may expand their sales quickly; the district court pointed out that insurers need only a license and capital, and that firms such as Aetna and Prudential have both. There are no barriers to entry—other firms may duplicate the Blues’ product at the same cost the Blues incur in furnishing their coverage…

The Blues do not own any assets that block or delay entry. The insurance industry is not like the steel industry, in which a firm must take years to build a costly plant before having anything to sell. The "productive asset" of the insurance business is money, which may be supplied on a moment’s notice, plus the ability to spread risk, which many firms possess and which has no geographic boundary…. The district court emphasized that every firm can expand its sales quickly if the price is right, that no firm has captive customers, and that many firms want to serve this market. The conclusion that the Blues face vigorous and effective competition is not clearly erroneous…

784 F.2d at 1335–36. The court’s reasoning is persuasive. BCBS no more possesses market power in central Maine than did the Blues in Indiana. In any event, the procompetitive benefits of CMPHP’s application discussed above outweigh the small foreclosure of market share which may be visited upon St. Mary’s.

Insurance Market Analysis

Finally, there is the issue of competition in the insurance market. Blue Cross acknowledges that "these plans are not for everyone." Because there is significant consumer demand for higher levels of provider choice and geographic coverage than the structure of these plans can accommodate, they can be expected to continue to encounter thriving and effective competition from other managed care plans, from indemnity plans, and from administrators that can facilitate fully and partially self-funded alternatives to comprehensive insurance. It is noteworthy that no Insurance competitor of Blue Cross intervened in opposition to CMPHP’s application. Moreover, if some or all of those competitive options do not turn out to be viable in the long run, it would not be in the public interest to keep them alive by artificial means.

Conclusion

In summary, although there are many well-founded concerns, it is not an appropriate regulatory response to innovation to deny these applications based on worst-case scenarios if there are conditions of approval that could provide an appropriate level of reassurance. Such conditions cannot eliminate all risk, but there is also risk in denying the application and maintaining the status quo. There are enough different possibilities that it would be premature to end the experiment before it began. The Applicants will necessarily function within an industry that is highly regulated to begin with and which provides opportunities for ongoing supervision to address these risks if and when they arise.

One goal in structuring conditions of approval is to ensure to the extent possible, that competition is based on price and quality rather than on predatory tactics. Another related goal is to ensure that these plans, if successful, fulfill their promise by passing the benefits from any increased efficiencies through to consumers rather than dissipating them in expenses. These goals dovetail with the goal of safeguarding Blue Cross’s charitable mission and preserving the community’s access to meaningful nonprofit health plans, as discussed in the next section, and point toward the following conditions of approval:

• The review of filed rates shall take into account the rates charged by Blue Cross Blue Shield for business written on a direct basis, and rates shall be disapproved as unfairly discriminatory if they are found to be based on inappropriate risk stratification between the Blue Cross Blue Shield and joint venture enrollment bases.

• Expense payments may not be excessive or inappropriate, and shall be subject to review in the examination process, the rate review process, or otherwise at the Superintendent’s discretion.

Charitable "Conversion" Issues²²

The HMO licensing law authorizes issuance of a certificate of authority only if "Nothing in the proposed method of operation … is contrary to the public interest." 24-A M.R.S.A. § 4204(2-A)(F). The Advocacy Panel, the public interest intervenors, and various individuals testifying during the public comment sessions have all expressed concern that the approval of these applications might result in or facilitate the conversion of Blue Cross from a nonprofit charitable corporation to a for-profit enterprise. In addition, the Advocacy Panel’s expert witnesses have offered persuasive testimony that the transfer of business from the parent to the two joint ventures could cost Blue Cross a total of between $6.1 million and $10.1 million in lost income from nonrenewed contracts. In light of Blue Cross’s significant market presence and historical existence as an entity born out of statute in 1939, the statutory public interest inquiry compels a thorough exploration of these issues.

²²The Central Maine Partners and Maine Partners proceedings were partially consolidated for purposes of considering the issues discussed in this final portion of the Decision, which is identical, verbatim, to the corresponding portion of the Maine Partners Decision.

A threshold matter is whether BCBSME is a charitable corporation at all, and if so, whether issues relating to BCBSME’s charitable obligations are properly before the Superintendent in this proceeding.

Jurisdictional Questions

Although BCBSME now disavows its charitable status, as have several other Blue Cross plans in states with similar laws, there is no room for reasonable dispute on this point. Associated Hospital Service of Maine "is hereby declared to be a charitable and benevolent institution." P.L. 1939, ch. 24, § 15 (emphasis added); accord, 24 M.R.S.A. § 2311. The various arguments advanced by BCBSME, in support of its claim that it is not a charity, are relevant only to whether it is in compliance with its charitable obligations, not to whether those obligations exist. The history of Blue Cross’s charitable service, and its repeated affirmations of its charitable status, are discussed in more detail in the next section, Historical Background.

However, the Applicants also contend that even if BCBSME is a charitable corporation, the Superintendent should not be considering the "conversion" issues at this time, either because the Superintendent does not have jurisdiction over these issues; because the Advocacy Panel and public interest intervenors do not have standing to raise these issues; or because this proceeding is not a proper forum in which to consider these issues.

The notion that the Superintendent does not have jurisdiction to hear and decide questions relating to BCBSME’s charitable obligations because "the Attorney General has exclusive jurisdiction over charitable trust issues" confuses the concepts of "jurisdiction" and "standing." The Attorney General’s role is not adjudicatory, so the concept of jurisdiction does not even apply to the Attorney General’s charitable trust enforcement powers. There are many matters over which the courts have exclusive jurisdiction, and the Superintendent has no authority to hear and decide those matters, but questions of compliance with Title 24 are at the heart of the Superintendent’s jurisdiction. Likewise, although the outer limits of the statutory "public interest" standard for HMO licensure can reasonably be debated, the public interest is definitely in the balance when the operation of the proposed HMO results in a fundamental restructuring of a nonprofit health service organization in a manner that calls into question its ongoing commitment to its charitable obligations.

The presence of charitable trust issues does not alter that jurisdiction in any way. Nothing in the charitable trust enforcement statute, 5 M.R.S.A. § 194, or in any case construing that statute, says that the Attorney General can only exercise his enforcement powers in a particular forum or suggests in any other way that the Superintendent should be divested of his jurisdiction in these matters. Indeed, the duty to preside over the dissolution of a charitable corporation — perhaps the highest responsibility under charitable trust law — is expressly conferred upon the Superintendent when the corporation is governed by Title 24, as is the case with respect to this organization. See 24 M.R.S.A. § 2310.

Nevertheless, the Applicant’s contention that the Attorney General has exclusive standing to raise charitable trust issues warrants serious consideration. In Fitzgerald v. Baxter State Park Authority, 385 A.2d 189, 195, as the Applicants stress, the Law Court cited with approval Professor Austin W. Scott’s treatise, The Law of Trusts, observing (emphasis in the original) that "In other jurisdictions it is an oft-repeated precept that only the Attorney General has the authority to enforce such charitable trusts." However, the Baxter Park Court characterized "that precept as a starting point," not as a bright-line rule, and ultimately granted standing to the private plaintiffs in that case. The Court expressly noted that an established exception to the sole standing rule permits "specially interested beneficiaries to bring suit to enforce a charitable trust intended for their benefit." Id., 385 A.2d at 196 n.11 (citing A. Scott, The Law of Trusts § 391). Furthermore, the specific purpose the Law Court identified for restricting standing was "protecting charities from a harassing multiplicity of suits." Id., 385 A.2d at 195. That is not a problem with respect to these proceedings. Indeed, resolving the charitable conversion issues in the context of an already ongoing licensing proceeding would advance these considerations of judicial economy, not hinder them.

Historical Background

In order to understand the nature of the charitable obligations at issue in these proceedings, it is necessary to examine them in their historical context.

BCBS was originally incorporated under the general nonprofit corporation law on an interim basis,²³ and was then incorporated by private and special act of the Legislature in 1939. See P. & S.L. 1939, ch. 24, entitled "An Act to Incorporate the Associated Hospital Service of Maine." Its charter was initially limited to operation of a nonprofit hospital service plan under which contracting hospitals agreed to provide services to "such of the public as become subscribers to said plan." P. & S.L. 1939, ch. 24, § 3. The new corporation was not permitted to commence operation until it had first been licensed by the insurance commissioner pursuant to a new statute of general applicability passed for that purpose at about the same time. P.L. 1939, ch. 149, entitled "An Act to Provide for the Organization of Nonprofit Hospital Service Corporations." P. & S.L. 1939, ch. 24 emphasized the nonprofit nature of BCBS, and Blue Cross’s charter expressly stated that "This corporation is hereby declared to be a charitable and benevolent institution, and its funds and property shall be exempt from taxation." P. & S.L. 1939, ch. 24, § 15. The new licensing law similarly stated that "Every corporation subject to the provisions of this act is hereby declared to be a charitable and benevolent institution, and its funds and property shall be exempt from taxation." P. L. 1939, ch. 149, § 10. Near-identical language is found in state enabling statutes nationwide.

²³Webb, Paul A., Blue Cross and Blue Shield of Maine: A History, (Blue Cross and Blue Shield of Maine, Portland, 1982), 8, 22–23.

This was more than mere rhetoric or legal boilerplate. At the time of these enactments, private health and hospitalization insurance "was virtually nonexistent." The Great Depression strapped the financial ability of individuals and families to pay for hospitalization, which resulted in intensified demands on hospital resources for the provision of charity care. As a result, hospital revenues plummeted. The American Hospital Association promoted state legislation which would both guarantee care to low-income persons and also develop a stable source of payment to hospitals. Sylvia A. Law, Blue Cross / What Went Wrong? (Yale University Press 1974, pp. 6–9. "Blues plans were organized on a not-for-profit basis and were dedicated to fulfilling a community service role. Accordingly, these plans sought to offer affordable coverage to all individuals, regardless of health status." "Blue Cross and Blue Shield: Experiences of Weak Plans Underscore the Role of Effective State Oversight," U.S. General Accounting Office (Letter Report, April 13, 1994, GAO/HEHS -94-71).

There is little in the record of this proceeding relating to the early history of BCBS. However, a wealth of detail is available in Blue Cross and Blue Shield of Maine: A History, written by Paul Webb, BCBS’s first executive director, and published by BCBS in 1982.

The formation of BCBS was part of the nationwide Blue Cross movement that was sweeping the country. The idea of a nonprofit hospital service plan for Maine was first suggested by the executive secretary of the Portland Community Chest in the fall of 1937, following which a study committee was appointed by Maine General Hospital (the predecessor of MMC) in early 1938. Webb, p. 8. BCBS originally conducted business from the office of the Community Chest. Webb, p. 13. The first paragraph of an October 10, 1938 introduction letter to employers emphasized BCBS’s philanthropic purpose:

For the past few months a small group of Portland citizens have, with cooperation of the American Hospital Association, been attempting to formulate a sound and practical plan for a non-profit hospitalization service for citizens of Portland and State of Maine. The Associated Hospital Service of Maine has applied for and received its charter. This Association incorporated "without capital stock" is a non-profit, self-sustaining organization, administered by a Board of Directors who serve in their capacity without remuneration. The ideal [in] back of this Association is entirely one of community service.

Reprinted at Webb, p. 6 (emphasis added). An undated solicitation letter seeking to enlist participating hospitals similarly stated that "Associated Hospital Service of Maine has been formed for the purpose of rendering a community service on a non-profit basis." Reprinted at Webb, p. 10. These announcements were met with a laudatory editorial from the Portland Press-Herald on November 14, 1938 extolling the "potent humanitarianism" of the hospitalization plan that "everyone can afford." "To those who have been instrumental in bringing the Associated Hospital Service to Portland and to Maine the public owes a debt of gratitude." Reprinted at Webb, p. 14. A copy of this editorial in its entirety is attached to this decision as Exhibit A. BCBS’s charter was amended in 1943 to allow it to offer nonprofit medical services as well as nonprofit hospitalization services. P. & S.L. 1943, ch. 21. Other expansions of its authority followed in succeeding years. Of special note is P.L. 1965, ch. 458, in which the Legislature removed BCBS’s authority to offer extended benefit plans in response to the Law Court’s decision in Associated Hospital Service of Maine v. Mahoney, 161 Me. 391, 412 (1965). This emergency legislation declared that "[i]t is in the public interest that Associated Hospital Service of Maine be authorized to continue to operate its present Blue Cross - Blue Shield Plans so that the subscribers of said plans may continue to be protected against the unfortunate financial impact of future illnesses," and section 3 of the statute affirmed that the incorporation of BCBS was "ratified and confirmed and made valid in all respects."

In 1994 most aspects of BCBS’s charter were folded into the successor of the general licensing statute for nonprofit hospital and medical service organizations. See P.L. 1993, ch. 702, §§ A-18 through A-30. Although most of the original charter provisions were repealed or substantially amended at this time, the declaration of BCBS’s charitable and benevolent status in P. & S.L. 1939, ch. 24, § 15 was left intact and remains in force today. Likewise, the parallel declaration contained in the original licensing law, P.L. 1939, ch. 149, § 10, still survives as 24 M.R.S.A. § 2311.

The details of Blue Cross’s charitable mission were never codified in law. Initially, before commercial health insurance was widely available, merely providing access to health coverage at all was generally considered a significant community benefit. After the advent of commercial insurance, the principal distinguishing features of Blue Cross plans were open enrollment, community rating, and direct payment. In addition, the Maine Blue Cross plan formerly had a special membership category called "service benefit" membership for some low-income enrollees, who were not required to pay coinsurance for professional services.²⁴

²⁴Official notice has separately been taken of an approved Blue Cross group contract from the early 1980s which includes service benefit provisions. The MPHP Applicants have subsequently furnished the supplemental information that the service benefit was negotiated through collective bargaining and the coinsurance waiver was subsidized by Blue Cross member physicians.

Open enrollment meant that all consumers, regardless of health status, had a source for health coverage, while community rating — charging all subscribers the same premium rates — made this access to coverage meaningful as long as Blue Cross retained a sufficiently broad subscriber base that its rates could remain competitive.

In response to competition from commercial insurers and the relatively low cost of self-insurance, Blue Cross plans abandoned community rating in the large group market by the 1950s, and this experience-rated large group business became Blue Cross’s largest product line. This led to criticisms that Blue Cross was evolving into just another insurance company, and eventually to significant reductions in the federal tax benefits for Blue Cross plans. Blue Cross, however, justifies that mode of operations by emphasizing that it is in the public interest for it to maintain a broad base of coverage, and that even its experience-rated operations provide economies of scale, expertise, and a larger asset base which enhance its ability to serve the entire range of public needs. See 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990).

Furthermore, long after the emergence of a commercial health insurance industry, BCBS continued to serve as a "carrier of last resort" for many persons whose medical conditions prevented them from obtaining coverage from commercial insurers. This pattern persisted until the enactment of guaranteed issue, guaranteed renewal, and community rating reforms in the early ‘90s which were applicable to all health insurers doing business in Maine. See P.L. 1991, ch. 861; P.L. 1993, ch. 477. See also CMPHP Exh. 13, resp. #78; CMPHP Exh. 20; Tspt., 1/22/97, pp. 236–37 (Foster testimony); Tspt., 1/30/97, pp. 192–93 (Vangeison testimony).

Blue Cross’s Charitable Obligations — An Overview

A core issue in this proceeding is whether operation of CMPHP and MPHP may lead to a conversion of BCBS’s assets from a public charitable purpose to private gain. The underlying legal principle is that charitable assets must only be used for charitable purposes. Attorney General v. First United Baptist Church of Lee, 601 A.2d 96, 98 (Me. 1992). The threshold question for decision is whether the value of BCBS can be characterized as charitable assets impressed with a public trust.

Unlike the Lee case, BCBS was not established by gift of a testator as a charitable trust. Nor, according to counsel, does BCBS solicit or accept charitable donations as do typical charitable organizations. MPHP Br. at 58. Distinguishing between a nonprofit corporation and a charitable nonprofit corporation, BCBS claims to be the former, but not the latter, and specifically disclaimed any charitable obligation at hearing.²⁵

²⁵See testimony of Keith Vangeison as quoted below in the "Charitable Purpose" section.

For two reasons, BCBS’s disclaimer is unconvincing. First and foremost is the Legislature’s establishment and repeated affirmation of BCBS as a charitable and benevolent institution. While BCBS dismisses these provisions (MPHP Br. at 58), this legislative determination is conclusive.²⁶ Notwithstanding some criticisms of Blue Cross’s "ostensibly charitable character," the Law Court ultimately acknowledged in Associated Hospital Service of Maine v. Mahoney, 213 A.2d 712, 723, 161 Me. 391, 412 (1965), that BCBS was a "charitable organization," if only "by legislative fiat rather than by its nature."

²⁶In this regard, it is significant that at least until 1966, BCBS was the only nonprofit health services corporation licensed under 24 M.R.S.A. §§ 2301 et seq. and its predecessors. P.L. 1965, ch. 458, emergency preamble. There is little doubt that the statement of charitable and benevolent purpose in the licensing law was thus specifically directed to BCBS.

Secondly, BCBS’s present contention that it has no charitable purpose is belied by the circumstances which led to its formation (recounted above) and by the company’s own statements of its mission and purpose. In addition to the early documents already discussed, BCBS’s representations to the Law Court in the Mahoney litigation are significant.²⁷ In those legal briefs, BCBS repeatedly characterized itself as a charitable, nonprofit corporation, and strongly argued that it was a charity: "AHS is a charity, and it follows that, by giving AHS broader powers, the public good is thereby served." A key fact relied upon by BCBS to bolster its charitable status in that case was that "the original capital investment of the plaintiff was underwritten by private persons as a charitable gift." Public Interest Intervenors’ Reply Brief, App. A.

²⁷In its opening brief and reply brief, MPHP argues that upon dissolution BCBS’s assets would be distributed to its members by dint of 24 M.R.S.A. § 2310 rather than to a charity. This, BCBS argues, is another indication of its noncharitable status. MPHP Br. 59; MPHP Rep. Br. 4, n.2. BCBS’s present position is again contradicted by its representations to the Law Court in the Mahoney case, where it argued:

In 1982, BCBS emphasized its public service in a report submitted to Governor Brennan in response to a study that had been commissioned on hospital cost containment:

Our most serious concern with the Board’s recommendations is that there would be repercussions to the Blue Cross system for financing the delivery of health care. The Blue Cross method is to provide coverage for health care on a non-profit basis to the widest possible segment of the population at the lowest possible cost. This coverage is extended to those who would otherwise have difficulty obtaining affordable coverage. Coverage is not cancelled because of poor health experience by the subscriber, and it includes broad conversion privileges for those who change or lose their jobs. Other unique features of the Blue Cross method are the support of statewide health planning and utilization review programs, health promotion programs, and direct financial support of such programs as the Poison Control Center.

We are concerned that the changes envisioned by the Board could result in a higher and unfair payment to hospitals, and that this in turn would result in both higher subscription rates for our members and a reduction in the unique services noted above.

"Blue Cross and Blue Shield of Maine’s Review of the Health Facilities Cost Review Board Report / Hospital Cost Containment in Maine / Study and Recommendations" (February 1982).

Although BCBS notes that, until recently, nothing in law compelled the company to perform these activities (CMPHP Br. 81, n. 28), that is precisely the point: BCBS historically offered affordable health and hospitalization insurance to a market segment that profit-driven commercial insurers chose not to serve until forced to do so by the legislative enactments noted above.

BCBS unquestionably resembles commercial insurers in many respects. Cf. Mahoney, supra. However, BCBS’s express establishment as a charitable and benevolent institution, its performance of that mission, and its past articulations of that mission necessarily lead to the conclusion that BCBS was formed to benefit the public health and welfare, that it has done so, and that it has received favorable state and federal income tax treatment as a result of that mission. As such, BCBS is a charitable nonprofit corporation. See Voelker v. Saint Louis Mercantile Library Ass’n, 359 S.W.2d 689, 694 (Mo. 1962) ("The owner of property may devote it to charitable purposes not only by transferring it to trustees in trust for such purposes, but also by transferring it to a charitable corporation."); Nacol v. State, 792 S.W.2d 810 (Tex.. App. 1990) (corporation organized for purposes benefiting a large and indefinite group of people is a charitable trust).

On March 24, 1997, the New Jersey Superior Court ruled that the statutory establishment of Blue Cross and Blue Shield of New Jersey as a "charitable and benevolent association" conclusively determined that organization’s status as a charity. See also Blue Cross and Blue Shield of Missouri v. Angoff, et al., Case No. CV196-619CC (Mo. Cir. Ct., 12/30/96, appeal pending), where the court held that the Blues’ transfer of 80% or more of its nonprofit health plan business to a for-profit subsidiary was inconsistent with the Blues’ nonprofit purposes and rendered the company subject to dissolution proceedings.

Property held by a charitable corporation is subject to the same restrictions as property held by a charitable trust:

Ordinarily the principles and rules applicable to charitable trusts are applicable to charitable corporations. Where property is given to a charitable corporation without restrictions as to the disposition of the property, the corporation is under a duty, enforceable at the suit of the Attorney General, not to divert the property to other purposes but to apply it to one or more of the charitable purposes for which it was organized.

Restatement (2d) of Trusts § 348, comment (f). Accord, IV Scott on Trusts § 348.1 (4th ed. 1989). This charitable trust is imposed on all assets of a charitable corporation. Pacific Home v. Los Angeles County, 41 Cal. 2d 844, 264 P.2d 539, 543 (1953). The next question for decision is whether the organization of MPHP and CMPHP constitutes a diversion of charitable funds from their charitable purpose, or may lead to such a diversion of charitable funds sometime in the future.

Charitable Purpose

Charitable assets must only be used for charitable purposes. Attorney General v. First United Baptist Church of Lee, 601 A.2d 96, 98 (Me. 1992). However, the chief operating officer of Blue Cross, when asked about his organization’s charitable obligations, explained: "I will just simply say that I don’t view Blue Cross as a charity, as a charitable trust.... [W]e don’t engage in charitable activities such as the provision of free health care or subsidized health care." [Vangeison 1/30 at 192]

This stark testimony makes clear that a "conversion" of sorts has already taken place. Blue Cross now seems to argue that it is really functionally identical to a mutual insurance company,²⁸ and that its charitable status was essentially an anomaly of tax policy. Even if the charitable status was established primarily for tax reasons, the obligations the Blue Cross incorporators assumed in return were real, serious, and important. If there was a bargain struck, Blue Cross must carry out its end, and remain true to its charitable purpose.²⁹

²⁸BCBSME’s claim that assets are to be distributed to "members" upon dissolution is ambiguous, since participating providers and professionals are also members of BCBSME. In any event, no authority has been cited for that claim, and it is inconsistent with BCBSME’s charitable obligations. See supra note 27 (the one just before this one)

²⁹Ironically, if the company were to be structured now or prospectively as a mutual insurance company owned by its policyholders (as the company is already authorized to do under existing law, 24 M.R.S.A. § 2301(9-B)), it could arguably then consider a demutualization that would vest in a large segment of Maine’s citizens (i.e. past and present policyholders) a quantifiable majority interest in the company, while providing the company with the ability to attract new capital.

This is not to belittle the very real problems BCBSME now faces in redefining its mission. In many ways, the distinctions between Blue Cross plans and commercial insurers have been diminishing. As pure community rating became less feasible in the marketplace, Blue Cross rating practices have increasingly resembled commercial rating practices. See, e.g., 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990); 1991 HealthChoice Decision, No. INS-91-8 (Me. Bur. Ins. 4/24/91). Meanwhile, health reform laws have also made commercial insurers operate more like Blue Cross plans traditionally operated. Through the years, Blue Cross had served as the insurer of last resort, with the mission of providing affordable coverage to the broadest possible subscriber base. See, e.g., 1992 Companion Plan Decision, No. INS-91-52 (Me. Bur. Ins. 11/26/91) However, commercial insurers and HMOs now must also take all applicants in the small group and individual lines of insurance so the only remaining distinction in this regard is that Blue Cross and Blue Shield of Maine does not have the option of leaving the State of Maine if it decides the pastures are greener across the border.

Beyond the provision of "bona fide nonprofit health care plan[s]," 24 M.R.S.A. § 2305(1), the precise contours of the charitable obligations of a nonprofit health service corporation have not been sharply defined in the statute. This general purpose provides both a guidepost for the long-range mission of the organization, and the necessary degree of flexibility in carrying out that mission in a changing environment.

Blue Cross has disavowed any affirmative charitable purpose. None the less, it has continued to provide the public with health plan services, has continued to regard itself as a responsible corporate citizen with the public obligations that status entails, and has continued to operate under fiduciary strictures against the waste or misapplication of corporate assets. Thus, even if the organization has abandoned some of its historical direction, neither has any real harm been done.

Nationwide, the insurance market is undergoing a wave of demutualizations, nonprofit conversions, and similar restructurings. In these applications, Blue Cross and Blue Shield of Maine is proposing to move a substantial portion of its book of business into a structure that is conducive to equity investment, even though this is not its current purpose. For all of these reasons, Blue Cross will be faced with important decisions over the next few years which will require careful attention to the question of who owns Blue Cross and why.

In this climate, it is recommended that Blue Cross and Blue Shield develop an affirmative program for implementing its charitable mission. In their briefs and testimony, the Applicants have described a number of charitable activities that Blue Cross Blue Shield of Maine does not engage in at this time, such as the provision of some level of subsidized health coverage to the needy. An excellent starting point for Blue Cross’s search for future public service options would be to explore which of those activities might be feasible and appropriate, in the context of Blue Cross’s particular experience, capabilities, and statutory mission.

It must be kept in mind, however, that the decision whether the Blue Cross will provide health coverage on a charitable or commercial basis cannot be based on their perception of the best interests of Blue Cross as an insurance company. For stock insurers, generating income for the owners is the goal, and providing services to customers is the way they accomplish that goal. For nonprofit insurers, by contrast, providing service is the goal, and transacting business in the marketplace — while it is every bit as essential a function as providing customer service is for the commercial insurer — is merely the means by which that goal is accomplished. A charitable corporation can have no business interests that are separate and apart from its overriding commitment to the public interest. In theory, hence, it is possible that Blue Cross, after giving full consideration to the range of possible charitable activities, may decide that "nonprofit health plans" are either no longer desired by the community or no longer feasible, and that Maine needs another grant-making foundation more than it needs a nonprofit alternative to commercial health insurance. and its managers and directors have the fiduciary duty to subordinate their personal and collective self-interest to the charitable purposes they were hired to carry out.

The significance of these issues to the two applications is the concern that the business purpose of the new HMOs may be in conflict with the charitable purposes of their owners. Because the community-centered health plan concept cannot be characterized as "incidental," it is not a sufficient response to those concerns to say that a charity may engage in commercial activity that is incidental to its overall charitable purposes.

Managed care is already a significant sector of the Maine health insurance market, and is expected in the future to become an even greater modality of coverage as it has in other regions. When the business operations become the primary focus of attention, the charitable focus of the parent can be dangerously diluted. The evidence indicates that these "community-centered health plans" are intended to be the primary vehicle for Blue Cross managed care business in the not too distant future. If the more expansive predictions of the future of managed care also come true, the joint venture HMOs may thus become the center of gravity for the entire Blue Cross and Blue Shield enterprise. Therefore, if Blue Cross were to channel its managed care efforts into providing coverage on a commercial basis, the effect would be precisely the de facto "creeping conversion" that the public interest intervenors and Advocacy Panel fear, in which the value of Blue Cross’ business may gradually shift over time to CMPHP and MPHP without any compensation having been paid to Blue Cross.

Nevertheless, though there is definitely the potential for that sort of conflict of interest, that conflict is not irreconcilable. The key to reconciling it is establishing conditions of approval that are appropriate to implement the Applicants’ assurances that the subsidiaries will be operated in furtherance of the nonprofit purposes of their parents. Without such conditions in place, these applications could not be approved as anything other than the preliminary stages of a conversion process; the Applicants have been emphatic that no conversion is intended at this time, and the type of evidence and analysis that might support a conversion was not offered by any party.

The first of these conditions, in some sense the most fundamental, is a simple one. The purpose of these subsidiaries, as here presented by the Applicants, is not to sell commercial insurance as a revenue-raising venture, but to provide the next generation of Blue Cross coverage through a different vehicle. There is no conflict between the charitable purposes of the parent and the commercial purposes of the subsidiary if the subsidiary is not being operated for commercial purposes. In order to assure that the subsidiaries will be operated in furtherance of the charitable purposes of their parents, this must be expressly stated as a corporate purpose through amendment of their Articles of Incorporation. The core statutory purpose of Blue Cross is the issuance of bona fide nonprofit health plans, 24 M.R.S.A. § 2305(1), and these HMOs must be managed as an integral part of that operation, not merely as a vehicle for raising revenue.³⁰

³⁰Blue Cross should give serious consideration to amending its Bylaws to admit to full voting membership all persons covered under health plans issued through subsidiaries either by expanding the definition of "Subscriber Members" or by creating a fourth class of voting members.

Conditions providing for consistent oversight of expenses and rating practices across the enterprise as a whole will further act to harmonize the purposes of these joint ventures with those of their charitable parents. With these conditions, the "for-profit" form of ownership is appropriate. A for-profit structure for nonprofit purposes may sound at first like an oxymoron, but the Applicants have testified persuasively that it is the logical way to implement their goals, steering a middle course between a true nonprofit corporation — which may be unable to return income to its owners — and a true business corporation, which would operate for the primary purpose of generating wealth for its owners.

If used for the appropriate purposes, the operational flexibility available to stock corporations is desirable. It would be counterproductive to impose rigid conditions that would either require or forbid these HMOs to be operated at a profit. There are a number of ways they could be operated in the public interest, ranging from issuing subsidized coverage at a level that would keep them operating at or near a break-even basis to using dividends from the HMOs for the benefit of other, less self-sustaining lines of coverage for which there is a public need.

These are not mutually exclusive options — a different mix may be desirable as conditions change. One public benefit that Blue Cross continues to provide is the dependable availability of a broad range of health coverage statewide, including: fee-for-service, preferred-provider, and HMO coverage for individuals, families, small, and large groups; Medicare supplement coverage; federal employee coverage; administrative services for self-funded employers. The synergies, mutual support, and economies of scale provided by a broad subscriber base enhance Blue Cross’s ability to meet the public’s needs in whichever markets happen to be underserved at a particular time or place. See 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990). It is in the public interest to maintain the ties between all of the Blue Cross lines of business, and not to sever them through a "good company/ bad company" split-up.

While there is therefore a wide range of management discretion as to how best to apply the HMO’s revenue toward its public purpose, one option that is not available is allowing wealth to accumulate at the subsidiary level for investment purposes. There need not necessarily be any significant profits, but if there are they must be appropriately distributed in a timely manner to the nonprofit owners. That must be a second condition of approval.

Charitable Assets

In summary, three ways have been identified in which the establishment of these subsidiaries might lead to some type of "conversion": (1) if individuals or for-profit entities obtain an ownership interest in the subsidiaries; (2) if the subsidiaries are operated in a manner incompatible with the charitable mission of their parents; or (3) if business becomes concentrated in the subsidiaries in a way that reduces Blue Cross to being primarily a holding company for for-profit enterprises. The conditions established up to this point are designed to forestall the likelihood of the two latter "indirect conversion" scenarios, where the assets remain in charitable hands but are used in a manner that conflicts with the owners’ charitable purposes. However, the organization of these joint ventures as stock corporations could also facilitate a straightforward direct conversion of all or part of the charitable assets themselves. It cannot be forgotten that the formation of for-profit Blue Cross subsidiaries in California and Missouri was quickly followed by public stock offerings. PII Exh. 1, pp. 7–9, 1/30/97 Tspt., p. 91 (Rosenfeld/Collins testimony)

Indeed, both joint venture transactions do contemplate the possible sale of the shares. The CMPHP Shareholders Agreement also notes the possibility of a public stock offering. CMPHP Exh. 21, §§ 1(a)(xi), 2. In the case of CMPHP, current plans include the sale by CMHC of its share of the company to affiliated physicians, although transfers to other persons are permissible only upon the vote of 75% of the directors. (See page 10 above.) In the case of MPHP, MMC has given the Maine Medical Center Physician-Hospital Organization, Inc. ("MMC-PHO") an option to purchase all its shares. MPHP Exh. 14. The option may be exercised at any time after December 31, 1997. (The option agreement also notes the possibility of earlier transfers by MMC to other hospitals and/or PHOs.) These shares will be made subject to a restriction on resale contained in the MPHP shareholders agreement. MPHP Exh. 13. But if the option is exercised, nothing prevents the new mix of shareholders from amending their agreement to permit resale of the transferred shares. The restrictions on transfer contained in the CMPHP shareholders agreement can similarly be lifted by the shareholders at a later date.

The purpose as stated in the MPHP option agreement can certainly be accepted as a worthy purpose which advances the public service goals of Blue Cross and its partners: "to establish a meaningful role in the governance of the HMO by the health care providers who have agreed to provide health care services to enrollees of the HMO" (MPHP Exh. 14, p. 1) Nevertheless, the exercise of the MPHP stock option, or the sale of CMPHP stock to physicians, would transfer charitable assets into private hands and would therefore amount to a partial conversion. Furthermore, even though current restrictions on resale of shares partially address concerns about the potential for absentee ownership, the future profitability of CMPHP and MPHP may make them attractive targets for takeover bids. Relying on contractual provisions without imposing corresponding regulatory restrictions would thus set the stage for subsequent transfers of CMPHP and MPHP stock to investors who may be less committed to the nonprofit purposes of BCBS, CMHC, and MMC than the present shareholders. In addition, if this occurs, any appreciation in the value of the stock will represent a further diversion of charitable assets to private hands.³¹

³¹This would frustrate the goal of MMC, whose treasurer testified to the hospital’s intent that "the dollars stay within our system and are totally 100 percent captured within our system." 1/15/97 Tspt., p. 204 (testimony of William Caron).

A valuation is not necessary, however, in order to quantify how much of the value ultimately derives from contributions, how much from operations, how much might ultimately be attributable to the benefits of the tax exemption, and so on. That question is irrelevant to the calculation of how much of the value of Blue Cross and Blue Shield of Maine is held in charitable trust. That calculation is simple — all of it. This includes all of the value of its subsidiaries, as long as those subsidiaries are 100% charitably owned. Concerns have been raised that once a joint venture HMO had built up value independent of the contributions of its charitable parents, it might be argued that only the book value of the corporation is impressed with a charitable trust, and any remaining goodwill or going-concern value has a for-profit character. This is not correct. If such value does not belong immediately to the corporation’s charitable parents, and therefore ultimately to the public, to whom else could it possibly belong?

The further claim has been raised that establishing CMPHP and MPHP as stock corporations may not merely be cause for concern about the potential for conversion, but actually be a conversion per se. However, this view is based on an incomplete understanding of the possibilities of this corporate form. As discussed in the preceding section, Charitable Purpose, the use of the for-profit mode of corporate organization does not necessarily indicate that Blue Cross is being converted in whole or part to a business corporation. As long as the joint venture is devoted exclusively to the furtherance of the charitable purposes of the parent shareholders and all stock remains in the hands of its charitable parents, there is no change in the character or ownership of charitable assets.

Traditionally, corporate shareholders are investors and their purpose is to make money, but the joint venture shareholders have testified that their purposes remain unchanged, and that their choice of corporate form was driven by necessity and should not imply any intent to form a business corporation in the conventional sense of the term. The Legislature has expressly granted nonprofit health service organizations the power to "own ... a health maintenance organization ... as a subsidiary or affiliate." 24-A M.R.S.A. § 2301(3-A)(E). This language spells out that one option which is available for providing HMO coverage is to do so through a subsidiary corporation, which by definition stands in a for-profit relationship to its parent corporation, whatever its relationship to the general public may be. Therefore, the formation and licensure of a stock HMO subsidiary does not by itself amount to a conversion of Blue Cross assets, provided the necessary safeguards for the assets are established at the outset. If that is not done, the only appropriate action is to conduct the valuation of the company at that time, before placing even one foot on the slippery slope. Consequently, a third condition of approval will be that no stock of the HMO may be sold, transferred, or given as security; no stock may be issued; and no rights in the stock may be assigned, except with the prior approval of the Superintendent. Consideration will be given to sale or transfers to charitable organizations with a healthcare mission. Any proposed sale, transfer, issuance, pledge, or assignment of stock to an entity lacking a charitable mission will need to be accompanied by a proposed plan to guarantee that the charitable assets of BCBS will continue to be used in their entirety for charitable purposes.

Planning for the Future

Unlike the "typical" conversion case, BCBS does not propose to sell or transfer outright any of its assets to either company. Rather, the fear is what witnesses Stephen Rosenfeld, Esq. and Kathleen Collins, Esq. of the Community Health Assets Project referred to as a "creeping conversion." Public Interest Intervenors ("PII") Exh. 1, pp. 7–8.³² Under this scenario, the value of Blue Cross’ business may gradually shift over time to CMPHP and MPHP without any compensation having been paid to BCBS.

³²The Public Interest Intervenors submitted as their Exhibit 1 the joint prefiled testimony of Mr. Rosenfeld and Natalie Seto, Esq. At hearing, Ms. Collins was substituted as a witness for Ms. Seto without objection.

Assuming for the moment that these applications are approved and licenses are issued, it is important to consider how to identify the point at which a conversion of BCBS’s assets may have occurred, before we are past that point. It is worth noting that BCBS has not formally assigned any of its policies to MPHP and CMPHP. Nevertheless, the distinction between a formal assignment of contract rights and a transfer of customer goodwill at renewal is not particularly significant here.

It is not possible to predict the future. However, past statements of BCBS, the likely sales patterns of CMPHP and MPHP, the provisions of the shareholder agreements and related instruments, and experience elsewhere all point to the likelihood that if these applications are approved without conditions, a conversion will eventually occur.

BCBS currently insures (redacted) Maine residents. MPHP Exh. 16. The third-year projection for CMPHP is 13,700 covered lives, of whom 6,485 are expected to migrate from other BCBS products. Of the 6,485 existing BCBS enrollees, 3,500 will be drawn from HMO Maine.³³ HMO Maine is the only managed care product of general applicability currently offered by BCBS. BCBS’s five-year enrollment projection from CMPHP is 19,900 covered lives. CMPHP Exh. 15.

³³See also (redacted) MPHP Exh. 11.

For MPHP, the third-year projection is 33,900 covered lives (Mercy Exh. 9), of whom 26,198 are expected to migrate from other BCBS products. MPHP Exh. 4, p. 24, n. 1 (Foster testimony). These 26,198 members include 17,329 from HMO Maine (MPHP Exh. 23) and (redacted). 1/15/97 tspt., pp. 324–25 (Foster testimony).³⁴ BCBS’s five-year enrollment projection for MPHP is (redacted) covered lives. MPHP Exh. 47.

³⁴(redacted) MPHP Exh. 17.

Despite the current standstill in the efforts to establish a community centered health plan with EMHC in Bangor, BCBS forecasts the eventual formation of an "eastern/northern Maine venture." BCBS’s five-year projection (including the CCHPs) forecasts a January 1999 start-up for the eastern/northern Maine venture at an estimated volume of 35% of MPHP’s three-year enrollment level, which would figure to 11,865 covered lives (33,900 x .35 = 11,865). MPHP Exh. 16. The year-2001 enrollment projections for the three planned CCHPs thus total 80,865 covered lives.

This is consistent with BCBS’s latest five-year enrollment forecast, found in MPHP Exh. 16, which appears in the form of two stacked-bar charts dated December 5, 1996 and an accompanying narrative entitled "Summary of the Effects of Proposed Community-Centered Health Plans Upon Associated Hospital Service of Maine." The chart which assumes operation of the CCHPs shows them accounting for (redacted) covered lives as of December 2001, which is (redacted) of the projected (redacted) overall enrollment in BCBS and the CCHPs at that time.

For some of the reasons set forth by Arthur Andersen consultant Mark Hoyer, the Superintendent finds that the actual enrollment in MPHP and CMPHP is more likely to exceed BCBS’s projections than to fall below them. Adv. Panel Exh. 2 (CMPHP), pp. 6–8; Adv. Panel Exh. 2 (MPHP), pp. 5–7. Chief among these is Mr. Hoyer’s assessment that the migration rate from HMO Maine to the Partners plans is likely to exceed BCBS’s projections.

The Partners products will enjoy a premium advantage over HMO Maine. The benefits provided by the lock-in and POS versions of the Partners products and HMO Maine are comparable. An entry in the minutes of BCBS’s May 15, 1996 board of directors meeting (redacted).³⁵ This was also the providers’ understanding. An April 4, 1996 memo from James Kane, CMHC’s director for integrated health care, stated that "virtually all of the current BCBS enrollment in Central and Western Maine will be transitioned into this new company." St. Mary’s Ex 15. These materials bolster Mr. Hoyer’s assessment that (redacted) Hoyer prefiled, both proceedings.

³⁵(redacted) MPHP Exh. 11.

This is particularly applicable to MPHP in light of the February 1997 decision to include Mercy Hospital in the MPHP provider network. Although the MPHP provider panel is not as broad as the HMO Maine provider panel in southern Maine, the inclusion of Mercy eliminates much of the difference between MPHP and HMO Maine in greater Portland from the purchaser’s point of view.

Promotion of the CCHPs at HMO Maine’s expense is not only BCBS’s intent. It also appears to be its binding obligation. The CMPHP and MPHP shareholder agreements not only obligate BCBS to use its best efforts in marketing the new products to existing BCBS HMO and fee-for-service customers (CMPHP Exh. 21, p. 17; MPHP Exh. 20, p. 13); the MPHP agreement requires BCBS to "give priority" to those efforts. In a related vein, both shareholder agreements give CMPHP and MPHP a right of first refusal within their respective service areas for all new lines of business that BCBS may propose to write (and vice versa). The likely effect of these provisions is that all product development and marketing initiatives will be funneled to MPHP and CMPHP, leaving BCBS, as time goes on, only with what little business it is unable to transition into the new managed care subsidiaries.³⁶

³⁶Although BCBS witnesses disagreed, the Superintendent accepts the likelihood of an adverse selection process in existing BCBS fee-for-service products as forecast by Mr. Leicester. Adv. Panel CMPHP Exh. 1, p. 11–12; Adv. Panel MPHP Exh. 3, p. 12; see also 1/29/97 Tspt., pp. 116–17 (Hoyer testimony); 1/30//97 Tspt., p. 89 (Rosenfeld testimony). That is, the healthier customers will tend to migrate to managed care for the premium savings, whereas less healthy customers who more frequently receive benefits will tend to avoid the restrictions on choice, access and utilization that define managed care. The poorer risk pools for the fee-for-service products will result in higher claims experience and concomitantly higher policy costs for the remaining policyholders. BCBS had a similar experience under its first-dollar, community-rated "traditional" nongroup plan and major medical supplement. See In re Blue Cross, Blue Shield, and Blue Alliance 1993 Nongroup Rate Filings, No. INS-92-64; In re Blue Cross, Blue Shield, and Blue Alliance 1993 Nongroup Rate Filings, No. INS-93-11.

Consistent with Mr. Hoyer’s testimony, I also find that the prospect of either MPHP or CMPHP expanding its service area is a real one. This could take the form of MPHP obtaining network providers beyond the current 30-mile radius from Portland in an effort to attract new groups located further from Portland. (redacted). 1/15/97 Tspt., pp. 295–302 (Vangeison testimony). Finally, I also concur with Mr. Hoyer’s testimony that implementation of a statewide (or cross-service area) coverage agreement by MPHP and CMPHP could lead to a modest increase in enrollment.

These and other contingencies led Mr. Hoyer to opine that CMPHP’s actual enrollment could (redacted), and that MPHP’s actual enrollment could (redacted). This testimony, and the findings recited above, lead to the conclusion that the BCBS estimate of (redacted) of its existing business being in the CCHPs by the end of 2001 is too low. Based on the evidence, it is reasonable to expect that the three CCHPs will account for 33% or more of BCBS’s business by that time.

During the 1997 – 1999 period (i.e., years 1–3), BCBS will have also transferred to CMPHP and MPHP without compensation many millions of dollars in lost revenues as measured by the 32,683 BCBS subscribers who are expected to migrate to the new companies.³⁷ Any attempt to put a precise dollar value on these policies suffers from the same uncertainties confronted above in an attempt to predict the enrollment of the CCHPs five years hence. Subject to the full range of variables discussed in his prefiled testimony, actuary Hoyer posited (redacted) in the case of CMPHP and (redacted) in the case of MPHP. CMPHP Adv. Panel Exh. 2, pp. 10–11; MPHP Adv. Panel Exh. 2, pp. 9–10. No more precise a finding is necessary. The point is that the value of the transferred policies is considerable.³⁸

³⁷BCBS is disingenuous is asserting that these subscribers have no value to the new companies in that the policies have not been legally assigned to CMPHP/ MPHP and the customers are free to go elsewhere. BCBS has based its marketing strategy and enrollment projections on the expectation that these plans would have an inside track with established BCBS customers, and it is doubtful that CMHC would have been nearly as interested in the joint venture if it regarded it as a startup with no existing customer base. BCBS cannot ask the Superintendent to approve an application which includes this enrollment while at the same time questioning whether the enrollment will ever materialize.

³⁸The Superintendent ruled at pages 19-20 above that the degree to which BCBS’s intangible contributions to the new HMOs (e.g., BCBS’s service marks and customer base) may have exceeded its 50% equity interest was not in and of itself a ground for denial of the applications. However, any such excess is appropriate to include in any valuation of assets that may subsequently be required.

Most important, the shift in value marked by the initial migration of existing policyholders is likely to continue. Due to the adverse selection spiral discussed at page 45 above, the growth of business in the CCHPs will likely come at the expense of BCBS. Although BCBS projects these new managed care plans to be profitable, HMO Maine, which lost $4.5 million over the last 2 years, will remain a BCBS product. The following testimony of Arthur Andersen consultant Leicester and Community Health Assets Project witnesses Rosenfeld and Collins is fairly persuasive:

The likely scenario is that over time low-risk subscribers will change to the lower priced HMO products. As a result value will build up in these for-profit entities. If provisions are not made for mandatory distributions and limits placed on surplus build up, the funds resulting from the profits will not be made available to the not-for-profit members for use in their charitable missions to benefit the community. Furthermore, if there are not adequate provisions protecting against excessive capital calls, there may be an inappropriate drain on resources as the HMO base expands and strives to capture greater market share by increasingly more competitive pricing. Independent of any distributions, there will be a build up in going concern value based on the revenue potential of the for-profit HMO. A substantial part of that value will have been acquired from AHS [i.e., BCBS], an entity regulated by the Bureau. The HMO’s market share associated with this going concern value will be an attractive target for acquisition…

CMPHP Advocacy Panel Exh. 1, p. 12 and MPHP Adv. Panel Exh. 3, pp. 12-13.

There is a very real concern that over time, the value of BCBSME could be effectively transferred to the for-profit venture. This shift will occur as a number of current BCBSME subscribers become subscribers of the Central Maine Partners Health Plan. Of course, there are no plans at present to transfer the current BCBSME subscribers overtly, e.g., by eliminating BCBSME products and forcing current subscribers to sign up with the Central Maine Partners Health Plan or another insurer. Instead, current BCBSME subscribers will be targeted using existing BCBSME marketing materials. In addition, Central Maine Partners Health Plan intends to market its HMO product at a price that is lower than that currently charged to other subscribers. Given these facts, BCBSME subscribers will have no reason to stay with their current products if they can purchase identical coverage for less money, from an entity that carries the "Blue Cross Blue Shield" trademark and service marks, and that possesses the combined financial strength of BCBSME and CMHC. If this assumption is correct, when you combine the resulting evisceration of its current HMO Maine product with the industry-wide assumptions regarding the future of indemnity lines of insurance, you could wind up with a situation where the majority of BCBSME assets are tied up in a venture that has no obligation to return money to the parent (except upon dissolution), thus frustrating the parent’s ability to fulfill its charitable mission.

PII Exh. 1, p. 7; see also 1/30/97 Tspt., pp. 174–77 (Leicester testimony).

If the fortunes of the CCHP operations thrive while those of BCBS operations wane, the primary value of BCBS may become that of a holding company for its for-profits subsidiaries rather than as a nonprofit writer of insurance in its own right. If this does in fact transpire, BCBS’s nonprofit status would be reduced to a non sequitur, and the company’s conversion to a for-profit company would, as a practical matter, be a fait accompli.³⁹ As Mr. Rosenfeld testified, this type of transformation would be a gradual process rather than a discrete event:

³⁹This, again, is the rationale of the Missouri decision invalidating the sale of Blue Cross assets to RightChoice. Cf. Guilford & Sangerville Water District v. Sangerville Water Supply Co., 130 Me. 217, 219 (1931) (a quasi-public corporation holds its franchise not only for its stockholders but also in trust for the public and may not, without legislative consent, so deal with its property as to incapacitate itself from performing its public duties).

That is, we all know when we’re at a time of twilight, but we don’t quite know when it begins, and that the challenge for regulators is to try to provide some guidance to make sure that a conversion hasn’t already occurred by the time it gains the public’s attention, that is, twilight hasn’t already happened…

1/30/97 Tspt. at 76.

I’m concerned that when a for-profit entity such as this is created that there are circumstances inherent both in the healthcare economy today, and I believe in the way this transaction is structured, that makes it virtually inevitable that the joint venture in both cases — I should say I’m making comments about both cases — will grow, and that partly on account of that growth directly and partly indirectly the parent will shrink, and there will come a time when the joint venture is the tail that begins wagging the dog, and, in fact, is a very large tail with a very small dog. When that happens, conversion, in my view, has occurred because the original character of the parent or stockholder will have fundamentally changed somewhere in the course of the growth of that for-profit HMO and the concomitant shrinkage of Blue Cross Blue Shield.

1/30/97 Tspt., at 77–78.

For these reasons, one cannot predict when a conversion of BCBS may in the future be said to have occurred. Therefore, it is important is that the matter be addressed now, as there may be no second chance.⁴⁰

⁴⁰In an earlier order in the Missouri Blue Cross case cited at page 37, the court ruled that the Missouri Insurance Director’s approval of the sale of assets to a for-profit subsidiary barred him from later attempting to rescind that approval in the event that Blue Cross did not agree to an after-the-fact charitable set-aside. Blue Cross and Blue Shield of Missouri v. Angoff, et al., Case No. CV196-619CC, Memorandum and Order (Cole County Circuit Court, 9/9/96).

Three conditions of approval have already been imposed with the goal of preventing a "creeping conversion" by functionally integrating the parent and the subsidiaries for the common purpose of issuing "nonprofit health plans." If the above conditions succeed in establishing and maintaining the roles of the joint ventures within an overarching nonprofit enterprise, it may not matter what proportion of Blue Cross business is written directly and what proportion through subsidiaries.

Under this approach, it is unnecessary to wait and see if a creeping conversion actually occurs. The amendment to the Articles of Incorporation, mandatory distributions of profits, and the restrictions on stock transfers already discussed, will directly prevent a conversion right now.

Order and Notice of Appeal Rights

It is therefore ORDERED:

The application is hereby APPROVED CONDITIONALLY. A Certificate of Authority, subject to the ongoing obligation to remain in compliance with the terms and conditions set forth below, shall issue within ten days after the Applicants have demonstrated to the satisfaction of the Superintendent that they have fulfilled all conditions precedent and have the capacity to comply with all conditions subsequent.

1. The HMO must amend its Articles of Incorporation to expressly include as a corporate purpose the furtherance of the charitable purposes of BCBS and CMHC, and must be managed as an integral part of BCBS’s statutory purpose of issuing bona fide nonprofit health plans.
2. The review of filed rates shall take into account the rates charged by Blue Cross Blue Shield for business written on a direct basis, and rates shall be disapproved as unfairly discriminatory if they are found to be based on inappropriate risk stratification between the Blue Cross Blue Shield and joint venture enrollment bases.
3. Expense payments may not be excessive or inappropriate, and shall be subject to review in the examination process, the rate review process, or otherwise at the Superintendent’s discretion.
4. The HMO shall make distributions to shareholders in a manner that will maintain its surplus at no more than 150% of minimum surplus requirements as defined in 24-A M.R.S.A. § 4204-A. The Board shall determine quarterly whether a distribution under the terms of this condition is warranted.
5. No stock of the HMO may be sold, transferred, or given as security; no new stock may be issued; and no rights in the stock may be assigned; except with the prior approval of the Superintendent. Consideration will be given to sale, issuance, or transfers to charitable organizations with a healthcare mission. Any proposed sale, transfer, issuance, pledge, or assignment of stock to an entity lacking a charitable mission will need to be accompanied by a proposed plan to guarantee that the charitable assets of BCBS will continue to be used in their entirety for charitable purposes.
6. The HMO shall demonstrate that the documents required by Bureau of Insurance Rule 191, including without limitation reinsurance policies, have been executed.
7. Evidence of coverage must be approved as provided by 24-A M.R.S.A. § 4207.
8. Appropriate contracts with HMO Maine or MPHP providers, as applicable, must be executed and filed to implement the point of service plan provisions for reimbursement to certain providers not in the CMPHP network on a maximum allowance basis.
9. Six months after it commences operation, the HMO must file documentation of its timely and accurate provision of utilization reports.
10. The HMO must file an acceptable plan for provision of mental health and substance abuse services.
11. The HMO may not expand its service area into Cumberland County without filing a plan to provide meaningful hospital access for residents of the northern part of the county.
12. Any filing with respect to acquisition of the HMO must include a full description of any compensation arrangements, direct or indirect, between management and potential acquirers.
13. Prior notice shall be furnished to the Superintendent of any revisions, amendments, or other changes to the transactional documents, including the Management Services Agreement and the Shareholders Agreement.
14. All submissions, filings, and other actions required pursuant to paragraphs 1-13 above, must be filed with the Superintendent on or before October 18, 1997, or this conditional approval shall lapse and the application shall be denied.

This Decision and Order is a final agency action within the meaning of the Maine Administrative Procedure Act. It is appealable to the Superior Court in the manner provided in 24-A M.R.S.A. § 236, 5 M.R.S.A. § 11002, and M.R. Civ. P. 80C. Any party to the hearing may initiate an appeal within thirty days after receiving this notice. Any aggrieved non-party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal on or before May 28, 1997. There is no automatic stay pending appeal; application for stay may be made in the manner provided in 5 M.R.S.A. § 11004.

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