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Maine.gov > PFR Home > Insurance Regulation > Hearing Decision Index > Document 27 : INS 99-14 : Hearing Decision

HARVEY & FRANK

ATTORNEYS

 

R o b e r t S. F r a n k

 

 

November 2, 1999

 

Alessandro A. Iuppa, Superintendent of Insurance

c/o Lyndy Morgan

Docket No. INS-99-14

Maine Department of Professional and Financial Regulation

Bureau of Insurance

124 Northern Avenue

Gardiner, Maine 04345

 

Re: Anthem-Blue Cross Blue Shield of Maine (BCBSME) proceeding
Docket No. INS-99-14

Dear Superintendent Iuppa:

Enclosed for filing are two paper copies and one floppy disk of the following:

  1. Associated Hospital Services of Maine d/b/a/ Blue Cross Blue Shield of Maine’ Response to Superintendent’s First Discovery Request (2 paper copies and one disk)

As reflected in the Certificate of Service attached to the Response, one paper copy of this letter and the enclosed responses and motion have been sent to Judith Chamberlain, Esq..

I have also sent copies of this filing to William Laubenstein, Esq., and to the those persons who represent the proposed intervenors, by mail.

Very truly yours,

 

 

cc: Confidential and Non-Confidential Portions

James Zimpritch, Esq.

Judith Chamberlain, Esq.

Martin Robles, Esq.

 

cc:

William Laubenstein, Esq.

Gregory A. Brodek , Esq. (Maine Health Alliance)

Andrew B. MacLean, Esq. (Thomas D. Hayward, M.D., Maroulla S. Gleaton, M.D., and the Maine Medical Association)

Joseph P. Ditre, Esq. (Consumers for Affordable Health Care Foundation/Coalition)

Michele M. Gavin, Esq. (Central Maine Healthcare Corporation)

Robert I. Goldman (Maine Council of Senior Citizens)

Bonnie Post (Sacopee Valley Health Center, Regional Medical Center at Lubec, Eastport Health Care, Inc. and the Maine Ambulatory Care Coalition)

John Dieffenbacher-Krall (Maine People’s Alliance)

STATE OF MAINE

DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION

BUREAU OF INSURANCE

 

In Re:

Application of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine to convert to a Stock Insurer and Voluntarily Liquidate and Dissolve

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and

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Certificate of Service
In Re:

Application of Anthem Health Plan of Maine, Inc. to Acquire the Assets of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine and Related Transactions

Docket No. INS-99-14
(CONSOLIDATED)

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CERTIFICATE OF SERVICE

The under signed person hereby certifies that on November 2, 1999, he caused a copy of the following documents to be served by United States mail, first class postage prepaid, on each of the persons listed below.

Associated Hospital Services of Maine d/b/a/ Blue Cross Blue Shield of Maine’

Response to Superintendent’s First Discovery Request

James Zimpritch, Esq.

Judith Chamberlain, Esq.

Martin Robles, Esq.

William Laubenstein, Esq.

Gregory A. Brodek , Esq. (Maine Health Alliance)

Andrew B. MacLean, Esq. (Thomas D. Hayward, M.D., Maroulla S. Gleaton, M.D., and the Maine Medical Association)

Joseph P. Ditre, Esq. (Consumers for Affordable Health Care Foundation/Coalition)

Michele M. Gavin, Esq. (Central Maine Healthcare Corporation)

Robert I. Goldman (Maine Council of Senior Citizens)

Bonnie Post (Sacopee Valley Health Center, Regional Medical Center at Lubec, Eastport Health Care, Inc. and the Maine Ambulatory Care Coalition)

John Dieffenbacher-Krall (Maine People’s Alliance)

 

Robert S. Frank

STATE OF MAINE

DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION

BUREAU OF INSURANCE

 

In Re:

Application of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine to convert to a Stock Insurer and Voluntarily Liquidate and Dissolve

 )
)
)
)
)
)
)

and

 )
)
In Re:

Application of Anthem Health Plan of Maine, Inc. to Acquire the Assets of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine and Related Transactions

Docket No. INS-99-14
(CONSOLIDATED)

 )
)
)
)
)
)
)
)
)
 Associated Hospital Services of Maine d/b/a/ Blue Cross Blue Shield of Maine's Response to Superintendent of Insurance's First Discovery Request

 

Associated Hospital Services of Maine d/b/a/ Blue Cross Blue Shield of Maine responds to the Superintendent of Insurance First Discovery Request, dated October 19, 1999, as follows:

Valuation

1.

 Please provide the curriculum vitae for each of the review appraisers and contributing appraisers identified in the certification of appraisal appended to the valuation of Blue Cross and Blue Shield of Maine completed by Houlihan, Lokey, Howard and Zukin Financial Advisors, Inc. which appears as Tab D to the application on file with the Superintendent.

Response:

 

 

 

 Biographies for the review appraisers are attached as B0076-80.

2

 In addition to a curriculum vitae, please provide any other relevant background information with respect to the contributing and reviewing appraisers including similar engagements in which each individual has been involved over the course of the past ten years.

Response:

 

 

 

 Relevant experience for appraisers is included in the response to Question #1. Additional relevant experience for engagements performed by Houlihan Lokey is summarized on the enclosed BC0066-75.

3.

 Please describe in detail the process utilized by the Board of Directors of Associated Hospital Service in selecting Houlihan, Lokey, Howard and Zukin as the appraisal firm for the completion of the valuation of Blue Cross and Blue Shield of Maine.

Response:

 

 

 

 

 

 

 

 

 Pursuant to the requirements of LD 1849, the Plan of Conversion under which a nonprofit hospital and medical service organization converts to a domestic stock insurer must include an appraisal "prepared by persons independent of the organization, experienced and expert in the area of corporate appraisal and acceptable to the superintendent."

In mid-July 1999, after signing a definitive asset purchase agreement with Anthem Insurance Companies, Inc. ("Anthem"), BCBS started drafting its Plan of Conversion and began the process of selecting a firm to perform the independent appraisal to be included therein. In selecting an appraisal firm, to comply with the express and implied provisions of LD 1849, BCBS based its selection of an appraiser on the following criteria:

- independence of the firm;

- overall experience and expertise in providing appraisals of mid-sized and large companies;

- experience and expertise in providing appraisals in the health care industry;

- experience and expertise in providing appraisals in the insurance industry; and

- reputation and prominence of the firm;

Based on discussions with counsel and others involved in the transaction, BCBS narrowed its search to the following three firms:

  1. Houlihan Lokey Howard & Zukin Financial Advisors, Inc.;
  2. Legg Mason Wood Walker Incorporated; and
  3. The Townsend & Schupp Company.

BCBS also considered The Robinson-Humphrey Company, LLC to supply the independent appraisal. Robinson-Humphrey is a subsidiary of Salomon Smith Barney which acted as selling agent for BCBS in the transaction. Although LD 1849 specifically provides that such a company may still be considered independent if certain "procedures are followed and representations and warranties are made," BCBS decided not to pursue Robinson-Humphrey because it wanted to avoid any possibility that the independence of the appraisal could be questioned.

Each of the three firms was contacted, and in late July and early August 1999, they submitted information concerning their relevant experience and expertise as well as proposals. The relevant information for each firm is summarized below:

  1. Houlihan Lokey

    - a recognized middle market leader in valuations and fairness opinions (has conducted over 3,000 appraisals of privately held businesses in the past three years);

    - has a dedicated "Healthcare Group" that has represented clients in virtually every segment of the healthcare industry in assignments ranging from enterprise valuations to seller representations;

    - has experience in not-for-profit conversion transactions;

    - has extensive experience with healthcare companies; and

    - has extensive experience with insurance companies.

  2. Legg Mason

    - has strong valuation and appraisal experience (completed 25 such assignments since 1997);

    - has familiarity with the "charitable assets" issue being faced by many Blue Cross Blue Shield plans across the US; and

    - has experience in the health insurance industry (two valuation appraisals of health insurance companies since 1997, including one transaction involving Anthem).

  3. The Townsend & Schupp Company

    - extensive experience in the insurance industry (especially life insurance)

    Based upon the information received and reviewed by BCBS and the guidance and advice of counsel, BCBS decided to interview Houlihan Lokey to provide the appraisal. On August 20, 1999, representatives of Houlihan Lokey met with BCBS management, and based upon that interview and other information that BCBS had regarding the firm, BCBS retained Houlihan Lokey to provide the appraisal. Among the factors which led BCBS to make this decision were the following:

    - Houlihan Lokey’s reputation as a leader in providing appraisal and valuation services;

    - Houlihan Lokey’s extensive experience in providing such services (over 3,000 in three years);

    - the experience of Houlihan Lokey’s dedicated Healthcare Group in providing such services in the healthcare and insurance industries;

    - BCBS looked upon Legg Mason’s previous experience with Anthem as a negative, as it wanted to avoid any concern that the appraisal may not have been independent as required by statute; and

    - while Townsend and Schupp had extensive experience in the insurance industry, the large majority was in the life insurance industry, not the health insurance industry, and their reputation is not as extensive as that of Houlihan Lokey.

    The full Board of Blue Cross was not directly involved in the process that led to the selction of Houlihan Lokey as appraiser. Houlihan Lokey presented the results of its appraisal to the Blue Cross Board in person before the appraisal was filed with the Superintendent.

Financial

1.

 Please provide the audited financial statements for Anthem Insurance Companies on a GAAP basis for the years ended December 31, 1997 and 1998 including the report of Independent Auditors. Note: Although some statements are referenced in the filing as appearing in Book 2 at Tab I, they appear to be missing.

Response:

 

 

 

  

These documents were provide under cover letter of October 19, 1999 from Robert S. Frank to Judith Chamberlain, and bear document control numbers AN 000001-00049.

2.

 The auditor’s report for the year ended December 31, 1998 of Blue Cross and Blue Shield of Maine appears in Book 2, Tab Q of the filing. Please provide pages 7, 8 and 10, as those pages appear to be missing.
Response:

 

 

 

  

These documents were provide under cover letter of October 19, 1999 from Robert S. Frank to Judith Chamberlain, and bear document control numbers B 00063-00065.

3.

 Financial projections for Blue Cross and Blue Shield of Maine on a consolidated basis are provided in the confidential portion of the filing. Please identify the companies whose financial figures are included within the projections.
Response:

 

 

 

 

 

 

  

The financial projections included within the confidential portion of the filing reflect the financial figures of Blue Cross and Blue Shield of Maine. For purposes of these projections, Blue Cross and Blue Shield of Maine's investments in Machigonne, Inc. (57% - owned), Maine Partners Health Plan, Inc. (50% - owned), and Central Maine Health Plan, Inc. (50% - owned) are accounted for by the equity method.

4.

 Financial statements for Anthem Insurance Companies are provided at Book 2, Tabs K, L, M, R and S. For each of these statements, please indicate which are done on a consolidated basis. For those statements which are consolidated, please identify the companies included within each statement.
Response:

 

 

 

  

BCBSME refernces the response of Anthem Insurance Companies to this request, because the request asks for information concerning the financial statements of Anthem Insurance Companies.

5.

 The membership information contained in the BCBSME financial projections in the confidential binder at page 50 provided with respect to Maine Partners Health Plan as of the year ended December 31, 1998 differs from the same information provided on the 1998 annual statement filed with the Bureau of Insurance. Please compare the two documents and explain the deviation. Additionally, please prepare and file the same financial projections on a SAP basis.
Response:

 

 

 

 

 The membership information contained in the confidential binder at page 50 with respect to Maine Partners Health Plan enrollment as of the year ended December 31, 1998 is in error. The reported total MPHP enrollment of 23,248 (a figure that represented total Maine Partners Health and Central Maine Partners Health Plan underwritten enrollment) was inadvertently pulled from the wrong column of a report. The correct figure for underwritten enrollment for Maine Partners Health Plan at that time was 18,199 as reported to the Bureau of Insurance. The same error affected the Central Maine Partners membership numbers reported on page 51. The correct numbers with respect to the Partners plans were shown on a combined basis on page 44 of the document. In addition, the financial projections shown on pages 50 and 51 and elsewhere in the document were based on correct enrollment figures, so these errors appear to have been not material.

BCBSME are preparing the financial projections shown on page 50 on a SAP basis and will submit them as soon as they become available.

6.

 The information contained in the BCBSME financial projections in the confidential binder at page 51 provided with respect to Central Maine Partners Health Plan as of the year ended December 31, 1998 differs from the same information provided on the 1998 annual statement filed with the Bureau of Insurance. Please compare the two documents and explain the deviation. Additionally, please prepare and file the same financial projections on a SAP basis.
Response:

 

 

 

 

 

 The difference with respect to the net income reported for 1998 in the confidential binder at page 51 with respect to Central Maine Partners Health Plan and the same information provided with the Bureau of Insurance reflects a difference with respect to GAAP and statutory accounting. The net income shown on page 51 in accordance with GAAP recognizes both a current tax asset and a deferred tax liability of $45,718 which offset to result in zero tax. On the other hand, the Bureau filing for 1998 reflects statutory accounting which only recognizes the statutory liability of $45,718 but does include an offsetting tax asset.

7.

 Please provide the NAIC annual statement for the year ended December 31, 1998 for Anthem Insurance Companies.
Response:

 

 

 

 

  

BCBSME incorporates the response of Anthem Insurance Companies to this request, because the request asks for information concerning the financial statements of Anthem Insurance Companies.

8.

 A comparison of the 1997 financial statement on a GAAP basis (at Book 2, Tab R) to the 1997 financial statement on a SAP basis (at Book 2, Tab J) for Anthem Insurance Companies revealed discrepancies in some of the values including revenue and assets. Please compare the two documents and explain in detail any discrepancies.
Response:

 

 

 

 

  

BCBSME references the response of Anthem Insurance Companies to this request, because the request asks for information concerning the financial statements of Anthem Insurance Companies.

9.

 The June 30, 1999 quarterly statement for Anthem Insurance Companies (at Book 2, Tab M) reflects a refund from the Internal Revenue Service. Please explain the basis for this refund and whether such a refund is expected to be a one-time event. What amount of tax refund is projected as of year end 1999 and what percentage of income is it expected to comprise?
Response:

 

 

 

  

BCBSME references the response of Anthem Insurance Companies to this request, because the request asks for information concerning the financial statements of Anthem Insurance Companies.

10.

 Please describe in detail the methodology used by Anthem Insurance Companies in determining the appropriate deduction from the purchase price should Blue Cross and Blue Shield of Maine fall short in its financial projections. Identify all considerations taken into account in reaching the conclusion that a $5.00 reduction in the purchase price is appropriate.
Response:

 

 

 

 

BCBSME references the response of Anthem Insurance Companies to this request, because the request asks for information concerning the methodology to be used by Anthem Insurance Companies.

11.

 Please explain with specificity the measures Anthem Insurance Companies, through Anthem Health Plan of Maine, will undertake in order to improve the administrative expense ratio of Blue Cross and Blue Shield of Maine should the proposed acquisition be approved.
Response:

 

 

 

  

BCBSME references the response of Anthem Insurance Companies to this request, because the request asks for information concerning the measures intended to be implemented by Anthem Insurance Companies

12.

 Please describe the procedures currently utilized by Anthem Insurance Companies and its subsidiaries to assure compliance with 18 U.S.C. §§1033 and 1034. Does Anthem anticipate the use of these same procedures by Anthem Health Plan of Maine should the proposed acquisition be approved? If not, please describe in detail the procedures to be used by Anthem Health Plan of Maine.
Response:

 

 

 

 BCBSME references the response of Anthem Insurance Companies to this request, because the request asks for information concerning the procedures currently used by Anthem Insurance Companies.

13.

 The bulk reinsurance agreement as well as other documents within the application on file refers to the intent of Anthem Health Plan of Maine to assume "substantially all" of the liabilities of BCBSME. Please provide a detailed itemization of those liabilities which will not be assumed including a complete description of the liability and the estimated or known amount of the liability.

Response:

 

 

  

BCBSME references the response of Anthem Insurance Companies to this request.

Date: November 2, 1999

________________________

Robert S. Frank

HARVEY & FRANK

Two City Center

Suite 402

Portland, Maine 04112-0126

(207) 775-1300

Attorneys for Blue Cross Blue Shield

Last Updated: March 27, 2012