STATE OF MAINE
DEPARTMENT OF PROFESSIONAL & FINANCIAL REGULATION
BUREAU OF INSURANCE

The Maine Medical Association and the Maine Osteopathic Association, Intervenors and associations of physicians practicing in the State of Maine, provide this Closing Statement to urge the Superintendent to disapprove the Conversion Plan submitted by the Applicants because the Plan is neither complete nor "fair and equitable" and has not been validly approved by the Board of Directors of BCBSME, and to urge the Superintendent to disapprove the Conversion Plan.

FACTS

Blue Cross Blue Shield of Maine ("BCBSME"), a Maine Nonprofit Hospital and Medical Service Organization, has been engaged for several decades in the business of providing indemnity health insurance benefits and arranging for the provision of health care services to subscribers and enrollees. During the past several years, BCBSME sustained substantial operating losses and its capital surplus has been reduced significantly, although BCBSME continues to meet the financial standards of the State of Maine and the Blue Cross Blue Shield Association required for continued operation. Notwithstanding these losses and reductions in capital surplus, BCBSME currently has a Company Level Risk-Based Capital Ratio of 150%. Hearing Transcript ("Tr.") 4/5/00, p.m., p. 18. Anthem has advised that it has an "expectation" that it will maintain the company level risk-based capital ratio for all its subsidiaries, including its Maine subsidiary at between 100 and 125%. Tr. 4/7/00, a.m., p. 42. Mr. Robert L. Hoyer, head of the national actuarial practice for Arthur Andersen and consultant to the Superintendent, has identified the 100-125% risk-based capital level as "absolutely a minimum level clearly less than optimal" and has suggested that Anthem "should change that management philosophy for all subsidiaries." Tr. 4/5.00, p.m., p. 19. Upon and immediately after the closing of the sale of the assets of BCBSME to a subsidiary of Anthem ("Anthem BCBSME"), the aggregate capital of Anthem BCBSME will be less than the current aggregate capital of BCBSME. Tr. 4/5/00, p.m., p. 23. Anthem has refused to make any commitment or binding obligation to make available to Anthem BCBSME capital resources of Anthem beyond the minimum required to qualify for licensing in Maine. Tr. 4/5/00, p.m., p. 125.

Change of Control Agreements have been in place and available to executives and senior management of BCBSME for several years. Tr. 4/3/00, p.m., pp. 34-38. In February 1999, after initial discussions with Salomon Smith Barney ("SSB") and one or more prospective investors or buyers, the Change of Control Agreements for some 11 executives and senior managers of BCBSME were updated and augmented in anticipation of a conversion and sale of assets of BCBSME. Tr. 4/3/00, p.m., pp. 34-38. The Change of Control Agreements have been provided to assure that senior management personnel "were not put in a position of ingratiating themselves to any potential acquirer and would negotiate aggressively" on behalf of the company. Tr. 4/3/00, p.m., p. 35.

These Change of Control Agreements remain in existence and provide enforceable contract rights to payments of substantial cash compensation and other benefits. Pursuant to the provisions of the Asset Purchase Agreement, Anthem or a designated subsidiary shall assume the obligations under those Change of Control Agreements.

These Change of Control Agreements have not been included in the Conversion Plan and made available for public inspection and copying.

These terms and provisions of these Change of Control Arguments have been designated by management of BCBSME and the Superintendent as "Confidential" and "Highly Confidential" documents. Accordingly, further discussion of terms and provisions of these Change of Control Arguments is set forth in the Confidential Attachment to this Closing Statement. Such discussion will be limited, necessarily, because the Intervenors in this proceeding, including the Maine Medical Association and the Maine Osteopathic Association were not granted access to any documents or hearing sessions deemed to be "Highly Confidential."

With the assistance of SSB, BCBSME negotiated and entered into an Asset Purchase Agreement, dated July 13, 1999, with Anthem Insurance Companies, Inc. ("Anthem"), an Indiana mutual insurance company (the "Asset Purchase Agreement"). The Asset Purchase Agreement provides for the payment of a purchase price of $120,000,000 and provides that such purchase price is subject to downward adjustment. The Asset Purchase Agreement provides that the reductions in the purchase price are to be made to adjust the purchase price for any losses sustained prior to closing and to defray transaction costs and other costs.

In addition, BCBSME engaged Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey") to prepare an independent appraisal of the fair value of the equity of BCBSME. According to the appraisal report of Houlihan Lokey, dated September 15, 1999, the fair value of BCBSME, as of July 13, 1999, is $102,500,000. Houlihan Lokey was not engaged by BCBSME to update its appraisal report or to adjust or "bring down" its appraisal of the fair value of the equity of BCBSME as of the "Conversion Date" and no such updating Houlihan Lokey appraisal is included in the Conversion Plan. The "Conversion Date" is the date of

completion or closing of the Conversion Plan that has been submitted by BCBSME and Anthem to the Superintendent of Insurance and the Attorney General.

At the time of completion of the negotiation of the Asset Purchase Agreement, the Board of Directors of BCBSME was briefed on the terms and provisions and undertook a review of the proposed Asset Purchase Agreement. According to Mr. William Ryan, the Chairman of the Board of BCBSME, "consultants and lawyers" advised that adequate provisions had been made for the necessary and appropriate capitalization of the Anthem company that is to acquire the assets and continue the business of BCBSME ("Anthem BCBSME"). He suggested that since Anthem BCBSME will be a subsidiary of Anthem and will have "access" to the substantial capital resources of Anthem. Mr. Ryan testified that such "access" to the capital resources of Anthem is equivalent to an agreement that obligates Anthem to provide capital to the subsidiary. Tr. 4/3/00, a.m., p. 75.

In this proceeding, management of Anthem has refused to make any binding commitments to contribute any capital to Anthem BCBSME in excess of the minimum amount required to secure a Certificate of Authority to permit the operation of Anthem BCBSME in the State of Maine. Mr. Hoyer has testified that there is a substantive and fundamental difference between a subsidiary corporation’s "access" to the capital of a parent corporation and a commitment or agreement to obligate and require a parent corporation to make capital contributions to a subsidiary corporation. Tr. 4/5/00, p.m., pp. 20 and 21.

On September 15, 1999, the Board of Directors of BCBSME voted to authorize and direct the officers of BCBSME to prepare and submit a Conversion Plan to the Maine Superintendent of Insurance and the Maine Attorney General. Applicants’ Ex. C-23 (Confidential). The requirements for the Conversion Plan are identified in Maine statute, Title 24, §2301-9-D) (the "Conversion Statute") and the Conversion Plan is to provide a "complete description" of the proposed conversion of the nonprofit hospital and medical service corporation to a stock company. The statute requires that the Conversion Plan is to be submitted to the Superintendent of Insurance for review and for determination by the Superintendent whether the "terms and conditions" of the Conversion Plan are fair and equitable," 24 M.R.S.A. 24 §2301-9-D-E(1), and do not "adversely affect the distribution of the [BCBSME]...value" (24 M.R.S.A. §2301-9-D-E(8)) to the charitable trust that is to be established to receive and hold that value for public benefit.

A Conversion Plan was prepared by BCBSME and Anthem, and the Houlihan Lokey appraisal report, dated July 13, 1999, was included in such Conversion Plan. That Conversion

 

Plan was submitted to the Superintendent of Insurance on September 15, 1999, and the review of the Conversion Plan by the Superintendent of Insurance was begun on that date.

Pursuant to orders entered by the Superintendent of Insurance, the Maine Medical Association and the Maine Osteopathic Association were granted the right to participate as Intervenors in the proceedings to review the Conversion Plan. In permitting the Maine Medical Association and the Maine Osteopathic Association to intervene in this proceeding, the Superintendent of Insurance recognized the central and essential role of physicians in the delivery of health care services to health insurance policyholders and enrollees of health maintenance organizations. See Superintendent’s Orders dated 11/12/99 and 12/22/99.

During the course of this proceeding, the Maine Medical Association made several discovery requests and filed a Motion to Compel production of information and documents related to Anthem’s health care delivery policies and practices. Anthem refused to produce the requested information and documents and opposed the Motion to Compel, asserting that such policies and practices of Anthem are irrelevant to this proceeding. The Superintendent denied the Motion to Compel the production of requested materials and ruled that issues related to Anthem’s provider contracting policies and practices in other states are irrelevant to this proceeding. Order of Deputy Superintendent, 3/22/00. Tr. 4/5/00, p.m., pp. 144-149.

In the second half of 1999, BCBSME incurred unexpected expenses and experienced net losses for the year of approximately $17,600,000. Management of BCBSME attributes the losses to some $10,000,000 of unbudgeted expenses to eliminate prospective Y2K computer problems, to increases in pharmacy benefit costs and to increases in medical claims. In accordance with the terms and provisions of the Asset Purchase Agreement, management of BCBSME calculated the adjustments to be made to the purchase price for the assets of BCBSME and determined that the net purchase price to be paid for the assets of BCBSME is approximately $81,700,000. McGinty Prefiled Testimony, p. 11.

The July 13, 1999 appraisal of Houlihan Lokey has not been updated and adjusted as of the date of completion of the Conversion Plan. The provisions of the Asset Purchase Agreement for the adjustment of the purchase price constitute agreements between the parties to the Asset Purchase Agreement and do not qualify as any adjustment to Houlihan Lokey’s independent appraisal of the fair value of BCBSME. An opinion expressed by Mr. Francis McGinty, Chief Financial Officer of BCBSME, that the current fair value of BCBSME is approximately $71,000,000, has been identified as "improper and incorrect," (Tr. 4/5/00, p.m., pp. 13-15), and the consultant to the Superintendent has offered his own opinion is that the current fair value of BCBSME is " somewhat less" than the net purchase price of approximately $81,700,000 that is to be paid by Anthem. Tr. 4/5/00, p.m., p. 17. The consultant to the Superintendent has suggested that sufficient documentation has been provided to enable the Superintendent to make a determination of the appropriateness and adequacy of the Conversion Plan, but on cross-examination, he, the consultant, confirmed that he had not prepared any appraisal of the current fair value of BCBSME. Tr. 4/5/00, p.m., p. 25. During the adjudicatory hearing a request was

made to the Superintendent to make available the work papers of his consultant relating to the consultant’s opinion concerning the current fair value of the equity of BCBSME and that request was denied. No documentation of any update to the appraisal of Houlihan Lokey is included in the record of this proceeding.

CONVERSION STATUTE

BCBSME has elected to sell its assets to a business subsidiary of Anthem and has elected to satisfy the Maine statutory requirements for such proposed transaction by preparing a "Conversion Plan" and submitting the Conversion Plan for review by the Superintendent of Insurance. The provisions of the Conversion Statute govern the proposed conversion of

BCBSME, a Maine nonprofit hospital and medical and service organization, to a stock insurance company and establish the requirements for the scope, content and review of the Conversion Plan.

In the event that a Conversion Plan is prepared to facilitate and permit the conversion of a nonprofit hospital and medical service organization, the Conversion Plan must be filed with the Superintendent and must be made available in the office of the Superintendent and elsewhere for inspection and copying. The Conversion Plan must satisfy the requirements of the Conversion Statute and must be submitted for review by the Superintendent. The Conversion Statute requires that the Superintendent make provision for review of the Conversion Plan in an adjudicatory hearing. Notice of the adjudicatory hearing must be provided to the public and certain other designated persons, including subscribers, and those persons who are entitled to notice of the hearing must be afforded the right to appear and be heard in the hearing. 24 M.R.S.A. §2301-9-D-C.

A Conversion Plan submitted pursuant to the Conversion Statute, must include "an appraisal of the fair value of the aggregate equity of the converted stock insurer to be outstanding upon completion of the conversion plan...." 24 M.R.S.A. §2301-9-D-I. To the extent that the appraisal report identifies a range of values for the converted stock insurer, the Conversion Plan must include "the methodology for fixing a final value coincident with the completion of the transaction provided for in the conversion plan." 24 M.R.S.A. §2301 9-D-I. The required appraisal:

• must be prepared by persons independent of the organization [submitting the appraisal and the Conversion Plan], experienced and expert in the area of corporate appraisal and acceptable to the Superintendent;
• must be in form and content acceptable to the Superintendent; and
• must "contain a complete and detailed description of the elements that make up the appraisal, justification for the methodology employed and sufficient support for the conclusions reached in the appraisal."

24 M.R.S.A. §2301 9-D-I(2).

The statute also requires that the appraisal must enable determinations of value for purposes of determining the amount of cash or other assets that subscribers or the charitable trust are entitled to receive under provisions of the Conversion Plan as required by paragraph E of the Conversion Statute. 24 M.R.S.A. §2301 9-D-I(i). The referenced provisions of paragraph E of the Conversion Statute require that shares of capital stock of the stock insurance company (the stock company that exists after the conversion of the nonprofit hospital and medical services organization) shall be transferred to the charitable trust that is to be organized in connection with the conversion of the nonprofit hospital and medical services organization and the Conversion Plan, without any requirement that the charitable trust pay anything for the shares. 24 M.R.S.A. §2301 9-D E (3).

Paragraph E of the Conversion Statute, 24 M.R.S.A. §2301 9-D E, provides that the Superintendent "may not issue final approval of a conversion plan unless the superintendent finds" that:

• the terms and conditions of the Conversion Plan are "fair and equitable" (24 M.R.S.A. §2301 9-D E(1)), and in determining whether the terms of the Conversion Plan are "fair and equitable" the Superintendent is required to consider, among other things:
• whether the Conversion Plan complies with the provisions of the Conversion Statute and any rules adopted by the Superintendent under the Conversion Statute; and
• whether the Conversion Plan "would adversely affect, in any manner, the services to be rendered to subscribers;"
• the Conversion Plan is approved by the vote of not less than 2/3 of the members of the Board of Directors of the nonprofit hospital and medical services organization; and
• the Conversion Plan complies with all applicable law.

Finally, the Conversion Statute provides that:

"A director, officer, agent or employee of the organization or any other person may not receive any fee, commission or other valuable consideration whatsoever other than that person’s usual and regular salary and compensation for in any manner aiding, promoting or assisting in a conversion under this section or any related transaction, except as set forth in the conversion plan approved by the superintendent".

24 M.R.S.A. §2301 9-D J.

ARGUMENT

The Superintendent "may not" issue final approval of the Conversion Plan for the reasons set forth below:

1. THE CONVERSION PLAN DOES NOT INCLUDE THE FAIR VALUE APPRAISAL REQUIRED BY THE CONVERSION STATUTE AND, THEREFORE, IS MATERIALLY DEFICIENT.

 

Paragraph 9-D-I of the Conversion Statute requires that the Conversion Plan include an appraisal of the fair value of the aggregate equity "of the converted stock insurer to be outstanding at the time of completion of the conversion." 24 M.R.S.A. §2301 9-D-I. In this case, this statutory provision requires that the aggregate equity value of BCBSME, upon and after conversion of BCBSME to a stock insurance company and at the time the assets of that stock insurance company are to be sold, and the fair value of such assets are to be delivered to the charitable trust. This statutory provision also requires that if the appraisal provides that there is a dollar range within which is the fair value of the assets being appraised, a methodology must be included for fixing a final value for the assets at the time of completion of the transaction provided for in the Conversion Plan. Since it is contemplated that the "conversion," the sale of assets and the delivery of proceeds from the sale of assets to the charitable trust, are going to happen simultaneously, a fair and necessary reading of the statute is that the appraisal of the fair value, or the fixing or determination of the "final value," is to be made as of the date of closing of the Conversion Plan transactions.

This interpretation of the statute is confirmed by related provisions of the Conversion Statute found in paragraph 9-D-I (1) that require that the appraisal must "enable" the determination of the amount of cash or other assets that must be delivered to subscribers or to the charitable trust. The cash or other assets are to be delivered at the time of "closing", and a fair reading of the plain language of the statute makes clear that the appraisal must enable the determination of the fair value of assets as of the time of that closing.

The fair value appraisal that is to be made and determined as of the completion of the conversion transactions is to be included as part of the Conversion Plan that is filed with the Superintendent and is to be made available for public inspection and copying is required, as set forth in paragraph I (2) of the Conversion Statute, 24 M.R.S.A. 2301 9-D-I (2). The statute also requires that such fair value appraisal is:

• to be prepared by a person that is independent of the party submitting the Conversion Plan and appraisal and must be "expert and experienced" in the preparation of such appraisals;
• to be in form and content acceptable to the Superintendent; and
• to contain a "complete and detailed" description of the elements that constitute the appraisal , the methodology used in preparing the appraisal and "sufficient support" for the conclusions reached in the appraisal.

23 M.R.S.A. §2301 9-D-I (2).

While the Conversion Plan does include the appraisal that was prepared by Houlihan Lokey, the Conversion Plan is materially deficient because the Houlihan Lokey appraisal is an appraisal of the fair value of the aggregate equity of BCBSME as of July 13, l999, and is not an appraisal of such fair value of such aggregate equity at the time of the conversion of BCBSME to a stock company and completion of the conversion transactions. The Conversion Plan that has been filed with the Superintendent and made available to the public for review and copying does not include any analyses or other information that would permit a reader to know and understand what is the adjusted fair value appraisal for the equity of BCBSME as of the current date or the completion of the Conversion Plan. There is certainly nothing in the public, non-confidential record of this proceeding that has been identified by anyone that constitutes the complete and detailed description of the elements that constitute the appraisal, the methodology that anyone used in preparing any new appraisal, updating and adjusting the Houlihan Lokey appraisal, and the "sufficient support" for appraisal conclusions that are required by Paragraph I (2) of the Conversion Statute.

The consultant to the Superintendent might be qualified to know and understand what analyses and adjustments must be made to update the Houlihan Lokey appraisal, but he has testified that he has not done that appraisal work. Similarly, while the Superintendent might conclude that he has enough information to make adjustments to the appraisal of Houlihan Lokey, the Conversion Statute does not contemplate and does not permit any such appraisal by the Superintendent. The Superintendent’s statutory duty is to review an independent appraisal prepared by experts in corporate appraisals on behalf of BCBSME. Moreover, even if the Superintendent is qualified and permitted under the Conversion Statute to undertake the appraisal function himself, he has not identified to anyone, other than perhaps his consultants, the information that he deems material to the appraisal, the methodology that he uses in making the appraisal and the support for his appraisal conclusions. And finally, no such information, methodology or support has been included in the Conversion Plan and made available for public inspection and copying to facilitate and permit review and argument by intervenors in the required adjudicatory proceeding.

In addition, there is no valid excuse for failure to include the required, updated appraisal in the Conversion Plan. It is common practice in corporate transactions to update or "bring down" financial statements and other basic company information through current unaudited financial statements and comfort letters, officer certificates, and purchase price escrow arrangements and related verification or earn-out agreements.

Experienced senior management and transactions consultants should recognize that in this instance the Asset Purchase Agreement could have been prepared to accommodate appropriate and necessary adjustments to the fair value appraisal and the purchase price; that Houlihan Lokey readily could have been engaged to undertake the analysis to update its appraisal; that the Conversion Plan could be updated and augmented by the inclusion of the updated appraisal required by the Conversion Statute; and that the adjudicatory hearing could be continued to permit reasonable and necessary review of the updated appraisal.

None of these possible, available, traditional and commonly used corporate transaction tools have been utilized in this case. The result is that the Conversion Plan is substantially and materially deficient.

The Conversion Statute prohibits the Superintendent from approving the Conversion Plan under these circumstances.

1. THE BOARD OF DIRECTORS APPROVAL REQUIREMENTS OF THE CONVERSION STATUTE HAVE NOT BEEN SATISFIED.

   The Board of Director 2/3 vote and approval requirements have not been met because management of BCBSME has not presented to the Board any Conversion Plan that is complete and substantially meets the requirements of the Conversion Statute.

   While the Board of Directors has reviewed and voted to approve the Conversion Plan that was filed with the Superintendent in September 1999, that vote does not satisfy the requirement of paragraph 9-D E(2) of the Conversion Statute because the Conversion Plan presented to the Directors for review and approval was materially incomplete and deficient. The appraisal required by the Conversion Statute must be regarded as a central and extremely important part of the Conversion Plan. Without the required appraisal, there is no confirmation that fair value is being paid for the assets of the nonprofit hospital and medical service organization, and a significant purpose of enacting the statute is to impose requirements that the fair value amount would be paid. The Directors of BCBSME have not reviewed or voted to approve or disapprove any fair value appraisal prepared as of the date of completion of the Conversion Statute, as required by the Conversion Statute.

   In addition, the votes cast on September 15, 1999 to approve the Conversion Plan materials submitted to the BCBSME Directors are not valid because the BCBSME Directors did not exercise the care and skill required of Directors of Maine nonprofit corporations in casting those votes. The Maine Nonprofit Corporation Act, l3-B M.R.S.A. 716, identifies duties of directors and officers of nonprofit corporations and provides that:

   The directors and officers of the corporation shall exercise their powers and discharge their duties in good faith with a view to the interests of the corporation and with the degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions...

    

   The duty and standard provided by this statute apply to the actions of the Board of Directors of BCBSME in reviewing and approving the Conversion Plan. The interests of the corporation in these conversion transactions is to make certain that the appropriate fair value, determined as required by the applicable Conversion Statute, is paid for the assets of the corporation and is delivered to the charitable trust that is to receive that fair value.

    

   Ordinarily prudent persons under circumstances comparable to those of this case would not approve an appraisal or the plan for a business transaction if that appraisal and plan were incomplete and materially deficient, without authorizing and directing the completion of the required appraisal and Conversion Plan. A plain reading of the statute requires the conclusion that the appraisal, upon which is to be determined the fair value of the assets, must be prepared as of the closing, the completion of the Conversion Plan. No particular legal or other expertise is required to understand the applicable and controlling statutory provisions, and ordinarily prudent persons who are elected to be Directors of companies comparable to BCBSME should be able to read and understand the statutory requirements and determine appropriate and required actions to be taken. The Directors of BCBSME have not satisfied the duties and standards of Section 716 because they have not required the updating and completion of the required appraisal and Conversion Plan and have not undertaken any review of such documents.

   Further, the BCBSME Directors did not exercise the requisite care and skill required by Section 716 of the Maine Nonprofit Corporation Act in voting to approve the Asset Purchase Agreement. The Board of Directors of BCBSME has voted to approve the Asset Purchase Agreement that was presented to them for review and approval and disapproval. That vote, however, is invalid because the terms and provisions of the Asset Purchase Agreement presented to the Directors for review and approval or disapproval, under the circumstances of these conversion transactions and the requirements of the Conversion Statute, are inappropriate and unlawful. The provisions in the Asset Purchase Agreement for the designation of a purchase price are not inappropriate, but the agreement is deficient to the extent that it does not make any provision for adjustment of the purchase to coincide with the fair value determined by the independent appraiser. As suggested by the consultant to the Superintendent, the provisions for the downward adjustment of the purchase price reflect only agreements made by the parties to the agreement and do not reflect or relate to any appropriate adjustments to be made to the fair value determined by the independent appraiser. Moreover, it appears from the testimony of the Chairman of the Board of BCBSME that the Directors of BCBSME had determined that "access" to capital and an "obligation" to provide capital have the same meaning and effect. To the extent that the Directors voted to approve the Asset Purchase Agreement on that plainly incorrect determination, the Directors did not exercise the requisite care and skill in casting their votes.

   The Asset Purchase Agreement, as negotiated and entered into in July1999, was not enforceable at that time because it did not satisfy the Conversion Statute provisions that require the payment of fair value as of the time of completion of the Conversion Plan. Director approval of an asset purchase agreement that is, on its face, invalid under the Conversion Statute, under the circumstances of these conversion transactions, should not be regarded as Director action taken in satisfaction of the duties and standards imposed upon Directors of nonprofit corporation by the provisions of 13-B M.R.S.A.716. And, at the same time, that Director vote to approve the deficient asset purchase agreement should not be regarded as the super majority vote required by the Conversion Statute and the vote required to provide extra assurance to subscribers and regulators that the Conversion Plan and its components have been properly negotiated and prepared and will protect the interests of the nonprofit corporation and its beneficiaries.

   There is no room to apply any harmless error standard to justify any approval of the Asset Purchase Agreement and the Conversion Plan. If the Asset Purchase Agreement was unlawful and unenforceable at the time of execution and delivery, it remains unlawful and unenforceable in the absence of any valid appraisal that establishes that the purchase price adjustment provisions do not generate a result prohibited by the Conversion Statute. Moreover, if the July 13,1999 vote of the Board of Directors of BCBSME was invalid because of the basic defects in the agreement, the Directors must take a fresh look at the corporation and the current circumstances of the market in which the corporation operates, and must exercise their independent business judgment, before taking any action to ratify and approve the July 13, 1999 vote. Any quick vote of ratification by the BCBSME Directors, without substantial and substantive analysis of the new circumstances of the corporation, would not be in the best interests of the corporation and would not satisfy the duties and standards established by Section 716 of the Maine Nonprofit Corporation Act.

2. THE CONVERSION PLAN IS INCOMPLETE AND DEFICIENT BECAUSE CHANGE OF CONTROL AGREEMENTS HAVE BEEN GRANTED AND THOSE CHANGE OF CONTROL AGREEMENTS HAVE NOT BEEN INCLUDED IN THE CONVERSION PLAN.

   The Change of Control Agreements do exist and have been granted to officers and employees of BCBSME. The agreements do provide to those officers and employees of BCBSME contract rights that constitute "valuable consideration" that is other than the officer’s or employee’s "usual and regular salary and compensation."

   Paragraph 9-D J of the Conversion Statute clearly provides that such Change of Control Agreements, stock options or other contract rights or compensation granted or paid to such officers and employees, must be included in the Conversion Plan. The purpose for the statutory requirement, quite clearly, is to provide for the disclosure of such agreements to the public, along with all the other terms, provisions and components of the Conversion Plan, to permit public inspection and copying and to subject the agreements to the scrutiny of the required adjudicatory proceeding.

   So long as the Change of Control Agreements exist and are enforceable, they must be included in the Conversion Plan, and to the extent they are not included in the Conversion Plan, the Conversion Plan cannot be approved by the Superintendent.

    

    

3. THE SUPERINTENDENT CANNOT MAKE ANY FINDING THAT THE CONVERSION PLAN IS FAIR AND EQUITABLE.

The Superintendent cannot make any finding that the terms of the Conversion Plan are "fair and equitable" because no information concerning Anthem health care delivery policies and practices is included in the Conversion Plan and the Superintendent has determined that all matters concerning Anthem policies and track record related to provider contracting are irrelevant to this proceeding. This action of the Superintendent, after repeated requests and objections made on behalf of Anthem, has precluded adequate and necessary consideration of the question whether the Conversion Plan "would adversely affect, in any manner, the services to be rendered to subscribers." In addition, 24 M.R.S.A. 222 requires that the Superintendent make the same determination before approving the acquisition of the assets of BCBSME.

Paragraph 9-D E of the Conversion Statute requires that the Superintendent make the finding, as a prerequisite to any final approval of the Conversion Plan, that the terms and provisions of the Conversion Plan are "fair and equitable." Paragraph 9-D L of the Conversion Statute, in turn, requires that in making any such determination that the Conversion Plan is "fair and equitable", the Superintendent must consider whether the Conversion Plan would adversely affect, in any manner, the services to be rendered to subscribers. Paragraph 9-D C of the Conversion Statute provides that the Superintendent can approve a Conversion Plan only after

conducting an adjudicatory hearing on the proposed hearing and only after providing notice of the hearing and permitting subscribers, and other persons with rights to appear, to be heard at the hearing.

The services to be rendered to subscribers of BCBSME and other nonprofit hospital and medical services organizations are the health care services that are to be provided by and through physicians and other health care professionals, hospitals and other providers. Paragraph 9-D E (1) of the Conversion Statute makes clear that any adverse affect on the delivery of health care services would have to be viewed as a material factor in determining whether the Conversion Plan is "fair and equitable." Since the statute also requires that the Superintendent must give notice to and permit subscribers to participate in the required adjudicatory hearing, there is virtually no room to conclude that the Superintendent can make a finding, that the implementation of the Conversion Plan will not adversely affect the delivery of health care services to subscribers, without a full and complete review of the issues in the adjudicatory hearing. The Superintendent’s prehearing orders denying access to information and documents concerning Anthem’s health care delivery policies and practices, renewed in the course of the adjudicatory hearing, have precluded any meaningful review of the issues related to the delivery of health care services.

In determining that the policies and track record of Anthem’s contracting with health care providers are irrelevant to this review proceeding, the Superintendent has simply noted that Anthem has agreed to assume the provider contract obligations of BCBSME. The Superintendent has refused to recognize that the provisions of those provider contracts permit unilateral amendment to those agreements upon 30 days’ notice by Anthem to the contracting provider and permit the institution and implementation of Anthem policies and practices, which may be substantially different from those implemented by BCBSME. The Superintendent has merely asserted that there can be no adverse affect since BCBSME also could institute changes to its policies and practices. Subscribers and other Intervenors in the proceedings have objected to this determination, and there is no valid and appropriate basis for that determination.

Under the standards and review process established by the Conversion Statute, the BCBSME health care delivery policies and practices to date, whatever they are, should be recognized as the base line from which one is to determine whether there will be any adverse change as the result of the conversion transactions under review. That base line does exist and is

what it is, and the Superintendent cannot avoid the public review required by the Conversion Statute simply by concluding that BCBSME could have made, or might make, modifications to its policies and practices.

Because discovery of information and documents concerning Anthem health care delivery policies and practices has been denied, because the Superintendent has deemed the issues of Anthem health care delivery policies and practices irrelevant to this proceeding and because the Superintendent has prohibited review of the issues in the adjudicatory hearing, there is no information in the record concerning such policies and practices. Without any record to provide support, the Superintendent cannot make any finding that the implementation of the Conversion Plan, and the attendant transfer to Anthem of substantial authority and control of the delivery of health care services would not "adversely affect, in any manner, the services to be rendered" to the existing 440,000 subscribers of BCBSME.

The regulation of companies that provide health insurance and health maintenance organizations is instituted primarily to protect the subscribers who are to be the recipients of health care services, and the conversion transactions under review in this proceeding will transfer authority and control of the delivery of health care services to a huge number of Maine residents. The Superintendent cannot approve the BCBSME Conversion Plan under these circumstances.

 

CONCLUSIONS

The Conversion Plan submitted by the Applicants is incomplete, fundamentally flawed and does not satisfy the requirements of the Conversion Statutes and, accordingly, the Superintendent should not approve and should reject the Conversion Plan. The Conversion Plan and the Asset Purchase Agreement have not been validly approved by the Board of Directors of BCBSME and, accordingly, are not enforceable. No action should be taken by the Directors of BCBSME to ratify their votes to approve the Conversion Plan and the Asset Purchase Agreement without substantial augmentation and modification of such plan and agreement, respectively, and without fresh and comprehensive analysis of the augmented and modified plan and agreement under the current circumstances of BCBSME.

The Change of Control Agreements granted by BCBSME should be included in the Conversion Plan made available for public inspection and copying as required by the Conversion Statute.

These proceedings, including the adjudicatory proceedings, should be continued and remain open to review any revised Conversion Plan and Asset Purchase Agreement, and the Change of Control Agreements, and to permit full review and hearing of the question whether the implementation of the Conversion Plan will adversely affect in any manner the delivery of health care services to subscribers.

Respectfully submitted,

MAINE MEDICAL ASSOCIATION MAINE OSTEOPATHIC ASSOCIATION

 

 

Michel A. LaFond Kellie Miller, Executive Director

Sulloway & Hollis, P.L.L.C. 693 Western Avenue

Attorney for Maine Medical Association Manchester, Maine 04351

9 Capitol Street, Box 1256 meosteo@mint.net

Concord, New Hampshire 03302-1256

603-224-2341

603-226-2405 - fax

mal@sulloway.com

Gordon H. Smith

Andrew MacLean

Maine Medical Association

30 Association Drive

P. O. Box 190

Manchester, Maine 04351

gsmith@ctel.net

 

 

CERTIFICATE OF SERVICE

 

The undersigned hereby certifies that on April 14, 2000 a copy of the Closing Statement of the Maine Medical Association and the Maine Osteopathic Association was served via United States mail, first class postage prepaid, on each of the persons listed below.

Robert S. Frank, Esq. Michele M. Garvin, Esquire

Harvey & Frank Ropes & Gray

Two City center One International Place

P.O. Box 126 Boston, Massachusetts 02110-2624

Portland, Maine 04112 e-mail: Mgarvin@Ropesgray.com

fax - 207-775-5639 (Central Maine Healthcare Corporation;

e_mail: frank@harveyfrank.com Central Maine Partners Health Plan)

(Blue Cross/Blue Shield of Maine)

Judith Chamberlain, Esq. Bonnie Pose, Executive Director

State of Maine Maine Ambulatory Care Coalition

Department of the Attorney General P. O. Box 390

6 State House Station Manchester, Maine 04351

Augusta, Maine 04333_0006 e-mail: bdpmacc@mint.net

e_mail: judy.chamberlain@state.me.us (Sacopee Valley Health center, Regional

(Bureau of Insurance) Medical center at Lubec, Eastport Health

Care, Inc. and the Maine Ambulatory

William H. Laubenstein, Esq. Care Coalition)

State of Maine

Department of the Attorney General  Joseph P. Ditre, Esq.

Consumer Health Law Program Consumer Health Law Program

One Weston Court, Level One

One Weston Court, Level One P. O. Box 2490

P.O. Box 2490 Augusta, Maine 04338-2490

6 State House Station e_mail: jditre@mainecahc.org

Augusta, Maine 04333-0006 (Consumers for Affordable Health Care

e-mail: bill.laubenstein@state.me.us Foundation/Coalition)mailto:bill.laubenstein@state.me.us

(Office of the Attorney General)

John Dieffenbacher-Krall

Executive Director

mailto:gabrodek@duanemorris.comMaine People’s Alliance

192 State Street

Portland, Maine 04101

e-mail: MPA@gwi.net

(Maine People’s Alliance)

Donald E. Quigley, Esquire

General Counsel

465 Congress Street, Suite 600 mailto:Mgarvin@Ropesgray.commailto:Rgoldma1@maine.rr.commailto:bdpmacc@mint.netmailto:MPA@gwi.netmailto:gsmith@ctel.net

Portland Maine 04101_3537

e_mail: quigld@mail.mmc.org

(Maine Medical center)

Sandra L. Parker, Esq.

Attorney for MHA, Inc.

150 Capitol Street

Augusta, Maine 04330

e_mail: sparker@themha.org

(MHA, Inc.)

James B. Zimpritch, Esquire

Jeffrey M. White, Esquire

Catherine R. Connors, Esquire

Pierce Atwood mailto:emiller@mainlung.org

One Monument Squaremailto:meosteo@mint.netmailto:emiller@mainelung.orgPortland, Maine 04101

(207) 791_1100

(Anthem Insurance Companies, Inc.)

 

 

Michel A. LaFond, #8932

Sulloway & Hollis, P.L.L.C.

9 Capitol Street, Box 1256

Concord, New Hampshire 03302-1256

(603) 224-2341

e-mail: mal@sulloway.com

Attorneys for Maine Medical Association

 

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