Blue Cross Loses Ruling on Shift to For-Profit Operation

In a ruling that could curb efforts by Blue Cross plans to become profit-making companies, a judge said Missouri’s plan broke the law when it shifted most assets to a for-profit subsidiary.

State Judge Thomas Brown III in Jefferson City, Mo., ruled late Monday that Blue Cross and Blue Shield of Missouri abused or exceeded its authority when it transferred 80% of its assets to Rightchoice Managed Care Inc. two years ago.

Brown could order the company dissolved or take Blue Cross’ assets for the public’s benefit. He put off a decision pending an appeal by the company.

Although his ruling affects only Missouri, it was the first such decision in the country and drew praise from consumer groups, which said it could influence others.

“The message for nonprofits across the country is that you cannot take public money and use it to benefit private interests without violating the law,” said Julie Silas, an attorney for Consumers Union, publisher of Consumer Reports magazine.

Blue Cross and Blue Shield of Missouri contended its actions were legal. Pending appeal, the company’s status and its health insurance coverage won’t change.

Shares of Rightchoice, which have been under pressure this year due to weak profits, fell $1 to $10.625 on the New York Stock Exchange.

Most of the more than 60 independent Blue Cross-Blue Shield health insurance plans are not-for-profits, which gives them special tax breaks and, usually, an obligation to provide some benefits for the poor.

A number of plans are converting to for-profit companies, including Blue Cross of California, which was the first Blue Cross to do so. The companies contend it’s the only way to remain competitive with big multi-state for-profit health maintenance organizations that are rapidly stealing customers with lower rates.

In allowing the conversions, some states have forced the Blue Cross plans to transfer millions of dollars in assets to public charities as compensation for the years of tax breaks they got.

In 1994, the Missouri plan shifted about 80% of its business into Rightchoice, a new for-profit company. Currently, the nonprofit Blue Cross provides health plans for about 131,000 consumers, while Rightchoice covers 1.7 million.

Consumer groups have tried to get Missouri’s Department of Insurance to require Blue Cross of Missouri to also transfer assets to charity, but the company’s reorganization was initially approved without such requirements.

Brown said Blue Cross’ contention that the reorganization was necessary for the survival of the company “lacks factual support.”

Don Downing, a lawyer for Blue Cross, said the ruling recognizes that an appellate court needs to look at the matter.

“The judge was uncomfortable moving forward toward any remedy” until the appeals court rules, he said.