Blue Cross For-Profit Unit Sought : Health care: The new subsidiary would operate the medical insurer’s HMO and other managed care programs. Up to a 20% equity stake would be sold to the public.
Nonprofit Blue Cross of California, the state’s largest health insurer, said Friday that it will create a for-profit, publicly held subsidiary that would operate its CaliforniaCare health maintenance organization and some of its other managed-care programs.
The Woodland Hills-based insurer, which covers 5.4 million people, said it will sell up to a 20% equity stake in the new unit to the public. Blue Cross itself will remain nonprofit and retain both the remaining equity and voting control of the new company.
The plan, subject to state Corporations Department approval, would enable Blue Cross to tap the financial markets for fresh capital at a time when many of its competitors have that access because they’re publicly held. Blue Cross said the size and date of its proposed offering has yet to be determined.
Leonard D. Schaeffer, Blue Cross’ chairman and chief executive, said “categorically” that the proposal will have no adverse impact on consumers.
“It will not increase premiums, and it will not decrease benefits. We hope it will have a positive effect” on Blue Cross’ customers by giving the company access to capital markets, he said. “For us, it’s the logical thing to do.”
Ray Pecuch, a health care analyst at Kemper Securities Inc. in Chicago, said: “Blue Cross has to have capital to grow, and this is one way for them to do it. We’re used to looking at Blue Cross as sort of an institution, but they’re not unlike any other HMO.”
Indeed, several other HMOs in California--such as FHP International Corp.--have converted from nonprofit to for-profit in recent years, then gone public. Health Net, the state’s second-largest HMO behind Kaiser Permanente, converted in February but has yet to offer stock to the public.
Unlike traditional “fee-for-service” health care, managed care programs such as HMOs and preferred-provider organizations (PPOs) limit members’ medical care choices in exchange for lower costs.
Because of their discounted cost, managed care programs have become increasingly popular with employers. A decade ago, Blue Cross was largely a fee-for-service insurer, but today managed care accounts for 95% of its business.
Schaeffer said the new subsidiary will operate CaliforniaCare, along with Blue Cross’ dental and pharmacy HMOs and part of its PPO program. The subsidiary’s final structure has yet to be worked out, he said.
Blue Cross’ restructuring plan is part of a trend among the nation’s 73 nonprofit Blue Cross and Blue Shield health plans--some of which have been struggling--to spin off parts of their operations to the public to raise cash.
Last year, Blue Cross & Blue Shield United of Wisconsin raised $17.4 million by selling 20% of a subsidiary to the public. Blue Cross & Blue Shield of Maryland has asked state regulators for permission to sell a portion of its managed care group, according to Modern Healthcare, a trade publication.
Blue Cross of California’s plan is the latest step in the company’s comeback from near-disastrous losses in the mid-1980s, including a $153-million loss in 1987. Under the stewardship of Schaeffer, who came to Blue Cross as president in 1986, the company has earned $353 million the past four years.
Moreover, the earnings have enabled Blue Cross to bolster its reserve for paying future claims to $528 million from only $75 million four years earlier.
