Blue Cross Offers Part of WellPoint : Health care: Insurer’s proposal comes in response to state pressure to increase charitable spending. The goal is to compensate taxpayers.
Under state pressure to boost its charitable spending, Blue Cross of California said Thursday that it will donate 22.5% of its ownership stake in its for-profit managed health care organization to a nonprofit foundation.
Blue Cross disclosed the proposal, which drew a lukewarm response from consumer advocates, after the state Department of Corporations asked the Woodland Hills-based nonprofit insurer late last month to make at least $100 million in charitable donations this year and contribute at least 40% of its stock in WellPoint Health Networks to a new foundation.
The charitable contributions are related to last year’s restructuring of Blue Cross, which created and sold shares in WellPoint to operate most of its health insurance programs. The contributions are meant to compensate Californians for the tax-exempt status Blue Cross enjoyed while building up the health network.
Blue Cross raised $517 million when it sold a 19.6% stake in WellPoint in an initial public stock offering in January, 1993. WellPoint includes Blue Cross’ CaliforniaCare health maintenance organization, its preferred provider organization and its dental and pharmacy plans.
The formation of WellPoint allowed Blue Cross to raise capital to continue to pay for the charity work it has performed since its creation during the Depression.
Blue Cross originally agreed to donate $100 million to charity over 20 years in a deal that was criticized by state legislators and consumer groups as undervaluing the tax-free benefits Blue Cross earned. The Department of Corporations, which oversees the conversion of nonprofit health care plans to for-profit firms, now apparently shares that view.
In a letter sent to Blue Cross directors last week, Department of Corporations Commissioner Gary S. Mendoza, said he “did not believe any shareholder would accept a return on their investment that was comparable to that proposed by (Blue Cross). . . . I do not believe the minimum 1994 commitment I am seeking is unreasonable or would in any way undermine (Blue Cross’) long-term viability.”
The effort to boost Blue Cross’ contribution pleased some critics. The proposal is “certainly more in keeping with what the public benefit should have been,” said Bob Fredenburg, a spokesman for state Sen. Art Torres (D-Los Angeles), who had been critical of the original agreement.
But Harry Snyder, a co-director of the West Coast office of Consumers Union, said the new proposals still fall short.
“I’m glad that Commissioner Mendoza is taking the steps he is taking,” Snyder said. “But they are not nearly enough. They (Blue Cross) don’t have the right to continue holding on to this money.”
Investors were also not pleased with Blue Cross’ proposal to divest some of its WellPoint shares. On the New York Stock Exchange on Thursday, WellPoint shares fell $1.375 to close at $30.25.
Based on Thursday’s stock prices, Blue Cross’ 80% ownership stake in WellPoint is worth $2.4 billion.
The Class B WellPoint shares Blue Cross would donate under its proposal are valued at $363 million.
In addition to donating 12 million WellPoint shares, Blue Cross would contribute $25 million to charities this year in addition to the $100 million it previously agreed to give over 20 years.
Blue Cross said it does not plan to donate or sell any more of its WellPoint holdings. The $25 million contributions and future donations would come from existing revenue, a company spokesman said.
The Department of Corporations has not yet responded to the Blue Cross proposal. A department spokeswoman said, “We are working with them to put forward and implement a strategy that meets their charitable obligations.”
Patrick Garner, senior vice president for Blue Cross, said negotiations over a new agreement began in February “when we got a sense from the commissioner that the $100 million was not going to be an acceptable number.”
