Blue Cross Proposal to Create $3.2-Billion Foundation Gets State OK : Health: Charity will support services statewide. Planned WellPoint-Health Systems merger also is approved.

State officials Thursday approved a proposal by Blue Cross of California to establish a $3.2-billion charitable foundation to fund health programs statewide, including some medical services for the needy and uninsured that are being hit by government budget cuts.

Wilson Administration officials also approved the proposed merger between WellPoint Health Networks, a Blue Cross subsidiary, and Health Systems International--a deal that would create the nation’s largest publicly held managed care company.

The Blue Cross proposal, approved by state Corporations Commissioner Gary Mendoza, will create the nation’s second-largest health care charity and sixth-largest charitable foundation, donating at least $160 million a year for health care in California. Blue Cross is required by state law to make the donation as part of its conversion from a nonprofit company to one with for-profit status.

The money will go to fund a broad range of health promotion efforts, including programs and activities that would increase access to medical services for the poor and uninsured and that would promote good health, Blue Cross and state officials said.

Mendoza said the settlement will help “answer the health care needs of Californians for generations to come.”

The deal follows more than two years of negotiations beginning in 1993 when Blue Cross shifted most of its private health insurance operations into a for-profit subsidiary, WellPoint. State law requires nonprofit organizations converting to for-profit status to make a charitable donation equal to the value of their assets. The payments are meant to compensate Californians for the tax-exempt status that the nonprofit companies enjoyed.

Blue Cross initially claimed that the law did not apply because it had not fully converted to for-profit status. That set off a chorus of criticism from consumer groups, legislators and state regulators. Two years ago, Blue Cross said it would be willing to donate more than $100 million over 20 years.

Blue Cross later agreed to make a far bigger donation. More recently, critics of the Blue Cross proposal have accused the giant insurer of attempting to retain too much control of the charity and use it to promote its managed care business.

But consumer groups had mostly praise for state regulators and the Blue Cross plan on Thursday.

“It’s basically a victory,” said Judith Bell, co-director of Consumers Union’s San Francisco office, which has been the most outspoken critic of the earlier Blue Cross proposals. “It’s not a perfect plan, but it’s a whole world of difference from where this whole thing started. It started with Blue Cross saying they owed nothing and ended with them handing over $3.2 billion.”

Another critic of the earlier proposals, the California Medical Assn., also praised the agreement.

“Mendoza clearly has had a charge to see this through. We applaud that,” said Danielle Walters, a CMA spokeswoman.

The deal is a significant win for the Wilson Administration and Mendoza, 39, whom the governor appointed in 1993 and who was the target of earlier criticism over the Blue Cross conversion.

The establishment of the charity comes at a time when budget cuts in Los Angeles County and elsewhere in the state are severely threatening public health services.

Consumers Union’s Bell said the money “is not enough to transform the problems but is enough to have an impact if it is strategically placed.”

Bell also said the state’s action has important national implications because Blue Cross/Blue Shield associations in other states are also thinking of converting to for-profit status.

Although the charitable foundation will be required to donate up to $160 million in its first year of operations, Mendoza said it was “not inconceivable” that the figure could rise to $300 million annually in 10 years. The charity’s only asset will be stock in the merged WellPoint-Health Systems company, and the value of the endowment will be tied to fluctuations of the new firm’s stock.

Under the deal, two new nonprofit foundations will be formed. One will make grants for health-related pursuits and will have initial assets of $1.2 billion in stock.

The second nonprofit is being established to hold $2 billion in stock in the new for-profit company. That nonprofit will gradually sell off the stock, transferring 80% of the proceeds to the first nonprofit.

The first nonprofit board of directors will have 11 new members and nine former Blue Cross members, with the chief executive of the foundation coming from among the new members.

The nonprofit that will handle the stock will have six members, three of whom will have no affiliation with Blue Cross. The Department of Corporations will have the authority to reject six nominees to the boards of directors of the new foundations.

Resolving the Blue Cross conversion plan was crucial to Mendoza’s giving a stamp of approval to the $1.89-billion merger of WellPoint and Health Systems, two large managed care companies based in Woodland Hills. Mendoza could have blocked the merger, though few thought he would take such an action.

Blue Cross Chairman Leonard Schaeffer called the state’s action a “very significant step forward. In one action, we have been able to create one of the largest donations in history to health care charity and create the largest investor-owned health care company in the United States.”

Schaeffer said he expects the merger to be completed in as soon as 60 days.

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Olmos reported from Los Angeles and Morain from Sacramento.