Special to the Fort Worth Star-Telegram
September 15, 1998

Illinois may give Texas bad case of the Blues

You're known by the company you keep, the saying goes. For the state's largest insurer - Blue Cross Blue Shield of Texas - this old truism could soon acquire a new meaning.

Just 1,200 miles away, its potential merger partner -- Blue Cross Blue Shield of Illinois -- has spent a busy summer attracting the wrong kind of headlines. A record-setting $144 million in civil and criminal penalties. Corporate guilty pleas on felony counts for lying to the federal government. Charges of fraud, document falsification and records shredding. Indictments against five managers and loss of its Medicare contract.

It's a shame, because a merger with the Illinois Blues could cloud the solid reputation that the 1.9 million member Blue Cross Blue Shield of Texas has painstakingly built over more than half a century. For example, the Texas Blues was the first health insurer in the state to offer coverage for cancer. It provided coverage for the poor and the elderly even before government programs came on board.

A good name takes years to build. But it can quickly vanish by poor judgment, unsound decisions, or a competitive philosophy that puts profits before people. In attempting to take over the Texas Blues, the Illinois company is banking on the reputation of its future partner to expand its base and compete in today's aggressive managed care market. Even though the Texas company will no longer exist, the Illinois Blues will do business in Texas under the soon to be defunct company's well-known tag.

But there's more than reputation at stake. For over two years, the Illinois Blues has been running the Texas Blues' plans through a management contract. Is it reasonable to question whether some of the illegal practices found in Illinois may have filtered to Texas? Are there sufficient auditing practices in place to prevent similar recurrences? Does the Illinois company's "culture" encourage employees to use any methods to improve profits? What will happen with the current Texas Medicare contract in light of the Illinois convictions?

Under Texas law, the insurance commissioner must approve a proposed merger unless he finds "unfair, prejudicial, hazardous, or unreasonable to policyholders of the insurer and not in the public interest." The commissioner can also deny an application if there are real doubts about the "competence, trustworthiness, experience, and integrity" of those who would control the operation of the domestic insurer. It is clear that Insurance Commissioner Elton Bomer has a duty to look into this matter carefully. His staff has advised that they are investigating the facts and circumstances and evaluating the impact of these indictments. We trust he will disclose these findings to the public.

This merger has other serious problems. The Texas Blues' history demonstrates it is grounded in a public welfare mission. It is a nonprofit company owned by the public with stated charitable purposes in its articles and bylaws. In contrast, the Illinois Blues is a mutual insurance company -- currently operating as a nonprofit -- but owned by its policyholders. Texas law requires the assets of charitable nonprofits to always serve the public. These assets - or, the total value of the nonprofit - are impressed with a charitable trust, dedicated to their original purpose.

This raises some red flags. First, following a merger the remaining Illinois corporation will not be subject to Texas nonprofit and charitable trust laws. The Texas Attorney General will no longer have authority to safeguard Texans' interests in the use of the company's charitable assets. Second, the nonprofit status of the Illinois company could change at any time with a majority vote of its board. In either case, the Texas Blues assets - initially dedicated to serving the public interest and accumulated via generous tax breaks over the years - would vanish.

How much will Texas lose in charitable assets? The Texas Blues should be worth hundreds of millions of dollars. But the exact valuation is today in the hands of the Texas Insurance Department, which refuses to disclose it citing an open records exemption. Consumers Union believes this is not only the public's business, it is a paramount piece of the merger puzzle.

In many states where the Blues have merged or converted to for-profit status, lawmakers and regulators have set aside or designated billions of dollars for charitable purposes. For example, Consumers Union's California office played a key role in having all of Blue Cross of California's assets - about $3.2 billion - transferred to health care foundations. Similarly, the Texas Blues money should be secured, preferably in a charitable foundation, for the health care needs of Texans.

While Commissioner Bomer has some key questions to ponder, state District Judge Joseph Hart has cleared the legal channels for the merger to occur, pending a final order. We urge the Attorney General to appeal the decision as soon as the final order is signed.

Texas Blue Cross Blue Shield is an invaluable public asset and a key part of our history. The way it stands now, Illinois would give Texas a bad case of the Blues.

Lisa McGiffert is a senior policy analyst with the Southwest Regional Office of Consumers Union, publisher of Consumer Reports.