This paper provides an update on the litigation between Blue Cross and Blue Shield and the State of Missouri. Its primary focus is the recent settlement of the Missouri Blue Cross litigation, including the major components of the final settlement, and some of the modifications that were incorporated in the agreement as a result of negotiations between the parties and consumer groups. The settlement establishes a new health foundation funded with the assets of Blue Cross and Blue Shield of Missouri.

1. What Were the Original Purposes of Blue Cross and Blue Shield Plans?

Blue Cross and Blue Shield plans were established during the Great Depression. At the time, health insurance was virtually nonexistent and the inability of many Americans to pay for medical care had placed a financial strain on the country's voluntary hospital system. Blue plans sought to address the crisis in health care access by offering "affordable coverage to all individuals, regardless of health status." The plans were organized on a not-for-profit basis and were dedicated to fulfilling a community service role. Based on their community service role, state legislation typically exempted Blue Cross plans from state taxes and insurance laws and gave them status as charitable and benevolent organizations.

2. Did Blue Cross and Blue Shield of Missouri Have Charitable Purposes?

Like other Blue Cross organizations, Blue Cross and Blue Shield of Missouri ("Blue Cross") was founded for public purposes and was designed to benefit the community as a whole. The company's articles of incorporation reflect these charitable purposes. Because of its "public benefit" purposes, Blue Cross has enjoyed exemptions from state premium taxes and numerous consumer protection statutes.

3. Have Blue Cross and Blue Shield Plans Become For-Profit Companies?

In recent years, Blue Cross organizations across the country have responded to changes in the health care marketplace by attempting to restructure their operations to compete with for-profit health insurers. In June 1994, the National Blue Cross and Blue Shield Association changed its long-standing rule requiring all Blue Cross and Blue Shield licensees to be nonprofit corporations and established new standards for licensing the Blue Cross and Blue Shield marks to for-profit companies. This has led to a wave of "conversion" activities by Blue Cross plans around the country.

4. Have Other Nonprofit Health Organizations Converted to For-Profit Companies?

In addition to Blue Cross organizations, many other nonprofit health insurers and hospitals, originally formed for charitable purposes, have converted to for-profit entities. It is well established that when nonprofit health services corporations convert to for-profit status, they must leave in the nonprofit sector the assets accumulated as nonprofit organizations. Typically, these converting nonprofit corporations have transferred their assets to charitable foundations.

5. What Led to the Lawsuit between Blue Cross and the State of Missouri?

In April 1994, Blue Cross and Blue Shield of Missouri sought expedited approval from the state Department of Insurance (DOI) to "reorganize" and transfer its managed care business to a newly created for-profit subsidiary, RightCHOICE, in exchange for shares of RightCHOICE stock. While the DOI approved the transaction, consumer groups alleged that the Blue Cross "reorganization" was a "conversion" to for-profit status, which required Blue Cross to transfer its nonprofit assets to a nonprofit foundation dedicated to charitable health purposes. When DOI also began to argue that Blue Cross had converted to for-profit status and owed a public benefit obligation, Blue Cross filed a lawsuit against the Attorney General and DOI.

6. What Did the Trial Court Decide?

On December 30, 1996, the trial court found that Blue Cross exceeded or abused its statutory authority as a nonprofit health services corporation in violation of Missouri's nonprofit law. Because the operation of RightCHOICE and its for-profit activities had become the "bottom-line" purpose of Blue Cross, the court held that Blue Cross no longer served the purposes of a nonprofit health services organization, in violation of Missouri's nonprofit law.

7. What Was Decided on Appeal?

On August 4, 1998, the Court of Appeals affirmed the trial court's decision. During the pendency of the appeal, the parties reached a proposed settlement agreement, which was rejected by the trial court. Rather than rule on the merits of the decision against Blue Cross, the Missouri Supreme Court instructed the parties that they could settle their case without court approval. The parties subsequently dismissed their case and began implementing their settlement agreement.

8. When Did the Parties Reach a Settlement?

During the pendency of the appeal, on September 20, 1998, the parties negotiated a settlement agreement. On November 20, 1998, the trial court appointed a "Special Master" to review the settlement agreement. The Special Master conducted extensive proceedings, including multiple hearings, depositions, and briefing regarding the parties' proposed settlement agreement, which was eventually modified and supported by consumer groups. The parties and the consumer groups filed the modified agreement with the court on March 12, 1999. Following the Supreme Court's directive, the parties finalized their agreement on January 6, 2000, and began implementing the final agreement.

9. Is the Settlement Agreement Comparable to the Results of Other Health Care Conversions?

The establishment of a new foundation funded with cash and stock in the new for-profit is consistent with the results of other such health care "conversions." A recent Grantmakers in Health report documents that 134 new health foundations have been created as a direct result of nonprofit to for-profit conversions of HMOs, hospitals, and insurers. Assets of these foundations total more than $15 billion. The Blue Cross and Blue Shield of Missouri settlement most closely resembles the resolution of the controversy involving Blue Cross of California, which resulted in the transfer of $3.2 billion in assets to a charitable foundation dedicated to health purposes.

10. Did the Final Settlement Insure that the Missouri Foundation for Health Receives the Full Value of Blue Cross's Assets?

A critical issue in the litigation (and in most health care "conversions") was whether the public would receive the full value of the converting nonprofit health organization. The final settlement ensures that the new foundation receives the full fair market value of Blue Cross's assets. The final agreement includes key revisions to the parties' original settlement that address the value of the new foundation's assets -- revisions which were sought by consumer groups.

11. What Will Happen to Blue Cross and Blue Shield of Missouri?

Under the terms of the final settlement agreement, Blue Cross and Blue Shield will complete its conversion to a for-profit company. The nonprofit Blue Cross and Blue Shield of Missouri will no longer exist. The new RightCHOICE, established by the final settlement will provide insurance to all of the remaining subscribers of the nonprofit Blue Cross plan as well as all of the subscribers that have already been receiving health insurance from the for-profit company. Because Blue Cross will now be exclusively a for-profit company, it will not have to meet nonprofit or "charitable" obligations and will no longer receive the tax-exempt status it has received since its inception.

12. Will the For-Profit Company Retain the Blue Cross License?

The final settlement meets the requirements of the National Blue Cross Association rules, thereby ensuring that the for-profit company retains the Blue Cross license -- which is beneficial to the company. Retention of the Blue license is important to the new foundation because it maximizes the value of its primary asset, its stock in RightCHOICE.

13. Which Consumer Groups Participated in the Settlement Process?

A large array of consumer groups engaged in advocacy around Blue Cross's restructuring at various stages of the controversy. The groups that participated as amici curiae ("friends of the court") were the League of Women Voters of Missouri, the Missouri Association for Social Welfare (MASW), the Reform Organization of Welfare (ROWEL), the American Association of Retired Persons (AARP), Missouri Chapter, and the Missouri Consumer Health Care WATCH -- a coalition of ninety organizations committed to achieving fair, accessible quality health care for Missouri citizens.

14. What Was the Role of Consumer Groups in Achieving the Settlement?

As indicated above, consumer groups played an important role in the process that led to the establishment of Missouri's largest health foundation. Consumer groups were responsible for the controversy that led to the litigation upon which the settlement is based and were involved at almost every stage of the process.

The Special Master appointed by the trial court invited these amici consumer groups to participate extensively in all hearings conducted by the Master on the parties' proposed settlement agreement -- which initially did not have the endorsement of consumer groups. The Special Master directed the parties to meet and confer with the amici curiae to address problems with the original settlement. Pursuant to that order, the parties and consumer groups reached an amended settlement agreement which satisfied the concerns of consumer groups.

15. Does the Final Settlement Meet the Original Goals of Missouri Consumer Groups?

From the outset of this controversy, consumer groups argued that Blue Cross had "converted" to a for-profit company, and was therefore required to transfer its assets to a charitable foundation devoted to health purposes. The final settlement agreement meets the goals of these public interest groups because it establishes a new health foundation endowed with all of the assets of Blue Cross and Blue Shield of Missouri.

16. How Will the New Missouri Foundation for Health Be Funded?

The new foundation will be funded with all of Blue Cross's stock in RightCHOICE, the for-profit Company that it created and which comprises most of the value of Blue Cross, and 12.78 million dollars in cash which represents the value of Blue Cross's remaining assets (real estate and remaining insurance business) -- which were not previously transferred to the for-profit subsidiary. Based on the current value of the RightCHOICE stock, it is likely that the foundation's assets will exceed $200 million and it will pay out over $10 million in annual grants.

17. What Are the Purposes of the New Health Foundation?

The new Missouri Foundation for Health is dedicated to identifying and addressing unmet health needs of underserved populations, identifying and filling gaps in health services, and identifying and funding health program opportunities that maximize the foundation's resources.

18. Can the New Foundation Help Meet Significant Unmet Health Needs in the Region?

The new Missouri Foundation for Health should have a substantial impact in addressing Missouri's unmet health needs. The foundations created in the California conversion are making a significant difference in the provision of health care in that state. The evidence before the Special Master demonstrated that the new foundation can similarly make a significant difference in addressing unmet health needs in Missouri. There is currently no comparable Missouri foundation to address these needs.

19. How Is the Board of Directors Selected?

The settlement requires that the Governor and the Attorney General must select board members from among the nominations of a community advisory committee -- a provision for which Missouri consumer groups have advocated and which was supported by the expert testimony before the Special Master. Following the selection of the initial Board of Directors, all future Board members shall be appointed by the Board of Directors from among the nominations of the community advisory committee.

20. What Is the Relationship Between the Missouri Foundation for Health and Blue Cross?

A critical element of the final Settlement Agreement is the foundation's independence from Blue Cross and Blue Shield and RightCHOICE. From the outset, consumer groups have argued that the foundation must be independent from Blue Cross and that Blue Cross receive no resulting benefit from its prior illegal conduct. The Amended Settlement Agreement ensures such independence in that Blue Cross officials will not serve on the Board of the Missouri Foundation for Health.

21. Will Government Officials Serve on the Foundation's Board of Directors?

Government officials may not serve on the Board of Directors of the new foundation.

22. What Are the Qualifications of the Board of Directors?

The settlement provides that all Directors must possess certain qualifications specified in the by-laws. Each Director must possess expertise, education or experience in one or more areas directly relevant to the health foundation's purposes: provision of health care, assets management and investment strategy, philanthropic administration or public health care.

23. How Important Is the Selection of the Initial Board of Directors?

Selection of the initial Board of Directors is crucial to the direction of the foundation, as the first Board will shape its priorities and direction. The first Board hires the foundation staff, which has a tremendous impact on any foundation or ongoing organization.

24. For How Long Will Board Members Serve?

Generally, the 15 members of the Board of Directors for the new foundation will serve terms lasting three years. Terms will be staggered so that each year five new members will be selected. To facilitate this process, it is necessary that the some of the initial members of the Board serve terms lasting less than three years. For instance, five members will be part of a first class that will serve only one year on the Board.

25. Who Is on the Community Advisory Committee?

The community advisory committee includes representatives from a broad range of groups and backgrounds. It include representatives from consumer groups such as Reform Organization of Welfare (ROWEL), the Missouri Association for Social Welfare (MASW), and the American Association of Retired Persons (AARP) Missouri Chapter, that participated in the litigation, including settlement process. The committee also includes representatives from the business, health care, public health, social service, legal and religious communities.

26. What Will be the Role of the Community Advisory Committee?

The community advisory committee has two basic functions: (1) to nominate members to the Board of Directors which will be selected by the Governor; and (2) to advise the Board regarding the health needs of the region that will be served by the foundation. The community advisory committee is an important link between the community and the Board of Directors that can help ensure that the foundation's grants are consistent with pressing community health needs.

27. Why Is Community Involvement Important for the New Foundation?

Because the origins of the funding for the new foundation differ from that of more traditional foundations, community participation is a vital factor in its development. The non-profit Blue Cross and Blue Shield of Missouri, like many non-profit organizations, was successful, in large part, because of public contributions in the form of federal and state tax exemptions. Thus, the foundation assets resulting from the conversion of this nonprofit is a "public trust," as opposed to private foundations created by individual, family or corporate donors. To protect the public's interest in these funds, a diverse representation of the community should be involved in the decision-making process. Community involvement is also an important way to ensure that the diverse health care needs of the community form the basis of the grantmaking decisions of the new foundation.

28. How Can the Foundation Engage the Community in Its Work?

There are many ways a foundation can effectively engage its community in program planning, grantmaking and evaluation of its activities. For example, the Board of the Caring for Colorado Foundation is visiting ten rural and urban communities to get a clear picture of the health needs in that state and to find examples of worthwhile programs to fund. In addition, the foundation will have a toll-free number and website to receive funding applications and information about community health concerns. The community advisory committee can also consider and evaluate the adequacy of the foundation's outreach and community engagement strategies -- rather than simply review the Board's grantmaking decisions.

29. Will the New Foundation Provide Health Insurance Directly for the Uninsured Residents of the Region?

Given its substantial assets, the new foundation will be in a position to make large grants to significantly impact the medically underserved. However, the foundation is unlikely to fulfill its mandate by directly providing health insurance. There is simply insufficient funding to provide insurance for all of the uninsured in the Blue Cross service area. Thus, like other health philanthropies, the foundation will have to leverage its annual grant budget to address the needs resulting from this significant gap.

30. What Region Will Be Served by the Missouri Foundation for Health?

The new foundation will serve the entire service area that has been served by the nonprofit Blue Cross and Blue Shield of Missouri. This service area includes the City of St. Louis and 85 counties in Eastern, Central and Southwest Missouri. The remaining counties that are not covered by the settlement are located in Western and Northwestern Missouri, which are served by Blue Cross and Blue Shield of Kansas City.

31. What Is the Tax Status of the Missouri Foundation for Health?

The Missouri Foundation for Health will be a Section 501(c)(4) corporation. However, important public interest provisions that apply to 501(c)(3) private foundations were incorporated into the foundation's governance documents. These protections include, for example, the 5% "minimum payout" requirement (at least 5% of the foundations funds must be spent each year on grantmaking). This provision guarantees that the foundation will be engaged in substantial charitable activity rather than "sitting on" its assets. The foundation will also be required to comply with the Missouri "open meetings" law, thus ensuring an even greater degree of public accountability.

32. What Are the Grantmaking Activities of Other Conversion Foundations?

Foundations resulting from health care conversions can be found across the country and they fund a diverse range of health-related programs. These conversion foundations fund such activities as health policy advocacy, direct services, outreach and health education for specific populations, community health needs assessments, and evaluation of existing health-related programs. The new Board will determine, with the assistance of the community advisory committee, the key areas of need in the region formerly served by Blue Cross and Blue Shield of Missouri.

33. What Are the Next Steps in Implementing the Settlement Agreement?

The Governor and Attorney General already have appointed the community advisory committee, which will nominate a slate of Directors to be selected by the Governor and Attorney General. The new Board will then undertake the responsibilities of starting the important work of the Missouri Foundation for Health, including the hiring of permanent staff members, and the decisions around grantmaking for the health needs of the region formerly served by Blue Cross and Blue Shield of Missouri. At the same time, the parties will finalize the conversion of Blue Cross into a for-profit company and the formation of the Missouri Foundation for Health.

The final settlement of the litigation concerning the reorganization of Blue Cross and Blue Shield of Missouri establishes the largest health foundation in Missouri, and should have a significant impact on the unmet health needs of the region. The settlement was achieved with unprecedented input from consumer and public interest groups after years of litigation and bitter controversy, and is consistent with the best outcomes in other states' Blue Cross conversions.

Blue Cross's past history, including its origins in serving underserved communities and years of tax-exempt status, are the basis for the remedy that the parties have adopted -- a charitable foundation dedicated to unmet health care needs. That history also explains the strong emphasis on community input -- both in board selection and future grantmaking of the new Missouri Foundation for Health. Such input will likely have a significant impact on the future success of the new foundation in meeting Missouri's unmet health needs.
 

Consumers Union's West Coast Regional Office

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