New York State Coalition For Aging

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New York Times
April 18, 2002

Blue Cross Assets Help Union, Not Health Charities

LOS ANGELES — Two years ago, the Clinica Monseñor Oscar A. Romero was getting a scant $10,000 to $15,000 a year from the California state health care program for the poor, elderly and disabled and receiving $4,000 a month in drugs free from manufacturers.

Today, it gets almost $300,000 a year plus $15,000 a month in medicine, thanks to the work of two new staff members hired with grants from the California Endowment, a charitable foundation created with money raised by converting the state's nonprofit health care providers into profit-making enterprises.

In New York, a similar conversion that was approved in January is turning Empire Blue Cross Blue Shield into a profit-making company, raising $1.1 billion for the state. Health care advocates had hoped the money would be used as it was in California and several other states that had similar conversions: to set up a charitable foundation that would generate millions of dollars every year from investments for health care.

That was the original plan, but in January Gov. George E. Pataki and the leaders of the State Assembly decided instead to use most of the $1.1 billion estimated in assets from the conversion to benefit workers in a politically powerful health care union, meaning almost all the money will be spent in two or three years.

Over the last decade, more than a dozen Blue Cross insurers around the country have converted to profit-making status to allow them to raise money in the public markets and remain competitive in a rapidly changing industry. In most cases, those conversions have spun off large sums of money that have been used by foundations to finance health care.

Not surprisingly, the conversions have been accompanied by intense and even bitter debates over where the money goes, how it gets used and to whom it belongs. Proponents of the California model praise it and criticize the New York approach.

But Robert R. Hinckley, deputy commissioner for operations at New York's Health Department, said the state did not need to use the money for purposes like California, because New York already had programs serving those needs.

"New York has, more than any other state, I believe, already created programs to address the problems of the uninsured," he said, citing programs like Child Health Plus and Family Health Plus. "Funding for those programs is sufficient and solid."

By common law doctrine, the money belongs to the converted nonprofit agency's former beneficiaries — the public in the case of the Blues. Thus the money often ends up in a charitable foundation that has a mission similar to the Blue Cross from whence it came. But not always, and the new foundations vary widely because the conversion process depends on several things: how big the Blue Cross agency was, how its assets were valued and who in the state had responsibility for overseeing the process.

In many cases, no specific laws covering conversions were on the books, and so legislatures, state officials and the public had to interpret or change existing laws.

"When conversions occur, there is always bound to be a lot of wrangling over the potential use of the assets, which is highly detrimental," said Malcolm V. Williams, a senior program associate at Grantmakers in Health, a health-oriented research and advocacy group in Washington. "The absence in many cases of clear laws and regulations governing conversions creates a hole that everyone starts fighting over."

In California, at places like the Clinica Monseñor Romero, the poor clearly have benefited from the establishment of the California Endowment. "The grants we have received from the endowment and other foundations like it have definitely had a positive impact on our ability to subsidize care for those who can't afford it or don't know how to get access to it," said Roland Palencia, the clinic's executive director.

In New York, the money will be used largely to recruit and retain health care workers with pay raises. But, Mr. Hinckley, the deputy health commissioner, said it also would be used for training and other new programs and to create a small, $50 million foundation.

"In some respects, it might be true that the money will be used for raises for health care workers," he said, "but not across the board. The money will be provided to health care facilities to do a whole range of things, some of which might be to give raises to employees but some of which could go to anything from day care centers to training programs."

Consumer advocates question using the Empire Blue Cross assets to plug a hole in the state budget instead of putting them all into a foundation whose investment income would generate millions of dollars for health care in perpetuity, as California chose to do.

"What you have in New York is a quick budget fix that will satisfy health care workers for a year or two," said Laurie Sobel, a staff lawyer at Consumers Union who is an authority on Blue Cross conversions. "Then the money will be gone and you'll have the same problem."

Additionally, the sudden change in plans for Empire's assets gave rise to charges of political maneuvering by the Republican governor, who is seeking a third term, and Dennis Rivera, the head of the powerful and traditionally Democratic health care workers' union, who later endorsed Mr. Pataki's re-election. Both men have denied there was any quid pro quo.

The New York plan also challenges the widely held legal doctrine used to protect charitable assets when a nonprofit becomes a profit-making entity. That doctrine holds that nonprofit assets should go to a similar charitable mission after a conversion.

Vincent Stehle, program officer for nonprofit sector support at the Surdna Foundation, a broad-based charity, said the money was not public money but rather charitable money. "What concerns us about the Empire case is that activities in Albany are breaking down boundaries between the public and the nonprofit sector," he said.

William Josephson, the New York assistant attorney general overseeing nonprofit groups, said his office believed the New York choice was permissible, citing authoritative sources saying that charitable assets may be used "to lessen the burden of government."

Some states have decided to resist conversion at all. In January, Kansas became the first state to reject a Blue Cross conversion, saying that it was not in the consumers' interest because premiums would go up. Maryland seems likely to follow suit. That, coupled with the sudden change in plans for Empire in New York, has heated up the debate over whether conversions make sense.

New York is not the only state to use the assets from a conversion for its budget. Virginia used $175 million when Trigon Blue Cross Blue Shield converted. Georgia likewise tried to use the assets for its budget but was forced by its courts to give some of the money to a foundation. Blue Cross Blue Shield of Wisconsin gave $250 million to two medical schools.

Consumer advocates who support California's choice say the beauty of a foundation is it that the money can grow. California put $3.2 billion from the sale of Blue Cross of California into two health care foundations in 1996, and their assets are now worth more than $6 billion.

"Even if we manage our assets conservatively, we're going to generate anywhere from $100 million to $200 million a year for grants," said Dr. Robert K. Ross, chairman and chief executive of the California Endowment.

Critics remain. "Sometimes they back these kinds of fluff-stuff projects that have marginal effect, in my opinion," said one recipient of an endowment grant who spoke on condition of anonymity. "The biggest barrier to health care is access, and yet they won't invest in direct medical care because they think it's a sinkhole."

Financing nontraditional approaches to health care is precisely what the new conversion foundations should be doing, Dr. Ross said. "The government cannot take risks with tax dollars," he said. "We can take some risks, and when those risks pay off, the government can step in and build on the models we've created."