Mark P. Scherzer Health Insurance Law Blog on Lawyers.com

JANUARY 29, 2008:  Testimony Delivered on January 29, 2008 at the New York State Insurance Department Hearing on Proposed For-Proft Conversion of HIP/GHI

Thank you for the opportunity to testify on the application of HIP/GHI, merged entities under the umbrella name Emblem Health, to convert to for-profit status.  New Yorkers for Accessible Health Coverage (“NYFAHC”), a coalition of over 50 voluntary health and allied organizations representing the interests of the seriously and chronically ill, disabled and elderly in the insurance system, opposes granting the current application.  While we will set forth at length the reasons for our opposition, we recognize that the Department has itself invested considerable time in making the application one it can approve.  For that reason, we will also discuss in this testimony some essential consumer protection mechanisms should the application be approved.

One of the statutory criteria you must consider in judging this application is whether it serves the interest of the public in delivery of health care benefits and services. NYFAHC believes that interest is best protected when there exists a strong non-profit sector providing coverage for such services, and when the public has faith that resources committed to nonprofit health care institutions will remain committed to the institution’s nonprofit mission.  Therefore, the Superintendent should only approve the conversion of non-profit organizations to for-profit corporations as a last resort, only when the non-profit is no longer able to carry out its mission. 

Another statutory criterion you must consider is whether granting the conversion application will lead to continued or increased access to health coverage. We believe that the Department should apply this criterion from the perspective of the Governor’s initiative, recently begun, to expand coverage health coverage universally to all New Yorkers. It should only authorize those changes in the structure of our health insurance market which contribute to increasing access to more affordable health coverage. 

The burden should be on HIP and GHI to show that conversion would meet these two tests.  In this case, we do not believe that either test has been met.

I.  The conversion has not been shown to be necessary

The reasons for conversion posited by HIP, a company enjoying considerable financial health, and GHI, a company still building its reserves but nevertheless currently able to operate on a financially sound basis, seem to be based on entrepreneurial hopes rather than a demonstration that conversion is the only way they can fulfill their non-profit missions.  The conversion plan is stated, truthfully, in tentative and speculative terms, expressing fear that the companies could be relegated to second tier status, that they might be unable to devote sufficient resources to development if they cannot get financing from equity markets, and similar possibilities. 

Taking a page from Empire Blue Cross’s book, the applicants have projected the same benefits from conversion that Empire Blue Cross predicted five years ago.  Those promised benefits for Empire and the State (that Empire would raise money for its competitive improvements through stock offerings, and that it would remain a locally controlled, responsive insurer) were never realized.  Empire neither relied on public stock offerings to raise capital nor did it remain a local company, being acquired by a national for profit Blue Cross behemoth. 

Emblem Health would in some ways be an easier acquisition target than Empire.  It is smaller, and no barriers of the sort associated with retention of the Blue Cross trademark restrict the universe of potential buyers.  New York should learn from experience, and experience tells us that conversion may simply facilitate a more concentrated insurance market dominated by an oligopoly of national commercial insurers. 

HIP/GHI have suggested some alternative rationales supporting the conversion.  They say that conversion to an equity company would facilitate re-entry into the New Jersey market, a necessary step for a credible regional insurer, because they can issue stock when acquiring a New Jersey operation instead of coming up with cash.  It is hard to imagine, however, that they would be unable to make such acquisitions only in that way.  HIP has been on a buying spree in recent years, acquiring other health plans, including for-profit plans, on Long Island and in New Jersey and Massachusetts.  It has over $400 million in excess reserves and could surely use the stock of some of its more far flung existing operations, including its for-profit subsidiaries in other states, as a means of payment right now. 

HIP/GHI have also asserted that conversion would enable them to enter into closely associated lines of business, such as life insurance and sale of health savings accounts, which are off limits to them now as Article 43 corporations.  While the statement is technically true, it requires a great leap of faith to assume that enabling such diversification will somehow encourage or facilitate broader offering of affordable health coverage.  HIP’s previous adventures in other states, including New Jersey and Florida, do not suggest that diversion from core mission necessarily helps the financial picture. 

In short, HIP/GHI have suggested some advantages that might be gained from the conversion, but have shown neither a compelling need to convert nor that the speculated advantages outweigh the negative effects of further eroding the nonprofit health sector, in fact depriving downstate New York of any significant nonprofit health insurers at all.

II.  The conversion will not promote access to affordable coverage.
For the past four months, the Department has been one of lead agencies in the Governor’s Partnership 4 Coverage process.  In hearings around the state, broadly representative consumer and provider groups have repeatedly testified about the ways in which commercial insurers stand as obstacles to decent coverage or access to care.   Many pointed the finger at currently low medical loss ratios as contributing to a lack of affordable of coverage, and thus as an obstacle to expanding coverage.

Unfortunately, it appears highly likely that premium increases will result from the proposed conversion.  HIP/GHI state in their conversion plan that one of the key advantages to conversion will be that they will no longer be subject to a 15% cap on administrative expenses, allowing them to invest resources in more aggressive medical management.  Being free to decrease the percentage of premium revenue spent on benefits and increase administrative expenses in fact frees revenue for a wide variety of  purposes, including dividends to investors and high executive salaries.  What it does not do is contribute to maintaining lower premiums.  Intuitively, higher premiums appear likely, especially in those markets, such as among New York City municipal employees, where GHI and HIP have been each others’ chief competitors.

Our prediction is, of course, speculative.  There is insufficient information in the current conversion plan for the Department to assess the likely effects on premiums for consumers.  We asked GHI whether its consulting actuaries had studied the likely effects, and were advised that they “do not have a comparative premium study comparing products and premiums by line-of-business for periods before and after conversion.”  While they noted that such a study would not be able to be publicized, under SEC regulations, the same restrictions would not seem to prevent the Department from examining and evaluating such a study. 

Before deciding whether to approve this application, the state should require an actuarial study, broken down by line of business, of likely effects on premiums.  If that study finds that premiums are likely to increase as a result of the conversion, the application should certainly be denied, as it will undercut the state's effort in the coming year to make coverage universally accessible at an affordable price.\1\  Any one-shot infusion of conversion dollars into state coffers will not offset the additional long term costs the state will have to bear when it tries to bring coverage to all New Yorkers if it changes the structure of the market in a way that makes coverage more expensive.

III.  If conversion is authorized, consumer protections must be strengthened.

The correspondence between the Department and Emblem Health posted on the website demonstrates that the Department has raised serious and important questions regarding the effect on consumers of the merger of the two companies which is being realized simultaneously with and as part of the proposed conversion.  In at least four respects, vulnerable consumers are at risk:

A.  Differences in clinical care standards:  GHI and HIP, while determining that they have few differences in utilization review and other clinical standards, have identified about 10% of standards which differ to some degree.  They have offered that consumers affected by a merging of clinical care standards should be able to continue current courses of treatment for some limited time.  However, consumers who have been maintained on therapies that are working for them, approved by their insurer, whether those be particular drugs on a formulary or other therapies recommended by their doctors, should not be forced to switch therapy simply because the insurer has assigned its contract to another entity.  While Emblem Health should be free to impose its unitary medical review criteria on new claims for treatment, those who have set their treatment course under earlier medical review criteria of one of the entities should be able to maintain that course of treatment in perpetuity unless the new insurer can show that the treatment has become contraindicated for their condition.

B.  Network changes:  While the merged companies apparently plan to offer all current providers in each entity’s networks the opportunity to participate in Emblem Health’s networks, the possibility exists that the new entity will not offer sufficiently attractive deals to the providers, and there could be much wider disruption of networks than is typical in times of transition.  Consumers with ongoing treatment needs related to chronic conditions should be protected from potentially broad disruption to the care networks they have taken years to establish.  The continuity of care provisions of the Managed Care Bill of Rights may be insufficient to enable these consumers to change all their providers in the allotted time.  They should be able to continue seeing their old providers for up to a year if those providers are willing to continue with the level of reimbursement previously earned under their contracts with the companies.

C.  Premium levels:   Premium disruption is as much a potential problem as provider disruption as risk pools are merged.  One can see wide variation in premiums between GHI and HIP.  In the direct pay market, for example, GHI currently charges about $1,000 more per month for a standardized  individual contract in New York City than HIP ($1600 vs. $600).  The carriers’ small group products may well evidence similar discrepancies.

In the case of the individual market, GHI has assured us that its pool is tiny compared with HIP’s, so that the merger of the two risk pools will have minimal effect on HIP’s subscribers’ premiums while providing substantial reduction to GHI’s.   The Department should insure that the positive effect of that pooling is spread across GHI’s entire direct pay population, so that the tiny number of subscribers in some upstate counties outside HIP’s current service area are folded into a single direct pay risk pool with thousands of others rather than isolated into a tiny unsustainable risk pool of their own. 

In the merging of group insurance pools, where the disparities may not be so great and some groups may as a result experience significant dramatic adverse rate effects from merger, the Department should limit the effects of those increases, if necessary limiting the percentage of increase permissible in any given year as a consequence of the merger.

D.  Safety net programs:  While Emblem Health states its intention to continue participating in the state programs, such as Family Health Plus, in which both GHI and HIP currently participate, any national company that acquires Emblem Health a few months after its conversion may not be so disposed.  The conversion plan as ultimately approved should mandate such continued participation for a period of years – five years would be a reasonable minimum -- and be binding upon any successor or acquirer.

NYFAHC stands ready to work with the Department in promoting affordable coverage for all New Yorkers.  We hope it will do so by denying the current conversion application.  If it does not deny the application, it must strengthen consumer protections for the most vulnerable consumers to avoid severe adverse impacts from the proposed merger and conversion.

\1\  This is not the only respect in which the conversion plan is too incomplete to enable evaluation of the public interest.  No details of the shareholder agreements under which the Public Asset Fund and the New York State Health Foundation would hold Emblem Health stock are provided in the plan.  They have apparently not even begun to be negotiated.  Without a review of those provisions, it is impossible to know whether even the state will be realizing the full value of the charitable assets which are slated for conversion.