Double Cross?

When 12 Missoula radiologists declined to sign a contract with Blue Cross Blue Shield, the state’s largest health care insurer called the doctors a monopoly and \nsued for antitrust violations. What are the Blues really after?


In September, Blue Cross Blue Shield of Montana (BCBSMT), the largest health care insurer in the state, sent a shock wave through Missoula’s medical community when it filed a lawsuit against a group of 12 Missoula radiologists doing business as Missoula Radiology, and its affiliate, Advanced Imaging at Community Medical Center. The suit charges the radiologists, who in June 2003 declined to accept a new service-provider contract with Blue Cross after four years of doing business with the state’s dominant health insurance provider, with antitrust violations—essentially, operating a monopoly. Close observers don’t buy that charge.

“Blue Cross didn’t claim [Missoula Radiology was] a monopoly when they were participants in their network,” points out Dirk Visser, president and CEO of BCBSMT competitor Allegiance Benefit Plan Management. “And yet nothing has changed within [Missoula Radiology’s] corporate structure.”

“That monopoly issue just doesn’t hold a lot of credibility,” agrees Dennis Palmer, a Helena radiologist who for several years sat on BCBSMT’s physician advisory board.

BCBSMT’s real motive for suing Missoula Radiology may be to force the radiologists to sign on the dotted line, ensuring that the specialty provider remains part of the BCBSMT network. There are several reasons for the insurance giant to want to keep its provider network intact, the most obvious and least nefarious of which is to be able to deliver comprehensive care to its policyholders: health care consumers. But another possibility is that BCBSMT may be eager to shore up its provider network in anticipation of a corporate restructuring—a sale or merger, for example—on the open market, with uncertain consequences for health care consumers in Montana.

Elsewhere in the country over the past decade, numerous formerly nonprofit Blue Cross companies have merged, been acquired or converted to for-profits. Some BCBSs have attempted to convert but been denied by state regulators. Blue Cross Blue Shield of Montana—now a nonprofit—denies up front that it has any such plans, but in fact BCBSMT may already be effectively converted, dependent on the outcome of an obscure auditor’s office dispute with the insurer and the results of the 2005 legislative session. In the auditor’s dispute, the state claims the corporation is what’s known as a public-benefit corporation; BCBSMT insists that it’s a mutual-benefit. As a mutual-benefit corporation, BCBSMT could sell or merge with no state regulation of corporate assets derived from BCBSMT’s longstanding nonprofit status. As a public-benefit corporation—which the state argues BCBSMT is—a portion of Blue Cross assets would remain in a public charitable trust in the event of a for-profit conversion.

In any case, Sen. John Cobb, R-Augusta, fears those assets might already be out of reach.

“Under the worst case scenario, they’ve already converted,” says Cobb. “And we don’t get anything.”

Blue Cross Blue Shield of Montana is one of 40 member health care organizations of the national Blue Cross Blue Shield Association (BCBSA). Nationally, Blue Cross Blue Shield contracts with more hospitals and physicians than any other insurer. The company’s roots go back to the Great Depression when teachers purchased prepaid hospital stays and employers purchased injury care for miners and loggers. Over time, Blue Cross and Blue Shield, which merged in 1982, became known as “the insurer of last resort.” Today, one in every three insured citizens is insured by a BCBS plan. In the past 10 years, “the Blues” have collectively increased membership by 30 million. In 2003, system-wide enrollment reached an all-time high of 88 million.

BCBS member organizations were originally chartered as nonprofits. In 1994, the association changed its bylaws to allow its members to convert to for-profit status. In 1985, more than 90 independent BCBS plans were operating in the United States. Today, due to mergers and acquisitions, there are 40. Three are for-profit, including two publicly traded companies, according to BCBSA spokesman Chris Hamrick. In late November, two of the largest Blue providers—Anthem, Inc. and WellPoint Health Networks, Inc.—merged.

In Montana, Blue Cross Blue Shield is responsible for nearly half of the commercial health insurance premiums collected in the state. The state’s 58 hospitals—including all of the state’s rural critical access hospitals—participate in some manner with BCBSMT. Nearly a quarter of the state’s population carries a BCBSMT health insurance card.

BCBSMT’s dominance in the market allows the insurer to play the heavy with health care providers.

When a BCBS-insured patient goes to a doctor, some portion of that doctor’s fee is paid by BCBSMT. Whatever is not paid by BCBSMT has to be made up elsewhere. The extra load can be passed on in the form of higher rates to non-BCBSMT patients, including the uninsured, or it can be passed on to BCBSMT patients whose visits to Missoula Radiology now constitute out-of-network service. Or it can be carved from the health care providers’ bottom line.

If a health care provider, like a hospital, should balk at the reimbursement rates offered by BCBSMT, BCBSMT can simply send—or threaten to send—its insured patients elsewhere. By many accounts, BCBSMT refuses to negotiate contracts with providers.

Fourteen years ago, Dr. Palmer, the Helena radiologist, joined Montana Interventional and Diagnostic Specialists, which contracts with BCBSMT.

“First of all,” says Dr. Palmer, “it’s not a negotiation. They send out a contract. They talk about Missoula Radiology having a monopoly. Well, they have a monopoly for the people we provide care for. They sort of hold the cards for those people. We either sign with them or we don’t.”

Dr. Palmer’s practice continues to sign, despite the fact that “we have taken a reduction in our level of reimbursement for almost every year,” Palmer says. In 2002, David Espeland, CEO of Fallon Medical Complex in Baker, considered not signing a contract with BCBSMT, believing that his hospital couldn’t afford to operate with the reimbursement rates offered by BCBSMT.

“I did ask what the alternative was if we didn’t sign an agreement with them. And they said, ‘Well, then I’m afraid that Blue Cross Blue Shield patients can’t come to you.’” At the time, Espeland says, roughly one third of the patients in Fallon County were covered by BCBSMT.

“We’re kind of held hostage in some respects. Because the last thing we want to do is alienate a large portion of our population. We were, in some ways, being told, ‘Either you sign, or patients are going to have to be redirected out of town,’” says Espeland.

Missoula Radiology, whose members declined to discuss the suit on the record on attorney’s advice, held a contract with BCBSMT from 1999 to 2003. Missoula Radiology is composed of 12 doctors and 11 staff; the company also owns 50 percent of Advanced Imaging at Community Medical Center, a diagnostic center that performs CAT scans, MRI scans and mammograms. According to internal Missoula Radiology reports, the practice saw BCBSMT reimbursements decline for most procedures each year of its contract. Had Missoula Radiology signed with BCBSMT for a 2004 contract, BCBSMT’s current reimbursements for the most frequently performed procedures would be on average 11.4 percent lower than they were in 1999.

BCBSMT says that while its reimbursement rates for some procedures may be declining, it uses the same reimbursement scale used by Medicare, Medicaid and other private insurers, and that improved technology has increased efficiency for many procedures, justifying lower rates.

BCBSMT has been joined in its suit by four small local businesses—Davis Transport, Inc., APS Healthcare Northwest, Inc., ELM Locating and Utility Services and Missoula Cartage Co.—whose employees are covered by BCBSMT plans. Their complaint: They may have to pay more for their employees’ health care coverage because Missoula Radiology, without a BCBSMT contract, is now an out-of-network provider.

“[BCBSMT has] basically painted Missoula Radiology and Advanced Imaging as the villain to these employers, whose angst is really misdirected,” says Allegiance’s Visser. “They do have a legitimate beef, but it’s with Blue Cross, not with the radiologists.”

Susan Good, former chairwoman of the Montana Republican Party and formerly a lobbyist on behalf of physicians, believes that BCBSMT may harbor concerns about Missoula Radiology’s rejection on a number of fronts.

“Network adequacy is something that they [BCBSMT] really need to pay attention to, which would be enough of a reason for them to be very concerned,” Good says. “They’ve got the domino-effect concern, where [potentially] everybody tells them, ‘stick it in your ear.’ And if they want to go for-profit, this could also be a motivator.”

Jesse Cole, a radiologist based in Butte, thinks he sees a pattern that supports the prospect of BCBSMT positioning itself to turn for-profit. Across the country, Blues have been amassing great sums of cash reserves. The companies are required by law to maintain minimum reserves to protect policyholders, but in some states, including Montana, no maximum is set. Often, after stockpiling reserves and funneling cash into for-profit subsidiaries, the corporations attempt to convert from nonprofit to for-profit status.

A portion of the reserve funds, explains Dr. Cole, is often used to satisfy state requirements for charitable assets. Oftentimes, however, state regulators undervalue the companies and the state acquires much less than policyholders have poured in. Additional reserves and long-term assets then go to shareholders. “What happens is Blue Cross Blue Shield tries its darndest to get as much market share as it can before this happens because that is going to figure into their stock valuation,” Cole says.

In general, a fuller network with specialty physicians translates to higher premiums, explains John Leonard, an analyst at Charlottesville, Va.’s SNL Financial, a financial research firm that covers the banking and insurance sectors, among others. Comprehensive networks and higher premiums, in turn, translate to improved financial ratings, appealing to management whether a corporation intends to convert to for-profit or not.

Blue Cross denies any intention to transition to for-profit status. BCBSMT spokeswoman Linda McGillen calls the idea “foolish,” saying the company already explored and rejected the idea.

“It dropped off of the table early in 2003 as not even an alternative to be looking at,” McGillen says.

However, an early 2003 letter from BCBSMT to Sen. Cobb stopped well shy of dismissing conversion, explaining only that the company intended to wait until the 2005 legislative session to pursue conversion-friendly legislation. BCBSMT spokeswoman Tanya Ask says the board has since changed direction, but declines to provide records of board meeting minutes that would document the board’s deliberation.

However, Chuck Butler, a former BCBSMT vice president and current communications director for Gov. Judy Martz, says that when he left the company in December 2002, it was not the board but President and CEO Peter Babin suggesting the company consider conversion. Babin directed all queries to McGillen, who is the corporate communications director, but declined to respond to repeated Independent requests for direct comment.

Pat Driscoll, chief legal counsel with the state Auditor’s Office, says conversion is currently “more of a theoretical concern.” But, “the fact that it is a theoretical concern suggests that it’s a possibility.”

By 1992, Montana law had established separate designations for nonprofit corporations: religious, public-benefit or mutual-benefit. Corporations could denote their nonprofit designation in their articles of incorporation. Otherwise, the state would consider a corporation’s 1995 annual report as the appropriate indicator. In 1995, BCBSMT filed an annual report designating itself as a public-benefit, but the insurer says that the original filing was the result of a clerical error.

A hearing between BCBSMT and the state auditor over BCBSMT’s corporate designation is pending.

If BCBSMT is found to be a public-benefit corporation, “they can’t under ordinary charitable trust law take assets that are dedicated to charitable trust purposes and give them to a for-profit entity,” explains Chris Tweeten in the Montana attorney general’s office. If BCBSMT were to attempt a for-profit conversion as a public-benefit corporation, or be sold or dissolved, the attorney general’s office would have authority to oversee the transaction and ensure that appropriate BCBSMT assets would be placed in a trust for the benefit of the state.

BCBSMT, however, considers itself a mutual-benefit, says spokeswoman Ask. If that is determined to be the case, the attorney general’s office has no authority over Blue assets, says Tweeten. If considered a mutual-benefit, the company is free to merge or be sold with no charitable trust obligations.

“In the worst case scenario, they don’t have to give us a dime,” says Sen. Cobb.

In March 2003, the Montana Department of Insurance, having audited BCBSMT from 1997 through 2000, asked BCBSMT to amend its articles of incorporation to reflect that it was a public-benefit corporation. BCBSMT refused. In August 2003, State Auditor John Morrison ordered that BCBSMT “must amend its articles of incorporation and its by-laws to reflect that it is a public benefit corporation.”

Negotiations between the state auditor’s office and BCBSMT have been underway for more than a year.

BCBSMT spokeswoman McGillen insists the company has no plans to convert to for-profit, and spokeswoman Ask confirms that the Board of Directors is not steering BCBSMT in that direction.

BCBSMT’s promises, though, hold little water with Cobb, who is anxious to have the issue resolved.

“Somebody could tell them they’re going to convert,” he says. “What if someone just buys them out? Another Blue Cross?”

“At this point, Blue Cross Blue Shield is not for sale,” counters Ask. “We have absolutely no intention of selling.” Neither, she says, is the company pursuing a merger.

When Butte radiologist Jesse Cole, M.D., reviewed his paperwork, he noticed that BCBSMT’s reimbursements were, on average, “considerably lower than anybody else.”

“In the 1990s, the percentage of money these guys started holding back for administrative expenses and cash reserves started to increase, and it did that all around the country,” he says.

In that respect, BCBSMT fits the national mold. According to the insurance commissioner’s office, BCBSMT held $52.8 million in reserve in 2000. By 2002, reserves had jumped to $60.5 million. With reserves of roughly $94 million as of June, BCBSMT is flush, holding more than three times the minimum required by state statute.

“They have enormous reserves, of course, and other companies would call that profit,” says former lobbyist Good.

BCBSMT reserves, says spokeswoman Ask, are now at an acceptable national average compared with other Blue Cross companies. The minimum required by state statute, says Ask, is well below the minimum required by the Blue Cross and Blue Shield Association. BCBSA, says McGillen, requires that its members hold at least 400 percent of risk-based capital in reserves. BCBSMT, she says, holds roughly 625 percent.

Since reserves nominally exist to protect consumers, the state is reluctant to set a maximum, according to the auditor’s office.

“They [BCBSMT] could charge to infinity and the state could say nothing. There is no upper limit. And that’s a loophole that I think these guys have been willfully exploiting,” Dr. Cole says.

The Consumers Union, the nonprofit publisher of Consumer Reports, tracks nonprofit-to-for-profit conversions, and San Francisco-based staff attorney Scott Benbow says the organization has discerned several indicators that a company may be planing to convert. Placing assets into for-profit subsidiaries is part of that pattern, he says.

Again, BCBSMT fits the pattern. In addition to cash reserves, BCBSMT owns four for-profit subsidiaries: Insurance Coordinators of Montana, Inc., incorporated in 1976; Combined Benefits Management, Inc., incorporated in 1993; Western States Insurance Agency, Inc., acquired in 1994; and Health-e-Web, Inc., incorporated in 1999.

Another sign of coming conversion, says Benbow, is activity in the Legislature.

“Often, when nonprofit health plans are lobbying for legislation to make conversions easier in any given state, a conversion proposal could be just around the corner,” Benbow says.

Montanans were well aware of the nationwide conversion trend in 1999 when Sen. Mignon Waterman, D-Helena, sponsored a bill that would have authorized the attorney general to review and regulate conversions. The Commissioner of Insurance supported the bill, anxious for guidelines that would determine what assets the public was due in the event of a nonproft-to-for-profit conversion. At the time, a spokesperson for Montana People’s Action, an advocacy group for low-income citizens, said that without proper oversight, “vast amounts of the public’s money could be siphoned from public benefit and put into private pockets.”

The bill died.

“[BCBSMT] succeeded in getting the bill killed,” Waterman says. “They worked very hard to get the bill killed.”

Susan Good also saw BCBSMT lobby heavily between 1995 and 2001. “Blue Cross Blue Shield has had so much influence at the Legislature in the past,” says Good. Once, she says, she received a copy of a draft bill. “It said in parentheses, ‘see Chuck Butler for more details.’”

At the time, Butler was a vice president for BCBSMT.

“They were writing the bill. That’s way too much influence,” says Good.

Consumers Union’s Benbow has noticed that BCBS profits are causing a stir nationally.

“In Pennsylvania, at the moment, four nonprofit Blue Cross plans are being asked by the insurance department there to explain why they have such huge surpluses, and why they’re not using those surpluses to further their nonprofit mission,” Benbow says.

In Montana, it’s executive salaries and benefit packages that are making the headlines. President and CEO Peter Babin’s salary in 2003 was $525,306. (The same year, the 16 board members were paid an average of $5,585 each.)

When Blues convert, it’s usually corporate executives who win big.

In 2003, Consumers Union issued a report titled “How Much is Too Much?” According to that report, nine years after Blue Cross of California converted to the for-profit WellPoint Health Networks, its CEO salary and bonuses increased from $922,000 to $19.26 million. When Virginia Blues converted to Trigon Healthcare, Inc., the CEO’s salary ballooned 203 percent. And competitor Anthem, Inc., which owns Blues from Nevada to Maine, is no different. Its CEO’s salary at the for-profit was 1,035 percent higher than his compensation before conversion. In 2002, Anthem CEO and President Larry Glasscock received $15.9 million for his work.

A 2000 Consumers Union report noted that when nonprofit health care organizations convert to for-profit, “Many of those dollars ended up in the hands of former executives, board members, and employees of the nonprofit as well as private investors.” As consumer watchdog groups have become aware of the threat, however, state regulators have made stronger demands on health care organizations attempting conversion.

The millions being siphoned into CEO salaries and perks, gouged out of patients, small businesses and the bottom lines of health care providers, were once reserved by state regulation for health care, and some states are loathe to see those revenues go up in CEO smoke.

Benbow describes the “legal wrangling” that took place in California to try to force the for-profit WellPoint to return policyholder money by placing it into charitable assets.

By the early 1990s, he says, most of Blue Cross of California’s assets were controlled by the for-profit WellPoint. In 1996, the California commissioner of corporations ruled that Blue Cross had committed a de facto conversion and had an obligation to return assets to the nonprofit sector.

“First the Blues plan offered zero. Then, [they] offered $100 million, which was rejected [by the corporations commissioner]. Finally, when all was said and done, they agreed to set aside $3.2 billion into two nonprofit foundations that are independent from the Blue Cross plan,” says Benbow.

Dr. Cole puts it this way: “They throw a few bones to some not-for-profit foundation.”

Then, the new for-profit corporation issues shares. Corporate executives and shareholders are handed the assets amassed by payments from policyholders. “It’s like the perfect crime,” says Dr. Cole. Except one thing: “It’s all legal.”

“The people that get screwed are the people who have been pouring their money into Blue Cross Blue Shield all these years for those premiums,” says Dr. Cole.

In July 2004, the insurance commissioner of the state of Washington, in denying Premera Blue Cross’s request to convert, concluded in part that conversion would result in less money being spent on health care. “Blue Cross Blue Shield pays us a little bit more than Medicare, and they pride themselves on that,” says Fallon Medical Center CEO Espeland. “It still amounts to a discount of 20 percent.”

“You guys [BCBSMT] don’t get the big picture here,” Espeland says. “If we don’t get adequate reimbursement, then we don’t keep the doors open, and there is not access for the patients. They don’t have access to medical care.”

While Blue Cross’s reserves have ballooned, Espeland says that his hospital has taken a loss for years, unable to set aside reserves of its own.

Faced with the choice, Missoula Radiology decided not to charge the uninsured and patients with other insurance more so that BCBSMT members can receive the giant’s discounted rates. Dr. Cole, who is not a Blue Cross Blue Shield provider, respects the Missoula radiologists’ decision.

“I applaud them for their moral clarity on this issue,” he says.

“I will work with anybody if they have financial hardships on a bill,” says Dr. Cole. “But I refuse to subsidize Blue Cross Blue Shield and Peter Babin with other people’s money. It’s wrong.”

In the end, the suit against Missoula Radiology may have backfired. In late September, a group of Missoula neurosurgeons and general surgeons cancelled their contract with BCBSMT to protest BCBSMT’s lawsuit against Missoula Radiology.

Other specialty providers without local competitors are wondering whether they, too, might come face to face with an antitrust suit that could cost millions to defend. “That’s the unspoken fear,” explains Dr. Cole. “There are lots of towns in Montana with only one specialist or one group of specialists…because this is Montana. It’s a small place. So are they going to be nailed as a medical monopoly if they decide they don’t want to participate?”

The Montana Medical Association’s Brian Zins believes the suit, currently pending, will be watched nationwide.

“I think the physicians are really, really concerned. You’ve got 12 people here against a huge entity,” says Zins. If the suit does force Missoula Radiology to join BCBSMT and accept its rates, Zins says, “I think this could be something that could have far-reaching effects on the practice of medicine.”

Preserving the integrity of its network is desirable for BCBSMT regardless of whether it plans to convert. But just in case, Sen. Cobb has prepared draft conversion legislation for the upcoming legislative session that he hopes will preserve some of the company’s assets as a charitable trust if it does make the move to for-profit.

Benbow and the Consumers Union encourage Montanans to insist that charitable assets be preserved if BCBSMT does convert. In California, he says, similar assets were eventually placed in health care foundations. “These foundations are making enormous contributions to the health and well-being of Californians by funding health initiatives all over the state,” says Benbow. “Montanans should accept no less.”

Dr. Cole, however, believes that the nonprofit BCBSMT should not be allowed to use its reserves to buy its way to for-profit status. He would like to see the corporation’s rates regulated more closely, as the Public Service Commission regulates utility rates.

Whether BCBSMT pursues for-profit conversion in the 2005 Legislature, as the insurer’s 2003 letter to Sen. Cobb suggests it might, it’s at least clear that BCBSMT is not afraid to use its muscle to force local health care providers into line, and that BCBSMT considers its assets to be the minimally regulated purview of a mutual-benefit corporation, whether the state likes it or not.

For Dr. Cole, the situation is maddening either way.

“If these guys are not-for-profit, and they’re supposed to be operating for the benefit of the policyholders, they’re not,” Dr. Cole says. “They are using the policyholders of Montana as their own personal piggy bank.”

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