POL SCI 793 Final paper BCBS Conversion non-profit to profit

Order Number: 750339Running Head: Empire Blue Cross

1 Conversion of

Empire Blue Cross

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3INTRODUCTION

Empire Blue Cross and Blue Shield was one of the most popular and

respected insurers of last resort in the United States of

America. The fact that this insurance organization was a non-

profit company enabled it to offer highly subsidized health

insurance covers to the New York population; this greatly

benefited low income earners who could not afford to pay the

hefty insurance premiums charged by other for-profit

organizations in New York. However, on 26th September 1996,

Empire Blue Cross and Blue Shield made an official announcement

that it was planning to convert from a non-profit organization to

a fully-fledged for-profit company. This meant that the huge

number of New Yorkers who had obtained individual health

insurance cover from Empire Blue Cross and Blue Shield would have

to seek alternatives which would more or less expose them to

greater health risks. (Robinson, 2003)

The only subscribers who wouldn’t be affected by Empire Blue

Cross and Blue Shield conversion were the 850 policy holders who

had permanent disability. This marked the start of an extensive


4legal, community and political tussle pitting the various

stakeholders who had different kinds of interests in Empire Blue

Cross and Blue Shield.

Experts argued that this conversion plan was a reflection of the

fast-rising competition in provision of health care not only in

the State of New York but also throughout the United States of

America. Other analysts suggested that Empire Blue Cross and Blue

Shield’s conversion from a non-profit to for-profit company would

only bring financial benefits but the organization would lose its

commitment to social obligations. Before making a formal

application to the State of New York Insurance Department, Empire

Blue Cross and Blue Shield embarked on a process of public

hearings so as to evaluate public concerns and input as far as

the conversion was concerned. The conversion from a non-profit to

a for-profit company would also require official permission from

various authorities such as the Exchange Commission, Supreme

Court of New York and the Attorney General. (Ducey, 2008)

Despite the lengthy political, legal and social sideshows

involving this proposal, the process came to a successful


5completion on 7th November 2002 when Empire Blue Cross and Blue

Shield officially converted to for-profit organization. Over $417

million was generated in the company’s initial public offering

making it among the best IPOs in United States’ history. The cash

windfall from conversion was used by the State of New York in its

budgetary allocations for health-related issues such as

increasing the salaries for healthcare practitioners in the

state.

DIFFERENCES BETWEEN NONPROFIT AND FOR-PROFIT ORGANIZATIONS

In order to fully understand the transformation that the

conversion of Empire Blue Cross and Blue Shield brought, it is of

paramount importance to closely assess the major characteristic

differences between a for-profit and a nonprofit organization;

first and foremost, there’s a major difference in the mission and

purpose. Whereas a nonprofit organization’s mission is based on

charitable activities and acts in the interests of the wider

public, for-profits remain limited to their primary concern or

goal. (Smith, 2004)


6This implies that for-profit companies have a mission that is

based o achievement of goals which are largely profits whereas

nonprofits have a sole purpose which is benevolent in nature.

Another major difference between for-profit and nonprofit

organizations is hinged on the ownership; for-profit

organizations are owned by policy holders, individual investors

and shareholders whereas nonprofit companies are owned by no one

in particular since the public acts as the only shareholder.

Before Empire Blue Cross and Blue Shield converted to a for-

profit company in the year 2002, it enjoyed partial exemption

from taxation but since the conversion, the company is liable for

total compliance since there’s no form of exemption. Whereas the

assets of Empire Blue Cross and Blue Shield remained in various

charitable activities, the profits generated after conversion can

be shared amongst the shareholders or individual investors.

CONVERSION

Conversion is a terminology used to refer to the transfer of

assets that take place from a nonprofit company to a fully-


7fledged for-profit corporation. A wide variety of financial and

legal transactions take place during a conversion and these might

include mutualization, mergers, acquisitions, selling and leasing

of assets among many others. In addition to these issues, the

board overseeing the conversion process must ensure that all

fiduciary obligations are met by justifying the need for transfer

of assets from a nonprofit organization to for-profit company.

Another important consideration that has to be met during the

conversion process is whether the transactions are of any

interest to the general public; for the case of Empire Blue Cross

and Blue Shield, the public had huge stakes in the deal and

therefore numerous public hearings were held. (Robinson, 2003)

Another important issue that must be addressed during the

conversion process is determining whether there are some benefits

or community services that should be scrapped; for the case of

Empire Blue Cross and Blue Shield’s conversion from a nonprofit

to for-profit company, the huge subsidies that were evident in

their health insurance covers would be eliminated. Private


8inurement must also be avoided as much as possible since it

creates a conflict of interests.

BRIEF HISTORY OF THE EMPIRE BLUE CROSS AND BLUE SHIELD PLANS

The roots of Empire Blue Cross and Blue Shield plans can be

traced back to the early 1930’s during the Great Depression. It

was founded with the primary goal of assisting individuals to

service healthcare bills; this was as a result of the dire need

to fill great voids in health insurance that were evident

throughout the entire country. The Empire Blue Cross and Blue

Shield plan was an instant success attracting millions of

subscribers all over the United States of America. This

successful trend and popularity of the Empire Blue Cross and Blue

Shield health insurance scheme came to a halt in the 1980s and

1990s when competition from other health insurance providers

became very stiff. (Ducey, 2008)

The fall of Empire Blue Cross and Blue Shield during this period

can also be attributed to the high rates of unemployment in the

United States of America which were occasioned by massive


9retrenchment programs. Despite this downfall, Empire Blue Cross

and Blue Shield remained steadfast in the State of New York where

it had significant contribution to health insurance cover. In the

year 1987 Empire Blue Cross and Blue Shield was made liable to

taxation from the federal government but still enjoyed a host of

tax exemptions. Its downfall was also heavily connected to

drastic reforms that had been evident in the heath sector; for

instance, the federal government no longer had total control in

the sector and market forces were greatly responsible for trends

even in terms of insurance cover. (Robinson, 2003)

Nevertheless, Empire Blue Cross and Blue Shield managed to

register marked improvements in terms of performance towards the

late 1980s; for instance, the organization accounted for more

than 61% of health insurance cover in the State of New York since

it had insured over 10 million individuals.

Among the organization’s health care plans that posted great

success included discount networks and community-based health

maintenance programs. In the wake of celebrating the

organization’s achievements for the previous half a century, the


10Empire Blue Cross and Blue Shield suffered a major blow when some

of its secret systems emerged in the public domain; for instance,

its treatment system strongly favored high-income earners and its

board frequently curtailed plans to move towards a community-

centered focus. It

also emerged that most of Empire Blue Cross and Blue Shield’s

strategies and policies were strongly manipulated by politicians

and thus compromising community interests in the process. The

year 1989 was also characterized by revelations that this company

had not been genuine in disclosing its financial performance; no

one actually knew whether it had surpluses or deficits. These

revelations had detrimental effects upon the Empire Blue Cross

and Blue Shield more-so in the period of early 1990s. (Smith,

2004)

EMPIRE BLUE CROSS AND BLUE SHIELD IN THE 1990S

This organization suffered adverse financial consequences as a

result of the negative publicity that faced it in the year 1989;

to begin with, the company’s reserves dipped below the 1% mark of


11premium revenues and by any given financial standards, this meant

that Empire Blue Cross and Blue Shield was technically bankrupt.

More and more New Yorkers started to switch their allegiance from

Empire Blue Cross to other for-profit organizations like United

States Healthcare and Oxford; consequently, the enrolment rates

for Empire Blue Cross and Blue Shield started to decline at rapid

rates. (Robinson, 2003)

As of the year 1992, Empire Blue Cross and Blue Shield had just

above 8 million subscribers but 4 years later, the number of

subscribers had plummeted to a staggering 4.5 million; this

represented a decline of more than 47% and all over sudden, an

organization that was once regarded as the holy grail of United

States health insurance sector was facing doom. In the year 1996,

Empire Blue Cross was ranked a shameful position 67/68 Empire

Blue Cross and Blue Shield plans throughout the United States of

America.

In addition to this undesirable ranking, Empire Blue Cross posted

the worst patient dissatisfaction ratings according to the State

of New York’s insurance department. As if that were not enough,


12Empire Blue Cross had only 7 computer systems which were not only

of low quality but also outdated. (Robinson, 2003)

POLITICAL INPUT

Politics had a huge hand in bringing down Empire Blue Cross and

Blue Shield organizational culture more-so considering the nature

of stringent regulations that are evident in the State of New

York. The State department of Insurance in New York was charged

with the responsibility of ratifying the various premiums that

Empire Blue Cross deducted from its subscribers. Political

tussles ensued when Empire Blue Cross sought to increase some of

its premiums; politicians who had one eye on popular votes

strongly opposed such an increment. The investigations conducted

at Empire Blue Cross in form of audit and extensive media

coverage brought a fresh wave of revelations; company directors

engaged in reckless spending habits such as usage of helicopters

even when trains were more suitable. (Ducey, 2008)

The board of directors and senior management of Empire Blue Cross

enjoyed luxurious lifestyles such as pampered mansions and


13expensive vehicles. However, this was a just but a tip of the

iceberg; investigations also showed that a lucrative computer

tender had been awarded to a member of Empire Blue Cross’s board

of directors despite the fact that he lacked any kind of

background on computer matters. This kind of negligence had

resulted into Empire Blue Cross accruing unnecessary expenditures

more-so with regard to compensation of health insurance policy

holders; the outdated computer systems could not make sufficient

inferences in order to differentiate between a legitimate and a

false claim. (Robinson, 2003)

CHANGE OF MANAGEMENT

These revelations made it inevitable for Empire Blue Cross to

overhaul its management team; a new management team assumed

office towards the end of the year 1994. However, despite this

change, the organization still struggled to balance the books

owing to the gross financial flaws that had been facilitated for

by the previous regime. Nevertheless, the new team managed to

instill some much needed reforms to Empire Blue Cross; by 1996,


14the organization made it to the top ten in terms of Empire Blue

Cross and Blue Shield plans rankings throughout the United States

of America. (Cutler, 2010)

Profits also started to trickle in and these were attributed to

the involvement of Empire Blue Cross in Medicare risk businesses

and numerous community-oriented programs.

THE CONVERSION PROCESS OF EMPIRE BLUE CROSS AND BLUE SHIELD

The lengthy process of conversion of Empire Blue Cross and Blue

Shield from a nonprofit organization to for-profit company took a

total of seven years to complete i.e. from 1995 up to 2002. Much

debate with regard to the conversion process revolved around the

beneficiaries of the company’s assets upon the successful

completion of the switch. In the initial stages, most

stakeholders adopted a philosophical approach by opposing the

conversion of Empire Blue Cross and Blue Shield; they argued that

such a plan would compromise the overall mission of the

organization towards its community. However, with time, these

very stakeholders started to sing a new song in that they began


15to argue in strong support of the conversion process; this is due

to the fact that they had one eye on getting some part of the

assets’ share.

a) THE CONVERSION PROPOSAL

The Empire Blue Cross and Blue Shield was in dire need of

structural re-organization that would overhaul the entire system

so as to bring in some much needed changes. In the year 1995,

plans for converting the organization from a nonprofit status to

for-profit commenced in earnest. This was initiated through a

proposal; this proposal provided for a re-organization of Empire

Blue Cross as a nonprofit organization but with profitable

subsidiaries which were accessible to investors. (Smith, 2004)

However, this proposal was met with stiff criticism from various

stakeholders such as community groups and human rights activists.

Some of these groups argued that this move was aimed at

justifying the Empire Blue Cross and Blue Shield’s previous

exemptions from paying taxes to the federal government. The

magnitude and extent of the public scrutiny and criticism that


16resulted from Empire Blue Cross and Blue Shield proposal made the

organization to re-strategize and thus embarked on a plan to

completely overhaul the company into a fully-fledged for-profit

organization. (Robinson, 2003)

Such an overhaul would call for a complete transfer of its assets

so as to have penetration into the healthcare market with new

capital. Initially, Empire Blue Cross and Blue Shield had

remained adamant that it was the sole owner of the organization’s

assets but this changed upon realization of the complexities

involved in a total conversion; as such, the company began

outsourcing for parties who would acquire its assets but help it

the restructuring process.

b) COMPLEXITIES OF CONVERTING

The provisions of the law towards the end of the 20th Century and

at the beginning of the new millennium outlined that all the

assets belonging to a nonprofit company that intended to convert

to a profit organization must be transferred to a charitable

entity whose mission is to enhance healthcare in various


17communities. For a period of five years beginning 1996, the

political systems in the State of New York collaborated with the

Empire Blue Cross and Blue Shield organization in formulating a

comprehensive strategy of handling the issue of transfer of

assets. (Ducey, 2008)

Apart from the political representatives, various stakeholders

from the civil society were also involved in the proposal

formulation process and these included community groups and human

rights movements drawn from all around the State of New York. The

process of conversion was extremely complicated and the fact that

the ownership of Empire Blue Cross and Blue Shield wasn’t clearly

defined made the process even more difficult. The intense media

scrutiny and public interest the conversion of Empire Blue Cross

and Blue Shield also significantly contributed to the

complication of the process.

The immense political interests and opposition from healthcare

representatives also had a huge role in complicating the

conversion of Empire Blue Cross and Blue Shield in that everyone

wanted to have his or her opinion considered for the final


18decision. The Empire Blue Cross organization’s established in the

1930s had been founded on a specially designed piece of

healthcare legislation; a similar approach to guide its

conversion was widely regarded by many stakeholders as the most

practical way to come to a consensus. (Robinson, 2003)

Based on the advice of the then Attorney General for the State of

New York, Dennis Vacco the Empire Blue Cross and Blue Shield

organization undertook its conversion plans safe in the knowledge

that no change in legislation would be required in order to

facilitate the conversion process; however, events took another

twist when another Attorney General assumed office in the year

1999. Eliot Spitzer, the new AG strongly affirmed that the

conversion of Empire Blue Cross and Blue Shield from a nonprofit

to a profit organization could no be accomplished without

adequate changes in the state law. This prompted Empire Blue

Cross and Blue Shield to file an official application in court

but many experts argued that this would not bear any fruits

without a great deal of political influence. (Smith, 2004)

c) ANTIPATHY FROM THE UNION


19Majority of the healthcare systems in the State of New York were

largely comprised of medical centers with academic interests; as

such, the conversion of Empire Blue Cross and Blue Shield would

greatly ruin their series. Many healthcare insurance

organizations in New York had greatly benefited from the downfall

of Empire Blue Cross and Blue Shield by attracting frustrated

subscribers with very low premiums which translated into low

revenues for the state’s hospitals. These kinds of trends created

a wave of opposition from most hospitals in the State of New

York; this is due to the fact that they considered a move to

convert Empire Blue Cross and Blue Shield from a nonprofit to

for-profit organization as a technique to covert it into an

institution that was unfriendly to hospitals.

Service Employees International Union (SEIU) provided its

unequivocal support to the hospitals’ efforts to oppose the

proposed conversion of Empire Blue Cross and Blue Shield. Under

the auspices of Local 1199, employees were able to exert

tremendous influence in the State of New York’s health care

policies in that the union boasted of more than 200,000 members


20who were all employees in different hospitals from all over New

York. With such a high level of membership, it is easy to

establish the reasons as to why Local 1199 had so much influence;

political figures heavily relied on them in terms of votes.

As such, Local 1199 had the potential to sway the opinion of

politicians by convincing them about the kind of healthcare

facilities that would benefit all Americans. Local 1199 together

with other hospitals from New York strongly opposed the

conversion of Empire Blue Cross and Blue Shield to for-profit

organization from nonprofit status; they cited investor motives

as the main reason behind the conversion plan. (Cutler, 2010)

d) COMMUNITY INPUT

In order to endorse the full transfer of its assets to a

charitable organization, Empire Blue Cross and Blue Shield

strongly collaborated with different stakeholders largely drawn

from communities in the State of New York; patients’ rights

movements were also invited to air their views with regard to the

proposed conversion.


21 As opposed to unionized groups such as Local 1199, the community

groups were is strong support of the conversion process of Empire

Blue Cross and Blue Shield since they were well aware that they

transfer of assets to a charitable organization would

significantly benefit them.

e) THE PROPOSAL OF 2001

The extensive and complicated process of trying to convert Empire

Blue Cross and Blue Shield from a nonprofit organization to for-

profit company continued into the 21st Century; in the year 2001,

the company formulated another proposal for conversion. The main

highlight of the new proposal was that the charitable foundation

that would benefit from transfer of assets would not only benefit

the needy patients but also the State of New York’s annual

budgetary plans. This is due to the fact that the foundation

would significantly lead to a massive subsidy on the cost of

drugs; under normal circumstances, subsidizing health care

services is the responsibility of the State authorities and as

such, this would give them a huge lift. (Robinson, 2003)


22However, this approach changed when the Empire Blue Cross and

Blue Shield proposed to offer a substantial chunk of its assets

to the state authorities; the very community groups that had been

a source of great support for the Empire Blue Cross and Blue

Shield changed their stance and opposed the move. On the other

hand, this approach did not serve to change the opposition

provided by hospitals towards the process. In the month of June

the year 2001, revelations were made concerning the secret

agreements that had been made between Empire Blue Cross and Blue

Shield and the State of New York’s hospitals; these revelations

indicated that Empire Blue Cross and Blue Shield had decided to

establish two different foundations.

One of these foundations would be geared towards enhancing

healthcare services for community groups while the other half

would be devoted towards financing different projects by the

hospitals. This proposal served to calm the hospital

representatives and thus eased their strong stance towards the

conversion process of Empire Blue Cross and Blue Shield from a

nonprofit company to for-profit organization.


23Despite this backroom agreement, the communities felt

shortchanged and offered strong opposition towards the deal. The

unfolding events made a field day for members of the fourth

estate who evaluated the alleged backroom compromise between

hospitals and the Empire Blue Cross and Blue Shield from all

kinds of angles. (Smith, 2004)

f) SECRET AGREEMENT

Local 1199, the vocal union that had previously provided stiff

opposition towards the conversion of Empire Blue Cross and Blue

Shield to a fully-fledged for-profit organization changed their

stance in the year 2001 by adopting a more philosophical approach

towards the entire process. In essence, the union had been

involved in extensive consultations with the State of New York

hospitals with regard to a pending salary increment; however,

over two hundred and twenty million dollars were required on an

annual basis in order to facilitate for the pay rise. On their

part, the healthcare facilities lacked the means to raise such

kind of money. However, considering the fact that the total worth


24of Empire Blue Cross and Blue Shield’s assets was in excess of

one billion dollars, the actualization of the conversion process

would be more than sufficient to fund the pay rise. (Robinson,

2003)

In addition to this, the transfer of the organization’s assets

to a foundation would help the New York State government to

easily finance numerous healthcare programs. This proposal served

every stakeholder excellently including the political systems and

the legislation was passed in the year 2002 during the month of

January; due to the great political interest in the deal, both

the Republicans and Democrats did not provide any opposition to

the legislation and as such, it was endorsed unanimously. This

marked an end to the lengthy process of converting Empire Blue

Cross and Blue Shield from a nonprofit entity into for-profit

organization. (Ducey, 2008)

g) RESPONSE FROM THE FOURTH ESTATE

The media carried different kinds of stories with regard to the

approval of the legislation that endorsed the conversion of


25Empire Blue Cross and Blue Shield into for-profit organization.

Prominent journalists more-so from the leading media houses such

as the New York Times and the Washington Post argued that even

though the deal between the hospitals, employees’ union and

Empire Blue Cross and Blue Shield appeared great, it would only

be beneficial in the short-run. This is due to the fact that the

transfer of the Empire Blue Cross and Blue Shield assets to the

wage increase kitty would only service the pay rise for a period

of three years only. Considering this kind of an issue, they

predicted a looming problem in the near future once the assets

had been exhausted. (Robinson, 2003)

The media houses from the State of New York also argued that the

conversion process of Empire Blue Cross and Blue Shield had

failed to include the input of home health agencies that would

also be greatly affected. The media also questioned how the State

of New York would deal with subsequent applications for

conversion from other nonprofit health insurance companies

throughout the state; they argued that the huge influence of

politics would make adoption of special legislation inevitable


26every time a health insurance company wanted to convert into for-

profit organization. (Cutler, 2010)

h) LEGAL SUITS

Two non-governmental organizations launched a legal battle

against the Empire Blue Cross and Blue Shield in the wake of the

successful conversion process. Interestingly, the two

organizations did not challenge the conversion of the company to

for-profit entity rather they considered the transfer of assets

to the state as being illegal. In their application, the

complainants argued that Empire Blue Cross and Blue Shield’s

assets were private property and as such, the state was not

entitled to take over. However, these complainants were not

successful in that the Supreme Court of the State of New York

failed to endorse the argument and thus dismissed the case.

i) INITIAL PUBLIC OFFERING

Following the successful conversion, an initial public offering

was made for the Empire Blue Cross and Blue Shield shares under

the brand name of WellChoice. Each share was valued at $27 and an


27overwhelming 17 million had been sold in the first 24 hours

alone. This reflected a great change of fortunes from a company

that was more or less valueless in the early 1990s. (Robinson,

2003)

IMPLICATIONS

The successful conversion of Empire Blue Cross and Blue Shield

from a nonprofit organization to for-profit organization might

have been very lengthy and accompanied by numerous kinds of

exchanges; however, this served as a an excellent platform for

other states throughout the united states of America to make

amendments to their legislation with respect to conversion of

nonprofit health insurance companies. In the aftermath of the

conversion of Empire Blue Cross, the approach of transferring the

organization’s assets into a charitable kitty has raised eyebrows

from different kinds of quarters; this is because there might be

other hidden motives in the conversion as it emerged with Empire


28Blue Cross. (Robinson, 2003)

The influence of politicians has also been criticized in terms of

the role they play in conversion processes; experts have argued

that most politicians have no value for private entities more-so

those that develop their own plans and policies internally.

Advocacy movements throughout the United States of America are of

the opinion that the cash generated from the sale of assets of

nonprofit insurers that convert should be entirely dedicated to

community oriented projects such as provision of health care

services and research programs.

CONCLUSION

The conversion process of Empire Blue Cross and Blue Shield from

a nonprofit company to for-profit organization was very lengthy.

Having begun in the year 1995, the process came to an end in the

year 2002. From this research paper, there are several issues

that can be attributed to the lengthy time it took for the

conversion to take place; first and foremost the number of

stakeholders who had an interest in the conversion was quite


29overwhelming. The stakeholders include political figures,

community-based organizations, hospitals, employees’ unions and

the State government of New York. Criticism for the conversion

process began with the formulation of the very first proposal and

continued even after endorsement of the plan by the New York

senate in the year 2002. The media ha also not been left behind

and different media houses like the New York Times have raised

questions with regard to the long-term practicability of the

conversion deal.


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References

1. Robinson, J. C. (2003). The Curious Conversion of Empire Blue Cross.

Project HOPE Inc.

2. Ducey, A. (2008). Never good enough: health care workers and the false

promise of job training. Cornell: Cornell University Press.

3. Smith, M. R. (2004). Governing nonprofit organizations. Harvard:

Fellows of Harvard College.

4. Cutler, D. M. (2010). Frontier in health policy research.

Massachusetts: MIT Press.

5. Sullivan, D. (2004). Proven portals: best practices for planning,

designing and developing enterprise portals. Boston: Pearson

Education, Inc.

6. Weisbrod, B. A. (2000). To profit or not to profit: The commercial

transformation of the nonprofit sector. Cambridge: Cambridge

University Press.

POL SCI 793 Final paper BCBS Conversion non-profit to profit

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