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Maine Partners Health Plan, a joint venture of Blue Cross Blue Shield of Maine and Maine Medical Center in Portland, has applied for licensure as a health maintenance organization. Another similarly structured HMO, Central Maine Partners Health Plan, is a joint venture of Blue Cross and Central Maine Healthcare Corporation in Lewiston, and its licensure application is the subject of a separate but related proceeding, No. INS-96-16. A third proposed "Community-Centered Health Plan," as Blue Cross refers to them, would involve Eastern Maine Medical Center in Bangor.

There has been widespread interest in this innovative proposal by Blue Cross, a Maine nonprofit health insurer, to write much of its future managed care coverage through for-profit subsidiaries. The public hearings held in these two proceedings have drawn by far the highest attendance of any hearings held by the Bureau.

The proponents of the community-centered concept have praised the ability of Blue Cross and the hospitals to respond to changing times and develop a new Maine-based, physician-centered alternative to a trend toward depersonalization of health care and absentee ownership. Others have questioned whether Blue Cross’s choice of particular hospitals as its "Partners," joining the State’s leading health insurer and two of the State’s leading hospitals, might limit consumer choice or unfairly discriminate against other hospitals. In addition, many consumers and health care providers spoke of the hardships of their personal experiences with managed care.

For the reasons set forth more fully below, I have determined that this application cannot qualify for approval in its present form. However, because the application can be modified so as to bring it into compliance with the applicable legal requirements, a conditional approval is warranted rather than an outright denial.

A serious deficiency is a lack of appropriate safeguards to make sure that Blue Cross’s sworn commitment – to operate these for-profit subsidiaries only in support of their owners’ nonprofit mission – can and will be kept in the future. The need to make this commitment more binding is demonstrated by Blue Cross’s troubling declaration in this hearing that it is not a charitable organization, which contradicts its charter, its enabling law, and its half-century and more of distinguished service to the people of Maine.

Therefore, the licensure of these joint ventures must be conditioned on an obligation to operate them only for the same "nonprofit health plan" purposes as Blue Cross itself, with restrictions on the transfer of stock from its current charitable ownership. Additional financial regulatory conditions will also be established, consistent with the regulatory framework for nonprofit insurers, and these conditions will also help protect against a possible adverse effect on competition in the health care market. With these conditions, however, these plans if successful could be a valuable addition to the range of health coverage options available to the people of Maine.

Factual Background and Procedural History

This is an application for health maintenance organization (HMO) licensure submitted by Maine Partners Health Plan (MPHP), Associated Hospital Service of Maine d/b/a Blue Cross Blue Shield of Maine,¹ and Maine Medical Center (MMC), a general hospital in Portland. MPHP, the proposed licensee, is a stock corporation owned 50% by Blue Cross and 50% by MMC. MPHP, Blue Cross, and MMC have all been named as parties to this proceeding and will be referred to collectively as the "Applicants."

¹Variously referred to as "Blue Cross," "BCBSME," "BCBS," and "AHS."

The other parties to this proceeding are St. Mary’s Regional Medical Center and the Maine People’s Alliance, which have been granted permission to intervene, and a Bureau of Insurance Advocacy Panel designated by the Superintendent.² The Maine People’s Alliance and Maine Alliance of Interdependent Neighborhoods (collectively, the "Public Interest Intervenors"), are consumer advocacy groups, and St. Mary’s is a hospital in Lewiston. Mercy Hospital in Portland also participated fully in the hearing, but resolved its dispute with the Applicants and withdrew as a party before briefs were filed.³

²It is standard Bureau of Insurance practice for the Superintendent to appoint an advocacy panel in HMO licensure proceedings, Holding Company Act proceedings, and other situations in which a separation of functions is necessary to avoid a conflict between the Bureau’s adjudicatory function and the Bureau’s advisory, investigatory, and enforcement functions. The advocacy panel is given organizational autonomy and is represented by separate counsel. In accordance with the Maine Administrative Procedure Act, 5 M.R.S.A. § 9054–9055, and the Maine Insurance Code, 24-A M.R.S.A. § 216(5), the advocacy panel has the same procedural status as would another state agency intervening in the case, and is subject to the same prohibition as other parties against private communication with the Superintendent and the rest of the hearing panel. The same advocacy panel, under the direction of Deputy Superintendent Alessandro Iuppa, is participating in both this proceeding and the Central Maine Partners proceeding.

³The other intervenors, which withdrew before the hearing commenced, were York Hospital, Kennebec Valley Medical Center, Mid-Maine Medical Center, the Maine Health Alliance, and Franklin Memorial Hospital. The Maine Education Association Benefits Trust also applied to intervene, but withdrew its application before the parties were designated.

The purpose of this proceeding is to determine whether the proposed licensee satisfies the qualifications for licensure set forth in the Maine Health Maintenance Organization Act, 24-A M.R.S.A. §§ 4204(2-A),⁴ and whether the formation of this new domestic insurance company is in compliance with the requirements of the Maine Insurance Holding Company Act, 24-A M.R.S.A. § 222(7)(A). The substance of these statutory requirements is explained in the body of the decision as they arise.

⁴Pursuant to 24-A M.R.S.A. § 4204(2-A)(A) & (B), the Commissioner of Human Services must also determine whether the proposed HMO either qualifies for a certificate of need, or is exempt from the certificate of need requirement and meets specified quality assurance requirements. On March 17, the Commissioner certified the Applicants’ compliance with these criteria.

Although the Advocacy Panel and hospital intervenors moved to consolidate this proceeding with the Central Maine Partners proceeding, No. INS-96-16, the two proceedings were coordinated for scheduling purposes but were consolidated only for the purpose of taking evidence on the charitable obligation issues. The need to evaluate separately the other issues in these separate applications was underscored when Mercy Hospital, which had challenged the exclusivity of the MPHP provider agreement, withdrew from both proceedings upon entering into an agreement in principle to participate in the MPHP network. The CMPHP network continues to exclude St. Mary’s and St. Mary’s continues to challenge both joint venture applications.

The public hearing in this proceeding commenced on January 14, 1997. The first day of the hearing was held in Portland and was dedicated to comment and testimony by members of the public. The final day of testimony was February 6, and the record closed on March 18 upon the submission of the parties’ reply briefs.

With regard to the specifics of this application, as noted earlier, MPHP is a for-profit corporation, the capital stock of which is owned 50% by Blue Cross and 50% by MMC. MPHP proposes to sell to employers located in Cumberland County and within a 30 mile radius of Maine Medical Center, but has applied for a service area encompassing Cumberland, York, Sagadahoc, Lincoln, and Knox Counties.⁵ BCBS and MMC have each committed to an initial investment of $1.5 million in MPHP and subsequent capital contributions of $2.25 million. MPHP Exh. 13.

⁵Outside the area served by MMC-PHO, the Management Services Agreement with Blue Cross provides for the use of the HMO Maine network.

BCBS has been a licensed Maine nonprofit hospital and medical service organization for many decades and is the largest health insurer in the State of Maine. More precisely, Associated Hospital Service of Maine, doing business under the name Blue Cross Blue Shield⁶ of Maine, is a nonprofit hospital and medical service corporation organized and regulated under Title 24 of the Maine Revised Statutes,⁷ and it holds the largest share of a market that comprises health insurance companies, health maintenance organizations, and Blue Cross.⁸ The health coverage market can also be viewed more broadly, as also encompassing administrative services for self-funded plans and for other insurers. Blue Cross in recent years has acquired third-party administrators that were active in both the health and workers’ compensation markets in Maine, and Blue Cross has also contracted with MPHP to provide its administrative services.

⁶"Blue Cross" and "Blue Shield" are trademarks used under license from the Blue Cross and Blue Shield Association, based in Chicago.

⁷Insurers and HMOs are organized and regulated under Title 24-A, the Maine Insurance Code. When Blue Cross plans were first established, the coverage that Blue Cross plans and HMOs provided was generally considered to be "prepaid medical services," not insurance. As discussed below in the analysis of Blue Cross’s charitable obligations, the subsequent evolution of the health care and insurance industries and of the governing law has rendered that distinction less significant. Blue Cross is "sufficiently analogous to that of the insurance industry, which is a matter of public interest, to be likewise of public concern" and appropriately regulated by the Superintendent. AHS v. Mahoney, 213 A.2d 712, 717 (1965) (citation omitted).

⁸The only other licensed Title 24 corporations, Delta Dental and Maine Vision Services, do not provide comprehensive health coverage.

BCBS offers a variety of traditional fee-for-service, HMO, Medicare supplement and federal employer plans. As of 1991, BCBS was predominantly a fee-for-service company and insured close to 50% of the overall health insurance market in Maine. Since that time, three trends have adversely affected BCBS’ competitive position. These are the emergence of self-insurance, greater interest by major employers and national accounts in managed care, and (redacted) MPHP Exh. 3, pp. 3–4 and 1/15/97 tspt., p. 82 (Vangeison testimony); 1/29/97 tspt., pp. 198–200 (Foster testimony); MPHP Exh. 19 (resp. #38). (redacted) are reflected in a reduction of BCBS’s subscriber base from (redacted) as (redacted) to (redacted) as (redacted). See MPHP Exh. 185.

Traditionally, health insurance was offered primarily on an "indemnity" basis; that is, the patient would receive treatment, pay the doctor’s bill or the hospital bill, and then be reimbursed for all or some percentage of that bill by the insurance company. Although Blue Cross used direct payment to providers rather than indemnity reimbursement, see former 24 M.R.S.A. § 2301(9), its coverage was also structured on a fee-for-service basis. In recent years, however, HMO coverage and other "managed care" plans have become more common. Managed care has not yet come to dominate the market in Maine in the same way as it has in many other states, but the percentage of the Maine market covered by fee-for-service plans has still declined. Blue Cross has responded to this trend by offering HMO coverage under the "HMO Maine" trademark;⁹ this product line now accounts for a substantial portion of its subscriber base. In the managed care arena, BCBS now faces competition from a number of HMOs licensed to do business in Maine. These include Healthsource Maine, NYLCare, Harvard Pilgrim Health Care, Tufts Health Plan, and Health Plans/ Martin’s Point.

⁹HMO Maine was originally a separate nonprofit HMO under common management with Blue Cross, but in 1994 merged into Blue Cross after legislation was enacted authorizing nonprofit health service organizations to own HMOs or to provide HMO coverage directly. 24 M.R.S.A. § 2301(3-A)(E).

MMC is a 600-bed nonprofit teaching hospital located in Portland, Maine. MPHP Ex. 2, p. 2 (Caron testimony). MMC serves as a tertiary referral center for Maine and [is] the principal provider of inpatient community hospital care services for the greater Portland region." Id., p. 5. Through the medium of the Maine Medical Center Physician-Hospital Organization ("MMC-PHO"), discussed below, MMC is to be the primary provider of hospital services to the members of MPHP. MPHP has also assembled a network of participating hospitals within its service area to serve members living outside Portland.¹⁰

¹⁰Pursuant to a letter agreement dated February 24, 1997, MPHP has also agreed to accept Mercy Hospital, also located in Portland, into the hospital network. Mercy had intervened in opposition to the application at the beginning of this proceeding to challenge its original exclusion from MPHP. The parties entered into the letter agreement after the hearing ended. Mercy’s motion to withdraw its opposition to the application was granted on March 11, 1997.

MPHP has contracted for the delivery of both physician and hospital services to subscribers with MMC-PHO, a nonprofit organization whose members are the Maine Medical Center and the Portland Community Physicians Organization (PCPO). MPHP Ex. 35, 37. The MMC-PHO was formed to offer a ready-made provider network to managed care organizations such as HMOs and PPOs (preferred provider organizations). Originally, the MMC-PHO rather than MMC was the 50% joint venturer with BCBS in MPHP.

MMC-PHO will serve as a contracting and medical management vehicle in a managed care environment. This application proposes that through a series of contracts — including a Network Agreement between MPHP and MMC-PHO (Filing, tab 21); Network Access Agreement between MMC-PHO and PCPO (Filing, tab 8C); Participating Hospital Agreement (Filing, tab 8B); and a Network Participating Physician Agreement (Filing, tab 8A) — the physician members of PCPO, MMC, and other health care professionals commit and obligate themselves to provide health care services to MPHP enrollees. This delivery system includes 106 primary care physicians and over 240 specialists. Filing, tab 7A (Marketing Plan). Ancillary providers, primarily consisting of the existing HMO Maine network, are available for those employees living outside of the service area, or in cases where a required network provider is not reasonably available. See Filing, tab 21, p. 15 (Network Agreement); Filing, tab 25 (Actuarial Memorandum).

This application proposes that marketing, claims processing, administration and financial accounting functions will be provided by BCBS as set forth in a Management Services Agreement. Filing, tab 22.

MPHP proposes to initially offer a "lock-in" HMO product only. Filing, tab 25 (Actuarial Memorandum). Under a lock-in HMO, enrollees are limited to obtaining nonemergency services from the provider network described above unless otherwise authorized by the primary care physician.¹¹ Although individual policies will be offered as required by 24-A M.R.S.A. § 4204(2-A)(N), the principal target market for MPHP is employers of 25 or more employees. Filing, tab 7A (Marketing Plan).

¹¹In this respect MPHP differs from CMPHP, which plans to offer both lock-in and point-of-service ("POS") HMO products. The POS offered by CMPHP does not limit enrollees to network providers, but does require payment of a deductible and coinsurance from patients who self-refer out-of-network.

MPHP originally projected 33,500 total enrollees by year-end 1999. This has since been revised upwards to 33,900. MPHP Ex. 47 (Updated pro formas). Of this 33,900, 26,229 are expected to migrate from other BCBS products. MPHP Ex. 23; see also MPHP Ex. 4, p. 24, n. 1 (Foster testimony). These 26,229 members include 17,329 from HMO Maine (MPHP Ex. 23) and (redacted) 1/15/97 tspt., pp. 324–25 (Foster testimony).¹²

¹²(redacted) MPHP Exh. 17.

HMO Maine’s total enrollment within Cumberland, York, Sagadahoc, Knox, and Lincoln Counties was 38,993 as of 1996. MPHP Exh. 23. Thus, within its first three years of operation, MPHP is expected to attract 44.4% of HMO Maine’s enrollment in that service area. The projected enrollment for MPHP at year-end 2001 is (redacted) members. MPHP Ex. 47.

Under the terms of the Network Agreement (Filing, tab 21), network physicians and network hospitals (redacted). See sec. 5.1 and Exhibit 8 to the Network Agreement. (redacted).

Under the traditional capitation model, physicians and physician groups who participate in managed care programs accept the risk that the cost of services provided (or authorized) by their individual practices will stay within the prenegotiated capitation rate.¹³ (redacted).

¹³No party has raised as an issue in either proceeding whether the proposed global capitation arrangements would result in the physician-hospital organizations acting as unlicensed insurers or health maintenance organizations, and this Decision and Order makes no determination on that question. The record makes clear that a variety of creative risk-sharing arrangements are already in place in the market, and legislative clarification in this area is currently being explored.

MMC’s 50% ownership of the new HMO, and the risk-sharing arrangement reflected in the Network Agreement, will be critical to the success of MPHP:

Q: How do you expect this new HMO to be able to lower the price in the marketplace?

A: We expect to be able to charge lower prices for these new products for two reasons. First, we will be able to obtain lower prices from providers since they will have a stake in the success of the venture and, at the hospital level, will share in the rewards of a successful venture as a half owner of the HMO. Second, by at least initially limiting our provider panel, we can expect to be able to deliver additional volume to providers and thus make up any income they may fear could be lost by virtue of offering the HMO lower prices.

MPHP Exh. 4, p. 3 (Foster testimony). The expectation of BCBS, MMC and the PCPO doctors is that hospitals and physicians will actively participate and collaborate in new patterns of practice that will lower payor costs. MPHP Exh. 2, pp. 13–15 (Caron testimony); 1/15/97 Tspt., pp. 109–10 (Vangeison testimony);

The provider panel’s active involvement in medical management is integral to MPHP’s prospects of success. MPHP may present a true opportunity for local input and control in a managed care environment that does not currently exist in a managed care environment.

I support the Maine Medical Center Blue Cross HMO effort because I think it offers this community the best chance for a smooth transition into a managed care arrangement and I say this for several reasons. First, this HMO will allow for local governance and input from local physicians. The rules, guidelines, credentialing, quality assessment, will all be done here by local officials and physicians. We physicians will have a substantial input into the plan and will not have it imposed upon us from the outside. We will have a good working relationship with the plan's medical director and will be able to carry out our practice, taking care of patients, in a cooperative rather than adversarial fashion, as is so often true with other managed care organizations that we've all had experience with. ....Physician input has been sought and listened to, and this is a very good thing.

(Tspt. 1/14/97, pp. 206–07: testimony of PCPO member Dr. Marc Miller) See also both pages of the October 18, 1996 edition of First Friday, the MMC-PHO newsletter, included in MPHP Ex.h 9 (document #s PHO 3470–71).

MPHP is relying on these new structural relationships with MMC and physicians as its primary means of achieving long-term cost savings. 1/15/97 Tspt., pp. 109–10 (Vangeison testimony). The truth of these assumptions will be quickly put to the test. Arthur Andersen consulting actuary Robert Hoyer testified that to achieve the claim cost and medical expense targets on which its rates are premised, (redacted). Adv. Panel Exh. 2, pp. 1–3.¹⁴ (redacted). Id., p. 3.

¹⁴The prefiled testimony of Arthur Andersen consultants Robert Hoyer and Mark Leicester is in large part a restatement of the text of a report they wrote as consultants to the Advocacy Panel, entitled "Financial Review of Maine Partners Health Plan and Central Maine Partners Health Plan." Adv. Panel Exh. 1.

The MPHP board will initially have twelve directors, six of whom are to be nominated by each of the two shareholders. By-laws, § 4.2 (MPHP Ex. 12) A "class vote," that is, favorable action by the six BCBS director nominees and by the six MMC nominees, is required for most major decisions of the corporation, including changes in service area. By-laws, § 4.9 (MPHP Ex. 12) ; MPHP Exh. 13 (Shareholders Agreement, § 7)

The shareholders agreement also contains mutual noncompetition and right of first refusal clauses. Both BCBS and MMC agree not to own or operate a competing HMO in MPHP’s service area, and each has conferred on the other a right of first refusal with respect to any new business products. Section 6.3 also contains a clause whereby BCBS pledges to "use its best efforts to giving priority to marketing the Corporation’s products to BCBS’ existing and potential managed care and indemnity customers."

MMC has given MMC-PHO an option to purchase all its shares. MPHP Exh. 14. (redacted).

General HMO Licensure Requirements

Although the most contentious issues in this proceeding arise out of the innovative features of these joint ventures, this application is first and foremost an application to charter and license a new domestic health maintenance organization. Both the Holding Company Act and the HMO Act, as noted above, enumerate a number of criteria with which the Applicants, like all others similarly situated, must comply in order to ensure, inter alia, that the company has sound financial management and can and will provide meaningful access to quality care within its proposed service area. This application has undergone extensive review and revision since it was first filed, and the Applicants’ compliance with most of these criteria is uncontested. However, certain specific issues remain.

 

Financial Issues

Pursuant to 24-A M.R.S.A. § 4203(3)(I), applications for a certificate of authority must include a financial feasibility plan. The essential elements of that plan are detailed in Bureau of Insurance Rule 191 and require financial and enrollment projections as well as descriptions of the methodologies employed in the development of those projections. MPHP has, in Exhibit 1, Tab 26, §§ A–F, supplemented by responses to various Advocacy Panel discovery requests, satisfied these financial feasibility requirements and has provided the basis for assessing the economic viability of the proposed HMO.

In their report and testimony, Arthur Andersen consultants Robert Hoyer and Mark Leicester make that assessment and offer a number of conclusions regarding the validity of the projections and the adequacy of the proposed capital contributions. The following excerpts from their report (Adv. Panel Exh. 1) highlight several of those conclusions.

(REDACTED)

It is clearly Arthur Andersen’s opinion that to the extent the applicant’s assumptions err, they will most likely err in a manner which may require greater capital than is presently anticipated. Specifically, the references above all imply faster growth and/or lower margins, which are precisely the cited ingredients for producing the need for additional capital. Recognizing the limitations of projections for performance three to five years hence, it is the Superintendent’s conclusion that it is necessary for MPHP to provide an annual update of its projections including a variance report for the most recent period and an analysis of its prospective capital requirements.

 

Adequacy of Network/Quality Assurance

The applicant has filed a detailed quality assurance plan as required by 24-A M.R.S.A. §§ 4203 and 4204. The applicant will follow the quality program currently in place for HMO Maine.

The applicant has filed a complaint system as required by 24-A M.R.S.A. § 4203 and will follow the standards currently in place for HMO Maine.

 

Access in the Bridgton Area

For employers located in Bridgton, Harrison, and Naples, Northern Cumberland Memorial Hospital (NCMH) will not be a network provider despite the fact that it is a local facility and the provider of choice for many local residents. Those towns as well as the facility are in Cumberland County; however, the facility is part of the CMPHP network. For that reason additional cost sharing will be required to access the facility by employees of employers from Cumberland County.

Information was provided by Blue Cross that indicated that it is likely that a redefinition of the service areas of the two HMOs will be sought in the future in the towns of Bridgton, Harrison and Naples. Those towns would likely be removed from the Maine Partners Health Plan service area and moved to the CMPHP service area for marketing purposes. See generally Application of Central Maine Partners Decision and Order, No. INS-96-16. If that happens, these access issues will no longer be directly relevant to this application, although MPHP may well have a role to play in facilitating the resolution of CMPHP’s access problems.

As currently proposed, however, the application fails to demonstrate how this model serves the public interest when residents of the border regions of the county are denied access to their hospital of choice at the most favorable benefit structure. The application contains no plan for responding to this situation through contractual arrangements between the two plans, with the HMO Maine or Blue Cross and Blue Shield networks, or otherwise.

There was testimony that an insurance plan should be structured to accommodate people who live in a community accessing their local hospital. No determination has been made whether the most effective manner of responding to this situation is to realign the service areas by moving certain towns to the CMPHP service area. However, statistics indicate that most residents of Bridgton and Naples prefer to go to Portland for medical care not available locally. There are a number of ways of addressing this local access issue. All of them assume cooperation between the applicants as a necessary element of the solution. In order to approve this application, it is necessary that the two plans, along with BCBS, coordinate in order to address customer and access concerns.

Subsidiary Question

In its Brief, the Advocacy Panel expresses concern that because Blue Cross only owns 50% of each joint venture, these companies would not be considered "subsidiaries," and would therefore be subject to the investment restrictions of 24-A M.R.S.A. §§ 1156(2)(F) and 1155(2),¹⁵ which limit total equity investments to 20% of admitted assets and any one investment to 10% of admitted assets. According to the Advocacy Panel, the reason these investments must be considered portfolio investments rather than investments in subsidiaries is that Blue Cross in their view is not a "controlling party" within the meaning of the Holding Company Act, 24-A M.R.S.A. § 222(F).

¹⁵Applicable to nonprofit health service organizations pursuant to 24 M.R.S.A. § 2301(9-A)(A).

The Applicants disagree, providing an extensive analysis explaining why they believe that Blue Cross is a controlling party and the joint ventures are subsidiaries, and assert further that the issue is not properly before the Superintendent in the first place because it is not a statutory criterion for approval and was not raised by any party in its designation of issues.

There is no compelling reason to make an exception to the general principle that issues not properly presented should not be decided, because the classification of an investment as a portfolio investment or a subsidiary investment is generally resolved through the Bureau’s regular examination process. There is no urgency in deciding this issue sooner, because the initial investments of Blue Cross in these joint ventures are small enough relative to the overall Blue Cross asset position that the investments do not come close to the 10% or 20% thresholds referenced above.

Due Diligence

The advocacy panel has recommended that the application be denied due to the failure of MPHP’s shareholders to exercise due diligence in the formation of MPHP. Specifically, the advocacy panel charges that BCBS failed to give sufficient information to its board of directors to enable informed decisionmaking; that the shareholders failed to fully explore the feasibility of organizing CMPHP as a nonprofit corporation or limited liability company rather than as a business corporation; and that BCBS gave considerably more value to MPHP than did CMHC.

MPHP Exhibit 9 is a narrative summary and compilation of BCBS management’s contacts with the board regarding the three community health projects proposed for Bangor, Portland, and Lewiston. Much of this material is extraneous, and (redacted).

(REDACTED) CMPHP Ex. 9, p. 4.

There is no contemporaneous documentation of any focused discussion regarding the corporate form the new entity should assume. In April, 1996, counsel inquired of the Bureau on a "no name" basis if organization of an HMO as an LLC was permissible. MPHP Ex. 193 (Stipulation of Facts). The essence of the Bureau’s response was that regulatory ambiguities precluded any easy answer to this question, and that it could have taken up to a year "to finalize the Bureau’s position given the competing priorities of the Bureau at that time." Id. How BCBS and CMHC assimilated this information is best described in a December 13, 1996 legal memo from the same counsel: (redacted) MPHP Exh. 76, p. 2, n. 1.

With respect to the feasibility of organizing the new HMO as a nonprofit corporation, Mr. Vangeison testified that BCBS "quickly came to the conclusion that that probably was not possible." 1/15/97 Tspt., p. 73; see also MPHP Ex. 3, p. 13.

Arthur Andersen consultant Mark Leicester charged that the the claimed lack of board involvement and too-hasty choice of a for-profit corporation were tantamount to a lack of due diligence. See 13-B M.R.S.A.§ 716. Mr. Leicester (redacted). Adv. Panel Ex. 3, pp. 4–5.

Relying on Arthur Andersen consulting actuary Robert Hoyer, the Advocacy Panel suggests that the 50–50 capitalization of MPHP undervalues the actual contribution of BCBS to the enterprise. Adv. Panel Ex. 2, pp. 10–13 (Hoyer testimony). According to Mr. Hoyer, the shareholders agreement places no value on the existing BCBS subscribers whom the BCBS pro formas assume will migrate to MPHP. Mr. Hoyer estimates the resultant net loss of profits to BCBS to be in the range of (redacted) (Adv. Panel Ex. 2, p. 10), and suggests that compensation in this amount is due BCBS. Id., p. 11. This block of business represents an opportunity contribution to the enterprise that BCBS can offer no one other than its equity partner. cite to transcript. This is not true of MMC’s chief intangible contribution, the MMC-PHO, which is not offering its services exclusively to MPHP. Rather, the MMC-PHO, which includes the hospital, is willing to bargain with any payor.

BCBS unconvincingly maintains that the assumed loss of customers to the new HMO has no economic value. More to the point, MMC refused to consider the venture unless capitalization and equity were both shared equally, and both parties perceived their respective intangible contributions to be of equal value.

The advocacy panel denominated the first two concerns—i.e., level of board involvement and choice of corporate form—as "process issues." However, it is the outcome of that process, not the process itself, that must be the primary focus. MPHP will be granted or denied a certificate of authority based on the application as actually filed, rather than on the quality of the internal planning and decisionmaking which resulted in the application. Certainly, poor planning, bad choices and uninformed decisionmaking can result in a deficient or defective application, but that is not the thrust of the advocacy panel’s position. Unless the advocacy panel can show that the application itself fails to meet any of the criteria in the HMO law or the Holding Company Act, or other applicable regulatory requirments, the process and relative equity issues will not take precedence over the filing itself.

The respective roles of board and management in corporate decisionmaking raise complex issues of fiduciary responsibility which need not be decided in this instance. The due diligence standard on which Mr. Leicester premises his conclusions is nowhere made a criterion for decision in the HMO law or Holding Company Act, either explicitly or implicitly. The degree to which the BCBS directors made informed or uninformed decisions falls within the realm of the business judgment rule, as set forth in Rosenthal v. Rosenthal, 543 A.2d 348, 352–54 (Me. 1988) and Central Maine Power Co. v. Public Utilities Commission, 405 A.2d 153, 177–79 (Me. 1979). Absent some indication of fraud or bad faith, neither of which are present here, the Superintendent cannot second-guess the BCBS board. Rosenthal makes quite clear that even if the directors had indeed failed to exercise due diligence in approving the transaction, such approvals could only be upset if they resulted from fraud or bad faith. 543 A.2d at 353.

The same principles compel rejection of the Advocacy Panel’s contentions that the joint venturers’ choice of a business organization is fatally flawed. First, 24–A M.R.S.A.§ 4214(1) appears to give organizers of a subsidiary HMO considerable latitude in choosing the business form to be assumed by the new company. It also appears dubious that a non-staff-model HMO such as MPHP, even if it passes the threshold hurdle of Internal Revenue Code ("IRC") § 501(m) that it not be providing "commercial-type insurance" as a substantial part of its activity, would qualify for federal income tax exemption under IRC § 501(c)(3) or (4) if organized as a nonprofit corporation. Sound Health Association v. Commissioner, 71 T.C. 158, 1978), acq. 1981-2 C.B. 2; Geisinger Health Plan v. Commissioner, 985 F.2d 1210 (3d Cir. 1993), sub. op. 30 F.3d 494 (3d Cir. 1994).¹⁶ If tax-exempt status were achieved under §501(c)(4), a further complication would be MPHP’s inability, as a tax-exempt organization, to distribute any share of its profits back to co-parent BCBS, which is not federally tax-exempt. See IRC § 501(c)(4). Second, there is no evidence that fraud or bad faith underlay the organizers’ rejection of the nonprofit form, bringing that decision within the scope of the business judgment rule as well. The same lack of fraud or bad faith insulates from oversight in this proceeding the joint venturers’ decision to forego organizing MPHP as an LLC, despite the more favorable tax opinion given by counsel.

¹⁶See Hyatt and Hopkins, The Law of Tax-Exempt Healthcare Organizations (John Wiley & Sons, Inc. 1995), §§ 9.1–9.3.

The Advocacy Panel contends further that the Board imprudently ignored the value of the existing Blue Cross customer base when negotiating the relative equity contributions of the parties, but that claim is likewise within the scope of the business judgment rule.¹⁷ The relative equivalence of consideration is not a licensing criterion, and exemplifies the type of after-the-fact review cautioned against in Rosenthal v. Rosenthal: "Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to the directors’ honest and unselfish decision…" 543 A.2d at 353 (emphasis added). The restricted choice of large hospitals and BCBS’ strong desire to partner with MMC as part of its planned community health system are both factors that could support a good-faith that the 50-50 arrangement made good business sense.

¹⁷However, these allegations do also raise questions regarding the stewardship of charitable assets, which will be discussed separately in the analysis of the "conversion" issues.

Impact on Competition

Pursuant to 24-A M.R.S.A. § 222(7)(A)(2), the Superintendent cannot approve an insurance acquisition that would substantially lessen competition in insurance in this State, tend to create an insurance monopoly, or violate Maine or federal laws relating to monopolies or restraints of trade. At the hearing, Mercy Hospital offered extensive expert testimony regarding the allegedly anticompetitive effects of the application as it was then structured. However, the agreement between MPHP and Mercy has narrowed the competitiveness issues in this proceeding considerably.¹⁸ The only legal issue that remains in dispute with regard to the competitive impact of the MPHP application is whether it is part of an unlawful "market allocation scheme," as alleged by St. Mary’s. See St. Mary’s Br. at 4–10. For the reasons set forth below, I conclude that it is not.

¹⁸A more global analysis of the market impact of the community-centered health plans can be found in the Central Maine Partners Decision.

St. Mary’s claim is based on the lack of overlap between the service areas of the two joint ventures. MPHP’s marketing area consists primarily of Cumberland County, although its proposed service area extends outward to York, Sagadahoc, Knox, and Lincoln Counties. CMPHP’s marketing area consists of Androscoggin and Oxford Counties only.

However, the operating territory of the each HMO was agreed upon by the shareholders of the respective corporations during the organizing stage of each. See the definitions of "Service Area" that appear in the two Shareholder Agreements. That is, BCBS and CMHC agreed that CMPHP would operate in the two central Maine counties, and BCBS and MMC (or MMC-PHO) agreed that MPHP would operate in the five southern-coastal counties. There is no evidence that the two HMOs themselves conspired to divide marketing and/or service areas between them. Rather, BCBS, in its separate negotiations with CMHC and MMC/MMC-PHO, was the driving force in determining what the service area of each would be. The lack of any agreement between affiliated corporations distinguishes these HMO applications from the Copperweld line of cases relied upon by St. Mary’s.

Moreover, there is no anticompetitive effect stemming from CMPHP and MPHP each operating in discrete areas. St. Mary’s overlooks the fact that the choice of market (or service) area is not determined solely by the HMOs themselves. Rather, approval of the applicants’ market areas lies with the Superintendent. There is no apparent procompetitive benefit in requiring each of the HMOs to compete in the other’s territory.¹⁹ BCBS rightly states that requiring CMPHP and MPHP to sell to the same large group of employers would in effect be tantamount to BCBS competing against itself.

¹⁹The Superintendent’s active supervision of HMO marketing areas and provider access as part of the licensing process brings St. Mary’s claim of anticompetitive conduct by CMPHP and MPHP within the scope of the state action immunity to antitrust liability. See, e.g., Parker v. Brown, 317 U.S. 341 (1943); Southern Motor Carriers Rate Conference v. United States, 471 U.S. 48 (1985). Thus even if St. Mary’s had shown an otherwise unlawful allocation of market areas by competitors, no antitrust violation would exist.

Unlike the competing suppliers of title insurance, eyeglasses, tractors and telephone directories involved in the case law relied upon by St. Mary’s, the health care services offered by CMPHP and MPHP are not fungible. Except for the Northern Cumberland border problem, MMC and MMC-PHO and CMMC and the regional PHO provide community care to different populations that, due to geography and access difficulties cannot realistically choose between one provider network or the other. This inherent limitation on any meaningful competition between CMPHP and MPHP is mirrored by those provisions of the HMO law that require an HMO to provide adequate access to providers within its service area. See 24-A M.R.S.A. §§ 4202-A(10)(D), 4204(2-A)(K)–(L). It is difficult to discern how either of the two HMOs, as currently structured, could qualify for a certificate of authority to operate in the other’s territory.

A further significant factor in determining that the joint ventures would not substantially alter the overall competitive relationship between Maine Medical Center and Central Maine Medical Center is that these hospitals would continue to deal separately with all other insurers, and will also deal separately with Blue Cross for all business transacted outside the joint ventures. Because it is limited to one of many payors, and only to a portion of that payor’s business, the de facto confederation resulting from the shared joint venture alliances does not demonstrably impede competition to the detriment of consumers.

Charitable "Conversion" Issues²⁰

The HMO licensing law authorizes issuance of a certificate of authority only if "Nothing in the proposed method of operation … is contrary to the public interest." 24-A M.R.S.A. § 4204(2-A)(F). The Advocacy Panel, the public interest intervenors, and various individuals testifying during the public comment sessions have all expressed concern that the approval of these applications might result in or facilitate the conversion of Blue Cross from a nonprofit charitable corporation to a for-profit enterprise. In addition, the Advocacy Panel’s expert witnesses have offered persuasive testimony that the transfer of business from the parent to the two joint ventures could cost Blue Cross a total of between $6.1 million and $10.1 million in lost income from nonrenewed contracts. In light of Blue Cross’s significant market presence and historical existence as an entity born out of statute in 1939, the statutory public interest inquiry compels a thorough exploration of these issues.

²⁰The Maine Partners and Central Maine Partners proceedings were partially consolidated for purposes of considering the issues discussed in this final portion of the Decision, which is identical, verbatim, to the corresponding portion of the Central Maine Partners Decision.

A threshold matter is whether BCBSME is a charitable corporation at all, and if so, whether issues relating to BCBSME’s charitable obligations are properly before the Superintendent in this proceeding.

Jurisdictional Questions

Although BCBSME now disavows its charitable status, as have several other Blue Cross plans in states with similar laws, there is no room for reasonable dispute on this point. Associated Hospital Service of Maine "is hereby declared to be a charitable and benevolent institution." P.L. 1939, ch. 24, § 15 (emphasis added); accord, 24 M.R.S.A. § 2311. The various arguments advanced by BCBSME, in support of its claim that it is not a charity, are relevant only to whether it is in compliance with its charitable obligations, not to whether those obligations exist. The history of Blue Cross’s charitable service, and its repeated affirmations of its charitable status, are discussed in more detail in the next section, Historical Background.

However, the Applicants also contend that even if BCBSME is a charitable corporation, the Superintendent should not be considering the "conversion" issues at this time, either because the Superintendent does not have jurisdiction over these issues; because the Advocacy Panel and public interest intervenors do not have standing to raise these issues; or because this proceeding is not a proper forum in which to consider these issues.

The notion that the Superintendent does not have jurisdiction to hear and decide questions relating to BCBSME’s charitable obligations because "the Attorney General has exclusive jurisdiction over charitable trust issues" confuses the concepts of "jurisdiction" and "standing." The Attorney General’s role is not adjudicatory, so the concept of jurisdiction does not even apply to the Attorney General’s charitable trust enforcement powers. There are many matters over which the courts have exclusive jurisdiction, and the Superintendent has no authority to hear and decide those matters, but questions of compliance with Title 24 are at the heart of the Superintendent’s jurisdiction. Likewise, although the outer limits of the statutory "public interest" standard for HMO licensure can reasonably be debated, the public interest is definitely in the balance when the operation of the proposed HMO results in a fundamental restructuring of a nonprofit health service organization in a manner that calls into question its ongoing commitment to its charitable obligations.

The presence of charitable trust issues does not alter that jurisdiction in any way. Nothing in the charitable trust enforcement statute, 5 M.R.S.A. § 194, or in any case construing that statute, says that the Attorney General can only exercise his enforcement powers in a particular forum or suggests in any other way that the Superintendent should be divested of his jurisdiction in these matters. Indeed, the duty to preside over the dissolution of a charitable corporation — perhaps the highest responsibility under charitable trust law — is expressly conferred upon the Superintendent when the corporation is governed by Title 24, as is the case with respect to this organization. See 24 M.R.S.A. § 2310.

Nevertheless, the Applicant’s contention that the Attorney General has exclusive standing to raise charitable trust issues warrants serious consideration. In Fitzgerald v. Baxter State Park Authority, 385 A.2d 189, 195, as the Applicants stress, the Law Court cited with approval Professor Austin W. Scott’s treatise, The Law of Trusts, observing (emphasis in the original) that "In other jurisdictions it is an oft-repeated precept that only the Attorney General has the authority to enforce such charitable trusts." However, the Baxter Park Court characterized "that precept as a starting point," not as a bright-line rule, and ultimately granted standing to the private plaintiffs in that case. The Court expressly noted that an established exception to the sole standing rule permits "specially interested beneficiaries to bring suit to enforce a charitable trust intended for their benefit." Id., 385 A.2d at 196 n.11 (citing A. Scott, The Law of Trusts § 391). Furthermore, the specific purpose the Law Court identified for restricting standing was "protecting charities from a harassing multiplicity of suits." Id., 385 A.2d at 195. That is not a problem with respect to these proceedings. Indeed, resolving the charitable conversion issues in the context of an already ongoing licensing proceeding would advance these considerations of judicial economy, not hinder them.

Historical Background

In order to understand the nature of the charitable obligations at issue in these proceedings, it is necessary to examine them in their historical context.

BCBS was originally incorporated under the general nonprofit corporation law on an interim basis,²¹ and was then incorporated by private and special act of the Legislature in 1939. See P. & S.L. 1939, ch. 24, entitled "An Act to Incorporate the Associated Hospital Service of Maine." Its charter was initially limited to operation of a nonprofit hospital service plan under which contracting hospitals agreed to provide services to "such of the public as become subscribers to said plan." P. & S.L. 1939, ch. 24, § 3. The new corporation was not permitted to commence operation until it had first been licensed by the insurance commissioner pursuant to a new statute of general applicability passed for that purpose at about the same time. P.L. 1939, ch. 149, entitled "An Act to Provide for the Organization of Nonprofit Hospital Service Corporations." P. & S.L. 1939, ch. 24 emphasized the nonprofit nature of BCBS, and Blue Cross’s charter expressly stated that "This corporation is hereby declared to be a charitable and benevolent institution, and its funds and property shall be exempt from taxation." P. & S.L. 1939, ch. 24, § 15. The new licensing law similarly stated that "Every corporation subject to the provisions of this act is hereby declared to be a charitable and benevolent institution, and its funds and property shall be exempt from taxation." P. L. 1939, ch. 149, § 10. Near-identical language is found in state enabling statutes nationwide.

²¹Webb, Paul A., Blue Cross and Blue Shield of Maine: A History, (Blue Cross and Blue Shield of Maine, Portland, 1982), 8, 22–23.

This was more than mere rhetoric or legal boilerplate. At the time of these enactments, private health and hospitalization insurance "was virtually nonexistent." The Great Depression strapped the financial ability of individuals and families to pay for hospitalization, which resulted in intensified demands on hospital resources for the provision of charity care. As a result, hospital revenues plummeted. The American Hospital Association promoted state legislation which would both guarantee care to low-income persons and also develop a stable source of payment to hospitals. Sylvia A. Law, Blue Cross / What Went Wrong? (Yale University Press 1974, pp. 6–9. "Blues plans were organized on a not-for-profit basis and were dedicated to fulfilling a community service role. Accordingly, these plans sought to offer affordable coverage to all individuals, regardless of health status." "Blue Cross and Blue Shield: Experiences of Weak Plans Underscore the Role of Effective State Oversight," U.S. General Accounting Office (Letter Report, April 13, 1994, GAO/HEHS -94-71).

There is little in the record of this proceeding relating to the early history of BCBS. However, a wealth of detail is available in Blue Cross and Blue Shield of Maine: A History, written by Paul Webb, BCBS’s first executive director, and published by BCBS in 1982.

The formation of BCBS was part of the nationwide Blue Cross movement that was sweeping the country. The idea of a nonprofit hospital service plan for Maine was first suggested by the executive secretary of the Portland Community Chest in the fall of 1937, following which a study committee was appointed by Maine General Hospital (the predecessor of MMC) in early 1938. Webb, p. 8. BCBS originally conducted business from the office of the Community Chest. Webb, p. 13. The first paragraph of an October 10, 1938 introduction letter to employers emphasized BCBS’s philanthropic purpose:

For the past few months a small group of Portland citizens have, with cooperation of the American Hospital Association, been attempting to formulate a sound and practical plan for a non-profit hospitalization service for citizens of Portland and State of Maine. The Associated Hospital Service of Maine has applied for and received its charter. This Association incorporated "without capital stock" is a non-profit, self-sustaining organization, administered by a Board of Directors who serve in their capacity without remuneration. The ideal [in] back of this Association is entirely one of community service.

Reprinted at Webb, p. 6 (emphasis added). An undated solicitation letter seeking to enlist participating hospitals similarly stated that "Associated Hospital Service of Maine has been formed for the purpose of rendering a community service on a non-profit basis." Reprinted at Webb, p. 10. These announcements were met with a laudatory editorial from the Portland Press-Herald on November 14, 1938 extolling the "potent humanitarianism" of the hospitalization plan that "everyone can afford." "To those who have been instrumental in bringing the Associated Hospital Service to Portland and to Maine the public owes a debt of gratitude." Reprinted at Webb, p. 14. A copy of this editorial in its entirety is attached to this decision as Exhibit A. BCBS’s charter was amended in 1943 to allow it to offer nonprofit medical services as well as nonprofit hospitalization services. P. & S.L. 1943, ch. 21. Other expansions of its authority followed in succeeding years. Of special note is P.L. 1965, ch. 458, in which the Legislature removed BCBS’s authority to offer extended benefit plans in response to the Law Court’s decision in Associated Hospital Service of Maine v. Mahoney, 161 Me. 391, 412 (1965). This emergency legislation declared that "[i]t is in the public interest that Associated Hospital Service of Maine be authorized to continue to operate its present Blue Cross - Blue Shield Plans so that the subscribers of said plans may continue to be protected against the unfortunate financial impact of future illnesses," and section 3 of the statute affirmed that the incorporation of BCBS was "ratified and confirmed and made valid in all respects."

In 1994 most aspects of BCBS’s charter were folded into the successor of the general licensing statute for nonprofit hospital and medical service organizations. See P.L. 1993, ch. 702, §§ A-18 through A-30. Although most of the original charter provisions were repealed or substantially amended at this time, the declaration of BCBS’s charitable and benevolent status in P. & S.L. 1939, ch. 24, § 15 was left intact and remains in force today. Likewise, the parallel declaration contained in the original licensing law, P.L. 1939, ch. 149, § 10, still survives as 24 M.R.S.A. § 2311.

The details of Blue Cross’s charitable mission were never codified in law. Initially, before commercial health insurance was widely available, merely providing access to health coverage at all was generally considered a significant community benefit. After the advent of commercial insurance, the principal distinguishing features of Blue Cross plans were open enrollment, community rating, and direct payment. In addition, the Maine Blue Cross plan formerly had a special membership category called "service benefit" membership for some low-income enrollees, who were not required to pay coinsurance for professional services.²²

²²Official notice has separately been taken of an approved Blue Cross group contract from the early 1980s which includes service benefit provisions. The MPHP Applicants have subsequently furnished the supplemental information that the service benefit was negotiated through collective bargaining and the coinsurance waiver was subsidized by Blue Cross member physicians.

Open enrollment meant that all consumers, regardless of health status, had a source for health coverage, while community rating — charging all subscribers the same premium rates — made this access to coverage meaningful as long as Blue Cross retained a sufficiently broad subscriber base that its rates could remain competitive.

In response to competition from commercial insurers and the relatively low cost of self-insurance, Blue Cross plans abandoned community rating in the large group market by the 1950s, and this experience-rated large group business became Blue Cross’s largest product line. This led to criticisms that Blue Cross was evolving into just another insurance company, and eventually to significant reductions in the federal tax benefits for Blue Cross plans. Blue Cross, however, justifies that mode of operations by emphasizing that it is in the public interest for it to maintain a broad base of coverage, and that even its experience-rated operations provide economies of scale, expertise, and a larger asset base which enhance its ability to serve the entire range of public needs. See 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990).

Furthermore, long after the emergence of a commercial health insurance industry, BCBS continued to serve as a "carrier of last resort" for many persons whose medical conditions prevented them from obtaining coverage from commercial insurers. This pattern persisted until the enactment of guaranteed issue, guaranteed renewal, and community rating reforms in the early ‘90s which were applicable to all health insurers doing business in Maine. See P.L. 1991, ch. 861; P.L. 1993, ch. 477. See also CMPHP Exh. 13, resp. #78; CMPHP Exh. 20; Tspt., 1/22/97, pp. 236–37 (Foster testimony); Tspt., 1/30/97, pp. 192–93 (Vangeison testimony).

Blue Cross’s Charitable Obligations — An Overview

A core issue in this proceeding is whether operation of CMPHP and MPHP may lead to a conversion of BCBS’s assets from a public charitable purpose to private gain. The underlying legal principle is that charitable assets must only be used for charitable purposes. Attorney General v. First United Baptist Church of Lee, 601 A.2d 96, 98 (Me. 1992). The threshold question for decision is whether the value of BCBS can be characterized as charitable assets impressed with a public trust.

Unlike the Lee case, BCBS was not established by gift of a testator as a charitable trust. Nor, according to counsel, does BCBS solicit or accept charitable donations as do typical charitable organizations. MPHP Br. at 58. Distinguishing between a nonprofit corporation and a charitable nonprofit corporation, BCBS claims to be the former, but not the latter, and specifically disclaimed any charitable obligation at hearing.²³

²³See testimony of Keith Vangeison as quoted below in the "Charitable Purpose" section.

For two reasons, BCBS’s disclaimer is unconvincing. First and foremost is the Legislature’s establishment and repeated affirmation of BCBS as a charitable and benevolent institution. While BCBS dismisses these provisions (MPHP Br. at 58), this legislative determination is conclusive.²⁴ Notwithstanding some criticisms of Blue Cross’s "ostensibly charitable character," the Law Court ultimately acknowledged in Associated Hospital Service of Maine v. Mahoney, 213 A.2d 712, 723, 161 Me. 391, 412 (1965), that BCBS was a "charitable organization," if only "by legislative fiat rather than by its nature."

²⁴In this regard, it is significant that at least until 1966, BCBS was the only nonprofit health services corporation licensed under 24 M.R.S.A. §§ 2301 et seq. and its predecessors. P.L. 1965, ch. 458, emergency preamble. There is little doubt that the statement of charitable and benevolent purpose in the licensing law was thus specifically directed to BCBS.

Secondly, BCBS’s present contention that it has no charitable purpose is belied by the circumstances which led to its formation (recounted above) and by the company’s own statements of its mission and purpose. In addition to the early documents already discussed, BCBS’s representations to the Law Court in the Mahoney litigation are significant.²⁵ In those legal briefs, BCBS repeatedly characterized itself as a charitable, nonprofit corporation, and strongly argued that it was a charity: "AHS is a charity, and it follows that, by giving AHS broader powers, the public good is thereby served." A key fact relied upon by BCBS to bolster its charitable status in that case was that "the original capital investment of the plaintiff was underwritten by private persons as a charitable gift." Public Interest Intervenors’ Reply Brief, App. A.

²⁵In its opening brief and reply brief, MPHP argues that upon dissolution BCBS’s assets would be distributed to its members by dint of 24 M.R.S.A. § 2310 rather than to a charity. This, BCBS argues, is another indication of its noncharitable status. MPHP Br. 59; MPHP Rep. Br. 4, n.2. BCBS’s present position is again contradicted by its representations to the Law Court in the Mahoney case, where it argued:

In 1982, BCBS emphasized its public service in a report submitted to Governor Brennan in response to a study that had been commissioned on hospital cost containment:

Our most serious concern with the Board’s recommendations is that there would be repercussions to the Blue Cross system for financing the delivery of health care. The Blue Cross method is to provide coverage for health care on a non-profit basis to the widest possible segment of the population at the lowest possible cost. This coverage is extended to those who would otherwise have difficulty obtaining affordable coverage. Coverage is not cancelled because of poor health experience by the subscriber, and it includes broad conversion privileges for those who change or lose their jobs. Other unique features of the Blue Cross method are the support of statewide health planning and utilization review programs, health promotion programs, and direct financial support of such programs as the Poison Control Center.

We are concerned that the changes envisioned by the Board could result in a higher and unfair payment to hospitals, and that this in turn would result in both higher subscription rates for our members and a reduction in the unique services noted above.

"Blue Cross and Blue Shield of Maine’s Review of the Health Facilities Cost Review Board Report / Hospital Cost Containment in Maine / Study and Recommendations" (February 1982).

Although BCBS notes that, until recently, nothing in law compelled the company to perform these activities (CMPHP Br. 81, n. 28), that is precisely the point: BCBS historically offered affordable health and hospitalization insurance to a market segment that profit-driven commercial insurers chose not to serve until forced to do so by the legislative enactments noted above.

BCBS unquestionably resembles commercial insurers in many respects. Cf. Mahoney, supra. However, BCBS’s express establishment as a charitable and benevolent institution, its performance of that mission, and its past articulations of that mission necessarily lead to the conclusion that BCBS was formed to benefit the public health and welfare, that it has done so, and that it has received favorable state and federal income tax treatment as a result of that mission. As such, BCBS is a charitable nonprofit corporation. See Voelker v. Saint Louis Mercantile Library Ass’n, 359 S.W.2d 689, 694 (Mo. 1962) ("The owner of property may devote it to charitable purposes not only by transferring it to trustees in trust for such purposes, but also by transferring it to a charitable corporation."); Nacol v. State, 792 S.W.2d 810 (Tex.. App. 1990) (corporation organized for purposes benefiting a large and indefinite group of people is a charitable trust).

On March 24, 1997, the New Jersey Superior Court ruled that the statutory establishment of Blue Cross and Blue Shield of New Jersey as a "charitable and benevolent association" conclusively determined that organization’s status as a charity. See also Blue Cross and Blue Shield of Missouri v. Angoff, et al., Case No. CV196-619CC (Mo. Cir. Ct., 12/30/96, appeal pending), where the court held that the Blues’ transfer of 80% or more of its nonprofit health plan business to a for-profit subsidiary was inconsistent with the Blues’ nonprofit purposes and rendered the company subject to dissolution proceedings.

Property held by a charitable corporation is subject to the same restrictions as property held by a charitable trust:

Ordinarily the principles and rules applicable to charitable trusts are applicable to charitable corporations. Where property is given to a charitable corporation without restrictions as to the disposition of the property, the corporation is under a duty, enforceable at the suit of the Attorney General, not to divert the property to other purposes but to apply it to one or more of the charitable purposes for which it was organized.

Restatement (2d) of Trusts § 348, comment (f). Accord, IV Scott on Trusts § 348.1 (4th ed. 1989). This charitable trust is imposed on all assets of a charitable corporation. Pacific Home v. Los Angeles County, 41 Cal. 2d 844, 264 P.2d 539, 543 (1953). The next question for decision is whether the organization of MPHP and CMPHP constitutes a diversion of charitable funds from their charitable purpose, or may lead to such a diversion of charitable funds sometime in the future.

Charitable Purpose

Charitable assets must only be used for charitable purposes. Attorney General v. First United Baptist Church of Lee, 601 A.2d 96, 98 (Me. 1992). However, the chief operating officer of Blue Cross, when asked about his organization’s charitable obligations, explained: "I will just simply say that I don’t view Blue Cross as a charity, as a charitable trust.... [W]e don’t engage in charitable activities such as the provision of free health care or subsidized health care." [Vangeison 1/30 at 192]

This stark testimony makes clear that a "conversion" of sorts has already taken place. Blue Cross now seems to argue that it is really functionally identical to a mutual insurance company,²⁶ and that its charitable status was essentially an anomaly of tax policy. Even if the charitable status was established primarily for tax reasons, the obligations the Blue Cross incorporators assumed in return were real, serious, and important. If there was a bargain struck, Blue Cross must carry out its end, and remain true to its charitable purpose.²⁷

²⁶Furthermore, in the unlikely event of the termination or dissolution of A.H.S., then the entire assets, would be paid to the general hospitals of Maine, who have participated in the underwriting risks of this corporation. These assets do not belong to the subscribers. The subscribers are not entitled to any rebate of premium, any "dividend", or any other form of the assets of the corporation. This is in stark contrast to the policyholders of a mutual insurance company or the stockholders of a stock insurance company, who do share in the reserve surpluses of their respective companies.

²⁷Public Interest Intervenors Rep. Br., App. A. See also Mahoney, supra, 161 Me. at 412.

This is not to belittle the very real problems BCBSME now faces in redefining its mission. In many ways, the distinctions between Blue Cross plans and commercial insurers have been diminishing. As pure community rating became less feasible in the marketplace, Blue Cross rating practices have increasingly resembled commercial rating practices. See, e.g., 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990); 1991 HealthChoice Decision, No. INS-91-8 (Me. Bur. Ins. 4/24/91). Meanwhile, health reform laws have also made commercial insurers operate more like Blue Cross plans traditionally operated. Through the years, Blue Cross had served as the insurer of last resort, with the mission of providing affordable coverage to the broadest possible subscriber base. See, e.g., 1992 Companion Plan Decision, No. INS-91-52 (Me. Bur. Ins. 11/26/91) However, commercial insurers and HMOs now must also take all applicants in the small group and individual lines of insurance so the only remaining distinction in this regard is that Blue Cross and Blue Shield of Maine does not have the option of leaving the State of Maine if it decides the pastures are greener across the border.

Beyond the provision of "bona fide nonprofit health care plan[s]," 24 M.R.S.A. § 2305(1), the precise contours of the charitable obligations of a nonprofit health service corporation have not been sharply defined in the statute. This general purpose provides both a guidepost for the long-range mission of the organization, and the necessary degree of flexibility in carrying out that mission in a changing environment.

Blue Cross has disavowed any affirmative charitable purpose. None the less, it has continued to provide the public with health plan services, has continued to regard itself as a responsible corporate citizen with the public obligations that status entails, and has continued to operate under fiduciary strictures against the waste or misapplication of corporate assets. Thus, even if the organization has abandoned some of its historical direction, neither has any real harm been done.

Nationwide, the insurance market is undergoing a wave of demutualizations, nonprofit conversions, and similar restructurings. In these applications, Blue Cross and Blue Shield of Maine is proposing to move a substantial portion of its book of business into a structure that is conducive to equity investment, even though this is not its current purpose. For all of these reasons, Blue Cross will be faced with important decisions over the next few years which will require careful attention to the question of who owns Blue Cross and why.

In this climate, it is recommended that Blue Cross and Blue Shield develop an affirmative program for implementing its charitable mission. In their briefs and testimony, the Applicants have described a number of charitable activities that Blue Cross Blue Shield of Maine does not engage in at this time, such as the provision of some level of subsidized health coverage to the needy. An excellent starting point for Blue Cross’s search for future public service options would be to explore which of those activities might be feasible and appropriate, in the context of Blue Cross’s particular experience, capabilities, and statutory mission.

It must be kept in mind, however, that the decision whether the Blue Cross will provide health coverage on a charitable or commercial basis cannot be based on their perception of the best interests of Blue Cross as an insurance company. For stock insurers, generating income for the owners is the goal, and providing services to customers is the way they accomplish that goal. For nonprofit insurers, by contrast, providing service is the goal, and transacting business in the marketplace — while it is every bit as essential a function as providing customer service is for the commercial insurer — is merely the means by which that goal is accomplished. A charitable corporation can have no business interests that are separate and apart from its overriding commitment to the public interest. In theory, hence, it is possible that Blue Cross, after giving full consideration to the range of possible charitable activities, may decide that "nonprofit health plans" are either no longer desired by the community or no longer feasible, and that Maine needs another grant-making foundation more than it needs a nonprofit alternative to commercial health insurance. and its managers and directors have the fiduciary duty to subordinate their personal and collective self-interest to the charitable purposes they were hired to carry out.

The significance of these issues to the two applications is the concern that the business purpose of the new HMOs may be in conflict with the charitable purposes of their owners. Because the community-centered health plan concept cannot be characterized as "incidental," it is not a sufficient response to those concerns to say that a charity may engage in commercial activity that is incidental to its overall charitable purposes.

Managed care is already a significant sector of the Maine health insurance market, and is expected in the future to become an even greater modality of coverage as it has in other regions. When the business operations become the primary focus of attention, the charitable focus of the parent can be dangerously diluted. The evidence indicates that these "community-centered health plans" are intended to be the primary vehicle for Blue Cross managed care business in the not too distant future. If the more expansive predictions of the future of managed care also come true, the joint venture HMOs may thus become the center of gravity for the entire Blue Cross and Blue Shield enterprise. Therefore, if Blue Cross were to channel its managed care efforts into providing coverage on a commercial basis, the effect would be precisely the de facto "creeping conversion" that the public interest intervenors and Advocacy Panel fear, in which the value of Blue Cross’ business may gradually shift over time to CMPHP and MPHP without any compensation having been paid to Blue Cross.

Nevertheless, though there is definitely the potential for that sort of conflict of interest, that conflict is not irreconcilable. The key to reconciling it is establishing conditions of approval that are appropriate to implement the Applicants’ assurances that the subsidiaries will be operated in furtherance of the nonprofit purposes of their parents. Without such conditions in place, these applications could not be approved as anything other than the preliminary stages of a conversion process; the Applicants have been emphatic that no conversion is intended at this time, and the type of evidence and analysis that might support a conversion was not offered by any party.

The first of these conditions, in some sense the most fundamental, is a simple one. The purpose of these subsidiaries, as here presented by the Applicants, is not to sell commercial insurance as a revenue-raising venture, but to provide the next generation of Blue Cross coverage through a different vehicle. There is no conflict between the charitable purposes of the parent and the commercial purposes of the subsidiary if the subsidiary is not being operated for commercial purposes. In order to assure that the subsidiaries will be operated in furtherance of the charitable purposes of their parents, this must be expressly stated as a corporate purpose through amendment of their Articles of Incorporation. The core statutory purpose of Blue Cross is the issuance of bona fide nonprofit health plans, 24 M.R.S.A. § 2305(1), and these HMOs must be managed as an integral part of that operation, not merely as a vehicle for raising revenue.²⁸

²⁸Not only are these positions inconsistent, both of them are incorrect. As the public interest intervenors have explained, 24 M.R.S.A. § 2310, 13-B M.R.S.A. § 1104(1)(D), 13-B M.R.S.A. § 103(3), and the 1978 technical correction amendment to 13-B M.R.S.A. § 102(4) are all in pari materia. Any dissolution proceeding supervised by the Superintendent would proceed according to 24–A M.R.S.A. §§ 4351 et seq., except that any distribution of assets remaining after the various expenses, charges and claims enumerated in subsections (1)–(9) would be payable to one or more organizations performing charitable functions similar to those of BCBS, pursuant to 13-B M.R.S.A. § 1104(1)(D), rather than to the "stockholders or other owners of the insurer" as specified in 24-A M.R.S.A. § 4379(10).

Conditions providing for consistent oversight of expenses and rating practices across the enterprise as a whole will further act to harmonize the purposes of these joint ventures with those of their charitable parents. With these conditions, the "for-profit" form of ownership is appropriate. A for-profit structure for nonprofit purposes may sound at first like an oxymoron, but the Applicants have testified persuasively that it is the logical way to implement their goals, steering a middle course between a true nonprofit corporation — which may be unable to return income to its owners — and a true business corporation, which would operate for the primary purpose of generating wealth for its owners.

If used for the appropriate purposes, the operational flexibility available to stock corporations is desirable. It would be counterproductive to impose rigid conditions that would either require or forbid these HMOs to be operated at a profit. There are a number of ways they could be operated in the public interest, ranging from issuing subsidized coverage at a level that would keep them operating at or near a break-even basis to using dividends from the HMOs for the benefit of other, less self-sustaining lines of coverage for which there is a public need.

These are not mutually exclusive options — a different mix may be desirable as conditions change. One public benefit that Blue Cross continues to provide is the dependable availability of a broad range of health coverage statewide, including: fee-for-service, preferred-provider, and HMO coverage for individuals, families, small, and large groups; Medicare supplement coverage; federal employee coverage; administrative services for self-funded employers. The synergies, mutual support, and economies of scale provided by a broad subscriber base enhance Blue Cross’s ability to meet the public’s needs in whichever markets happen to be underserved at a particular time or place. See 1990 Companion Plan Decision (Me. Bur. Ins., January 8, 1990). It is in the public interest to maintain the ties between all of the Blue Cross lines of business, and not to sever them through a "good company/ bad company" split-up.

While there is therefore a wide range of management discretion as to how best to apply the HMO’s revenue toward its public purpose, one option that is not available is allowing wealth to accumulate at the subsidiary level for investment purposes. There need not necessarily be any significant profits, but if there are they must be appropriately distributed in a timely manner to the nonprofit owners. That must be a second condition of approval.

Charitable Assets

In summary, three ways have been identified in which the establishment of these subsidiaries might lead to some type of "conversion": (1) if individuals or for-profit entities obtain an ownership interest in the subsidiaries; (2) if the subsidiaries are operated in a manner incompatible with the charitable mission of their parents; or (3) if business becomes concentrated in the subsidiaries in a way that reduces Blue Cross to being primarily a holding company for for-profit enterprises. The conditions established up to this point are designed to forestall the likelihood of the two latter "indirect conversion" scenarios, where the assets remain in charitable hands but are used in a manner that conflicts with the owners’ charitable purposes. However, the organization of these joint ventures as stock corporations could also facilitate a straightforward direct conversion of all or part of the charitable assets themselves. It cannot be forgotten that the formation of for-profit Blue Cross subsidiaries in California and Missouri was quickly followed by public stock offerings. PII Exh. 1, pp. 7–9, 1/30/97 Tspt., p. 91 (Rosenfeld/Collins testimony)

Indeed, both joint venture transactions do contemplate the possible sale of the shares. The CMPHP Shareholders Agreement also notes the possibility of a public stock offering. CMPHP Exh. 21, §§ 1(a)(xi), 2. In the case of CMPHP, current plans include the sale by CMHC of its share of the company to affiliated physicians, although transfers to other persons are permissible only upon the vote of 75% of the directors. In the case of MPHP, MMC has given the Maine Medical Center Physician-Hospital Organization, Inc. ("MMC-PHO") an option to purchase all its shares. MPHP Exh. 14. The option may be exercised at any time after December 31, 1997. (The option agreement also notes the possibility of earlier transfers by MMC to other hospitals and/or PHOs.) These shares will be made subject to a restriction on resale contained in the MPHP shareholders agreement. MPHP Exh. 13. But if the option is exercised, nothing prevents the new mix of shareholders from amending their agreement to permit resale of the transferred shares. The restrictions on transfer contained in the CMPHP shareholders agreement can similarly be lifted by the shareholders at a later date.

The purpose as stated in the MPHP option agreement can certainly be accepted as a worthy purpose which advances the public service goals of Blue Cross and its partners: "to establish a meaningful role in the governance of the HMO by the health care providers who have agreed to provide health care services to enrollees of the HMO" (MPHP Exh. 14, p. 1) Nevertheless, the exercise of the MPHP stock option, or the sale of CMPHP stock to physicians, would transfer charitable assets into private hands and would therefore amount to a partial conversion. Furthermore, even though current restrictions on resale of shares partially address concerns about the potential for absentee ownership, the future profitability of CMPHP and MPHP may make them attractive targets for takeover bids. Relying on contractual provisions without imposing corresponding regulatory restrictions would thus set the stage for subsequent transfers of CMPHP and MPHP stock to investors who may be less committed to the nonprofit purposes of BCBS, CMHC, and MMC than the present shareholders. In addition, if this occurs, any appreciation in the value of the stock will represent a further diversion of charitable assets to private hands.²⁹

²⁹BCBSME’s claim that assets are to be distributed to "members" upon dissolution is ambiguous, since participating providers and professionals are also members of BCBSME. In any event, no authority has been cited for that claim, and it is inconsistent with BCBSME’s charitable obligations. See supra note 25.

A valuation is not necessary, however, in order to quantify how much of the value ultimately derives from contributions, how much from operations, how much might ultimately be attributable to the benefits of the tax exemption, and so on. That question is irrelevant to the calculation of how much of the value of Blue Cross and Blue Shield of Maine is held in charitable trust. That calculation is simple — all of it. This includes all of the value of its subsidiaries, as long as those subsidiaries are 100% charitably owned. Concerns have been raised that once a joint venture HMO had built up value independent of the contributions of its charitable parents, it might be argued that only the book value of the corporation is impressed with a charitable trust, and any remaining goodwill or going-concern value has a for-profit character. This is not correct. If such value does not belong immediately to the corporation’s charitable parents, and therefore ultimately to the public, to whom else could it possibly belong?

The further claim has been raised that establishing CMPHP and MPHP as stock corporations may not merely be cause for concern about the potential for conversion, but actually be a conversion per se. However, this view is based on an incomplete understanding of the possibilities of this corporate form. As discussed in the preceding section, Charitable Purpose, the use of the for-profit mode of corporate organization does not necessarily indicate that Blue Cross is being converted in whole or part to a business corporation. As long as the joint venture is devoted exclusively to the furtherance of the charitable purposes of the parent shareholders and all stock remains in the hands of its charitable parents, there is no change in the character or ownership of charitable assets.

Traditionally, corporate shareholders are investors and their purpose is to make money, but the joint venture shareholders have testified that their purposes remain unchanged, and that their choice of corporate form was driven by necessity and should not imply any intent to form a business corporation in the conventional sense of the term. The Legislature has expressly granted nonprofit health service organizations the power to "own ... a health maintenance organization ... as a subsidiary or affiliate." 24-A M.R.S.A. § 2301(3-A)(E). This language spells out that one option which is available for providing HMO coverage is to do so through a subsidiary corporation, which by definition stands in a for-profit relationship to its parent corporation, whatever its relationship to the general public may be. Therefore, the formation and licensure of a stock HMO subsidiary does not by itself amount to a conversion of Blue Cross assets, provided the necessary safeguards for the assets are established at the outset. If that is not done, the only appropriate action is to conduct the valuation of the company at that time, before placing even one foot on the slippery slope. Consequently, a third condition of approval will be that no stock of the HMO may be sold, transferred, or given as security; no stock may be issued; and no rights in the stock may be assigned, except with the prior approval of the Superintendent. Consideration will be given to sale or transfers to charitable organizations with a healthcare mission. Any proposed sale, transfer, issuance, pledge, or assignment of stock to an entity lacking a charitable mission will need to be accompanied by a proposed plan to guarantee that the charitable assets of BCBS will continue to be used in their entirety for charitable purposes.

Planning for the Future

Unlike the "typical" conversion case, BCBS does not propose to sell or transfer outright any of its assets to either company. Rather, the fear is what witnesses Stephen Rosenfeld, Esq. and Kathleen Collins, Esq. of the Community Health Assets Project referred to as a "creeping conversion." Public Interest Intervenors ("PII") Exh. 1, pp. 7–8.³⁰ Under this scenario, the value of Blue Cross’ business may gradually shift over time to CMPHP and MPHP without any compensation having been paid to BCBS.

³⁰Ironically, if the company were to be structured now or prospectively as a mutual insurance company owned by its policyholders (as the company is already authorized to do under existing law, 24 M.R.S.A. § 2301(9-B)), it could arguably then consider a demutualization that would vest in a large segment of Maine’s citizens (i.e. past and present policyholders) a quantifiable majority interest in the company, while providing the company with the ability to attract new capital.

Assuming for the moment that these applications are approved and licenses are issued, it is important to consider how to identify the point at which a conversion of BCBS’s assets may have occurred, before we are past that point. It is worth noting that BCBS has not formally assigned any of its policies to MPHP and CMPHP. Nevertheless, the distinction between a formal assignment of contract rights and a transfer of customer goodwill at renewal is not particularly significant here.

It is not possible to predict the future. However, past statements of BCBS, the likely sales patterns of CMPHP and MPHP, the provisions of the shareholder agreements and related instruments, and experience elsewhere all point to the likelihood that if these applications are approved without conditions, a conversion will eventually occur.

BCBS currently insures (redacted) Maine residents. MPHP Exh. 16. The third-year projection for CMPHP is 13,700 covered lives, of whom 6,485 are expected to migrate from other BCBS products. Of the 6,485 existing BCBS enrollees, 3,500 will be drawn from HMO Maine.³¹ HMO Maine is the only managed care product of general applicability currently offered by BCBS. BCBS’s five-year enrollment projection from CMPHP is 19,900 covered lives. CMPHP Exh. 15.

³¹Blue Cross should give serious consideration to amending its Bylaws to admit to full voting membership all persons covered under health plans issued through subsidiaries either by expanding the definition of "Subscriber Members" or by creating a fourth class of voting members.

For MPHP, the third-year projection is 33,900 covered lives (Mercy Exh. 9), of whom 26,198 are expected to migrate from other BCBS products. MPHP Exh. 4, p. 24, n. 1 (Foster testimony). These 26,198 members include 17,329 from HMO Maine (MPHP Exh. 23) and (redacted) 1/15/97 tspt., pp. 324–25 (Foster testimony).³² BCBS’s five-year enrollment projection for MPHP is (redacted) covered lives. MPHP Exh. 47.

³²This would frustrate the goal of MMC, whose treasurer testified to the hospital’s intent that "the dollars stay within our system and are totally 100 percent captured within our system." 1/15/97 Tspt., p. 204 (testimony of William Caron).

Despite the current standstill in the efforts to establish a community centered health plan with EMHC in Bangor, BCBS forecasts the eventual formation of an "eastern/northern Maine venture." BCBS’s five-year projection (including the CCHPs) forecasts a January 1999 start-up for the eastern/northern Maine venture at an estimated volume of 35% of MPHP’s three-year enrollment level, which would figure to 11,865 covered lives (33,900 x .35 = 11,865). MPHP Exh. 16. The year-2001 enrollment projections for the three planned CCHPs thus total 80,865 covered lives.

This is consistent with BCBS’s latest five-year enrollment forecast, found in MPHP Exh. 16, which appears in the form of two stacked-bar charts dated December 5, 1996 and an accompanying narrative entitled "Summary of the Effects of Proposed Community-Centered Health Plans Upon Associated Hospital Service of Maine." The chart which assumes operation of the CCHPs shows them accounting for (redacted) covered lives as of December 2001, which is (redacted) of the projected (redacted) overall enrollment in BCBS and the CCHPs at that time.

For some of the reasons set forth by Arthur Andersen consultant Mark Hoyer, the Superintendent finds that the actual enrollment in MPHP and CMPHP is more likely to exceed BCBS’s projections than to fall below them. Adv. Panel Exh. 2 (CMPHP), pp. 6–8; Adv. Panel Exh. 2 (MPHP), pp. 5–7. Chief among these is Mr. Hoyer’s assessment that the migration rate from HMO Maine to the Partners plans is likely to exceed BCBS’s projections.

The Partners products will enjoy a premium advantage over HMO Maine. The benefits provided by the lock-in and POS versions of the Partners products and HMO Maine are comparable. An entry in the minutes of BCBS’s May 15, 1996 board of directors meeting (redacted). This was also the providers’ understanding. An April 4, 1996 memo from James Kane, CMHC’s director for integrated health care, stated that "virtually all of the current BCBS enrollment in Central and Western Maine will be transitioned into this new company." St. Mary’s Ex 15. These materials bolster Mr. Hoyer’s assessment that (redacted).

This is particularly applicable to MPHP in light of the February 1997 decision to include Mercy Hospital in the MPHP provider network. Although the MPHP provider panel is not as broad as the HMO Maine provider panel in southern Maine, the inclusion of Mercy eliminates much of the difference between MPHP and HMO Maine in greater Portland from the purchaser’s point of view.

Promotion of the CCHPs at HMO Maine’s expense is not only BCBS’s intent. It also appears to be its binding obligation. The CMPHP and MPHP shareholder agreements not only obligate BCBS to use its best efforts in marketing the new products to existing BCBS HMO and fee-for-service customers (CMPHP Exh. 21, p. 17; MPHP Exh. 20, p. 13); the MPHP agreement requires BCBS to "give priority" to those efforts. In a related vein, both shareholder agreements give CMPHP and MPHP a right of first refusal within their respective service areas for all new lines of business that BCBS may propose to write (and vice versa). The likely effect of these provisions is that all product development and marketing initiatives will be funneled to MPHP and CMPHP, leaving BCBS, as time goes on, only with what little business it is unable to transition into the new managed care subsidiaries.³⁴

³³The Public Interest Intervenors submitted as their Exhibit 1 the joint prefiled testimony of Mr. Rosenfeld and Natalie Seto, Esq. At hearing, Ms. Collins was substituted as a witness for Ms. Seto without objection.

³⁴See also (redacted) MPHP Exh. 11.

Consistent with Mr. Hoyer’s testimony, I also find that the prospect of either MPHP or CMPHP expanding its service area is a real one. This could take the form of MPHP obtaining network providers beyond the current 30-mile radius from Portland in an effort to attract new groups located further from Portland. (redacted) 1/15/97 Tspt., pp. 295–302 (Vangeison testimony). Finally, I also concur with Mr. Hoyer’s testimony that implementation of a statewide (or cross-service area) coverage agreement by MPHP and CMPHP could lead to a modest increase in enrollment.

These and other contingencies led Mr. Hoyer to opine that CMPHP’s actual enrollment could (redacted), and that MPHP’s actual enrollment (redacted). This testimony, and the findings recited above, lead to the conclusion that the BCBS estimate of (redacted) of its existing business being in the CCHPs by the end of 2001 is too low. Based on the evidence, it is reasonable to expect that the three CCHPs will account for 33% or more of BCBS’s business by that time.

During the 1997 – 1999 period (i.e., years 1–3), BCBS will have also transferred to CMPHP and MPHP without compensation many millions of dollars in lost revenues as measured by the 32,683 BCBS subscribers who are expected to migrate to the new companies.³⁵ Any attempt to put a precise dollar value on these policies suffers from the same uncertainties confronted above in an attempt to predict the enrollment of the CCHPs five years hence. Subject to the full range of variables discussed in his prefiled testimony, actuary Hoyer posited (redacted) in the case of CMPHP and (redacted) in the case of MPHP. CMPHP Adv. Panel Exh. 2, pp. 10–11; MPHP Adv. Panel Exh. 2, pp. 9–10. No more precise a finding is necessary. The point is that the value of the transferred policies is considerable.³⁶

³⁵(redacted) MPHP Exh. 17.

³⁶

Most important, the shift in value marked by the initial migration of existing policyholders is likely to continue. Due to the adverse selection spiral discussed at note 34 above, the growth of business in the CCHPs will likely come at the expense of BCBS. Although BCBS projects these new managed care plans to be profitable, HMO Maine, which lost $4.5 million over the last 2 years, will remain a BCBS product. The following testimony of Arthur Andersen consultant Leicester and Community Health Assets Project witnesses Rosenfeld and Collins is fairly persuasive:

The likely scenario is that over time low-risk subscribers will change to the lower priced HMO products. As a result value will build up in these for-profit entities. If provisions are not made for mandatory distributions and limits placed on surplus build up, the funds resulting from the profits will not be made available to the not-for-profit members for use in their charitable missions to benefit the community. Furthermore, if there are not adequate provisions protecting against excessive capital calls, there may be an inappropriate drain on resources as the HMO base expands and strives to capture greater market share by increasingly more competitive pricing. Independent of any distributions, there will be a build up in going concern value based on the revenue potential of the for-profit HMO. A substantial part of that value will have been acquired from AHS [i.e., BCBS], an entity regulated by the Bureau. The HMO’s market share associated with this going concern value will be an attractive target for acquisition…

CMPHP Advocacy Panel Exh. 1, p. 12 and MPHP Adv. Panel Exh. 3, pp. 12-13.

There is a very real concern that over time, the value of BCBSME could be effectively transferred to the for-profit venture. This shift will occur as a number of current BCBSME subscribers become subscribers of the Central Maine Partners Health Plan. Of course, there are no plans at present to transfer the current BCBSME subscribers overtly, e.g., by eliminating BCBSME products and forcing current subscribers to sign up with the Central Maine Partners Health Plan or another insurer. Instead, current BCBSME subscribers will be targeted using existing BCBSME marketing materials. In addition, Central Maine Partners Health Plan intends to market its HMO product at a price that is lower than that currently charged to other subscribers. Given these facts, BCBSME subscribers will have no reason to stay with their current products if they can purchase identical coverage for less money, from an entity that carries the "Blue Cross Blue Shield" trademark and service marks, and that possesses the combined financial strength of BCBSME and CMHC. If this assumption is correct, when you combine the resulting evisceration of its current HMO Maine product with the industry-wide assumptions regarding the future of indemnity lines of insurance, you could wind up with a situation where the majority of BCBSME assets are tied up in a venture that has no obligation to return money to the parent (except upon dissolution), thus frustrating the parent’s ability to fulfill its charitable mission.

PII Exh. 1, p. 7; see also 1/30/97 Tspt., pp. 174–77 (Leicester testimony).

If the fortunes of the CCHP operations thrive while those of BCBS operations wane, the primary value of BCBS may become that of a holding company for its for-profits subsidiaries rather than as a nonprofit writer of insurance in its own right. If this does in fact transpire, BCBS’s nonprofit status would be reduced to a non sequitur, and the company’s conversion to a for-profit company would, as a practical matter, be a fait accompli.³⁷ As Mr. Rosenfeld testified, this type of transformation would be a gradual process rather than a discrete event:

That is, we all know when we’re at a time of twilight, but we don’t quite know when it begins, and that the challenge for regulators is to try to provide some guidance to make sure that a conversion hasn’t already occurred by the time it gains the public’s attention, that is, twilight hasn’t already happened…

1/30/97 Tspt. at 76.

I’m concerned that when a for-profit entity such as this is created that there are circumstances inherent both in the healthcare economy today, and I believe in the way this transaction is structured, that makes it virtually inevitable that the joint venture in both cases — I should say I’m making comments about both cases — will grow, and that partly on account of that growth directly and partly indirectly the parent will shrink, and there will come a time when the joint venture is the tail that begins wagging the dog, and, in fact, is a very large tail with a very small dog. When that happens, conversion, in my view, has occurred because the original character of the parent or stockholder will have fundamentally changed somewhere in the course of the growth of that for-profit HMO and the concomitant shrinkage of Blue Cross Blue Shield.

1/30/97 Tspt., at 77–78.

For these reasons, one cannot predict when a conversion of BCBS may in the future be said to have occurred. Therefore, it is important is that the matter be addressed now, as there may be no second chance.³⁸

Three conditions of approval have already been imposed with the goal of preventing a "creeping conversion" by functionally integrating the parent and the subsidiaries for the common purpose of issuing "nonprofit health plans." If the above conditions succeed in establishing and maintaining the roles of the joint ventures within an overarching nonprofit enterprise, it may not matter what proportion of Blue Cross business is written directly and what proportion through subsidiaries.

Under this approach, it is unnecessary to wait and see if a creeping conversion actually occurs. The amendment to the Articles of Incorporation, mandatory distributions of profits, and the restrictions on stock transfers already discussed, will directly prevent a conversion right now.

Order and Notice of Appeal Rights

It is therefore ORDERED:

The application is hereby APPROVED CONDITIONALLY. A Certificate of Authority, subject to the ongoing obligation to remain in compliance with the terms and conditions set forth below, shall issue within ten days after the Applicants have demonstrated to the satisfaction of the Superintendent that they have fulfilled all conditions precedent and have the capacity to comply with all conditions subsequent.

1. The HMO must amend its Articles of Incorporation to expressly include as a corporate purpose the furtherance of the charitable purposes of BCBS and MMC, and must be managed as an integral part of BCBS’s statutory purpose of issuing bona fide nonprofit health plans.
2. The review of filed rates shall take into account the rates charged by Blue Cross Blue Shield for business written on a direct basis, and rates shall be disapproved as unfairly discriminatory if they are found to be based on inappropriate risk stratification between the Blue Cross Blue Shield and joint venture enrollment bases.
3. Expense payments may not be excessive or inappropriate, and shall be subject to review in the examination process, the rate review process, or otherwise at the Superintendent’s discretion.
4. The HMO shall make distributions to shareholders in a manner that will maintain its surplus at no more than 150% of minimum surplus requirements as defined in 24-A M.R.S.A. § 4204-A. The Board shall determine quarterly whether a distribution under the terms of this condition is warranted.
5. No stock of the HMO may be sold, transferred, or given as security; no stock may be issued; and no rights in the stock may be assigned, except with the prior approval of the Superintendent. Consideration will be given to sale or transfers to charitable organizations with a healthcare mission. Any proposed sale, transfer, issuance, pledge, or assignment of stock to an entity lacking a charitable mission will need to be accompanied by a proposed plan to guarantee that the charitable assets of BCBS will continue to be used in their entirety for charitable purposes.
6. The HMO shall demonstrate that the documents required by Bureau of Insurance Rule 191, including without limitation reinsurance policies, have been executed.
7. Evidence of coverage must be approved as provided by 24-A M.R.S.A. § 4207.
8. The HMO must file a plan to provide meaningful hospital access for residents of the northern part of the county if the service area is not amended to remove those towns.
9. Any filing with respect to acquisition of the HMO must include a full description of any compensation arrangements, direct or indirect, between management and potential acquirers.
10. Prior notice shall be furnished to the Superintendent of any revisions, amendments, or other changes to the transactional documents, including the Management Services Agreement and the Shareholders Agreement.
11. All submissions, filings, and other actions required pursuant to paragraphs 1–10 above, must be filed with the Superintendent on or before October 18, 1997, or this conditional approval shall lapse and the application shall be denied.

This Decision and Order is a final agency action within the meaning of the Maine Administrative Procedure Act. It is appealable to the Superior Court in the manner provided in 24-A M.R.S.A. § 236, 5 M.R.S.A. § 11002, and M.R. Civ. P. 80C. Any party to the hearing may initiate an appeal within thirty days after receiving this notice. Any aggrieved non-party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal on or before May 28, 1997. There is no automatic stay pending appeal; application for stay may be made in the manner provided in 5 M.R.S.A. § 11004.

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