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Maine.gov > PFR Home > Insurance Regulation > Hearing Decision Index > Document 624 : INS 99-14 : Hearing Decision
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 28, 2000, a copy of Applicants Exhibit C-37, Pre-filed Testimony of Keith Vangeison, Confidential Version was served by United States mail, first class postage prepaid, or, where indicated, by hand delivery, or e-mail, on each of the persons listed below.
James B. Zimpritch
One Monument Square
Portland, Maine 04101
Judith Chamberlain, Esq.
State of Maine
Department of the Attorney General
6 State House Station
Augusta, Maine 04333-0006
(Bureau of Insurance)
William H. Laubenstein, Esq.
State of Maine
Department of the Attorney General
6 State House Station
Augusta, Maine 04333-0006
(Office of the Attorney General)
Gregory A. Brodek, Esq.
Duane, Morris & Heckscher, LLP
15 Columbia Street, 4th Floor
Bangor, Maine 04401-6355
(Maine Health Alliance)
Joseph P. Ditre, Esq.
Consumer Health Law Program
One Weston Court, Level One
P.O. Box 2490
Augusta, Maine 04338-2490
(Consumers for Affordable Health Care Foundation/Coalition)
Michele M. Garvin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)
Robert I. Goldman
Maine Council of Senior Citizens
27 Bowery Beach Road
Cape Elizabeth, Maine 04107
(Maine Council of Senior Citizens)
Executive Director of the Maine Ambulatory Care Coalition
P.O. Box 390
Manchester, Maine 04351
(Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)
Maine Peoples Alliance
192 State Street
Portland, Maine 04101
(Maine Peoples Alliance)
Gordon H. Smith, Esq.
Maine Medical Association
30 Association Drive
P.O. Box 190
Manchester, Maine 04351
(Maine Medical Association)
Donald E. Quigley, Esq.
465 Congress Street, Suite 600
Portland, Maine 04101-3537
(Maine Medical center)
Sandra L. Parker, Esq.
Attorney for MHA, Inc.
150 Capitol Street
Augusta, Maine 04330
Kellie P. Miller, M.S.
Maine Osteopathic Association
693 Western Avenue
Manchester, Maine 04351
(Maine Osteopathic Association)
John P. Doyle, Esq.
Preti, Flaherty, Beliveau & Pachios, LLC
One City center
PO Box 9546
Portland, Maine 04112-9546
(Maine Hospital Association)
Sulloway and Hollis, P.L.L.C.
9 Capitol Street
Concord, New Hampshire 03302-1256
Applicants Exhibit 37
STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE
March 28, 2000
Q. Please state your name and employment.
A: My name is Keith W. Vangeison. I am President and Chief Executive Officer of Associated Hospital Services of Maine d/b/a/ Blue Cross Blue Shield of Maine ("BCBSME). BCBSME is a non-profit hospital and medical service organization organized under Title 24 of the Maine Revised Statutes.
Q: What will be the subject matter of your testimony?
A: My testimony will summarize the major terms of the acquisition agreement, the reasons that the Board of Directors of BCBSME pursued an affiliation, the criteria and process used by the Board to assess strategic business options and the basis for the acceptance of the Anthem Insurance Companies, Inc. ("Anthem") proposal to acquire the assets of BCBSME.
Q: Please summarize the terms of the acquisition of BCBSME by Anthem.
A: The terms of the acquisition are set forth in the Asset Purchase Agreement between BCBSME and Anthem dated July 13, 1999. Key terms of the Agreement in its original form included the following:
The Asset Purchase Agreement appears behind Tab 6A in the Applicants Initial Consolidated Filing of September 15, 1999 (Applicants Exhibit 1A).
Q: Please describe the recent amendments to the Asset Purchase Agreement.
A: As a result of modifications by the Superior Court to the Charitable Trust Plan and other events, on March 20, 2000 BCBSME and Anthem executed Amendment No. 1 to the Asset Purchase Agreement (the "Amendment"). The BCBSME Board of Directors approved this Amendment on March 15, 2000 as reflected in Applicants Exhibit No. C-24. The key provisions of the Amendment to the Asset Purchase Agreement are as follows:
The Amendment to the Asset Purchase Agreement appears as Applicants Exhibit 13.
Q: Please describe the recent history of the Company that forms the background to this transaction.
A: BCBSME has faced an increasingly difficult competitive environment. As a result of aggressive market share acquisition strategies deployed by regional managed care companies and the pricing strategies of large, well capitalized national competitors, BCBSME sustained substantial losses and experienced financial results that have been far below forecasts. In 1997, the Company sustained a loss of $ 45.5 million. Enrollment decreased from 390,900 members on December 31, 1997 to 289,100 on December 31, 1998. In 1998, the Company pursued an aggressive business plan to improve pricing discipline, forfeit unprofitable business, and reduce administrative costs concomitant with anticipated reductions in enrollment. Nevertheless, the Companys net loss for 1998 was $1.5 million.
Q: What has been the impact on the Companys surplus for policyholders ?
A: The capital position of the Company has eroded. [Redacted] Though BCBSMEs statutory reserves are sufficient to meet its obligations to subscribers and providers under the standards established by the Maine Bureau of Insurance, the higher capital benchmark and service standards set by BCBSA for maintenance of the name and mark governed the business decisions and assessment of long term capital acquisition alternatives considered by BCBSME management and directors in the context of the proposed Anthem affiliation. In 1997, Blue Cross Blue Shield Association placed BCBSME on a watch list. In the spring of 1998, the BCBSA informed the Companys board of directors that if its capital fell below the BCBSA benchmark the Company would lose its right to operate under the Blue Cross and Blue Shield trademarks. The Bureau of Insurance and its financial consultants also advised the Companys directors that the Company needed to undertake steps to improve its capital condition
Q: What was the Companys response?
A: In 1998, BCBSME's Board and management began to consider a range of solutions short-term and long-term to address the Companys capital condition. With the advice of business and financial consultants, the Board ultimately determined that short-term capital infusions did not sufficiently address the longer-term risk associated with the Companys financial condition and the changing dynamics of the health care insurance market. In assessing these changes, the Board anticipated that the market disruption created by the entry of new competitors would ultimately be survived by large, well-capitalized national firms, such as CIGNA Health Care and Aetna/US Healthcare. These companies had demonstrated their ability to achieve significant economies of scale through their scope of operations, and, drawing on large corporate reserves, had demonstrated the capacity to deploy or withstand sustained promotional pricing to gain or retain market share. In addition, absent access to an assured source of capital in the long term, BCBSME in its weakened financial condition would be unable to sustain a level of investment in systems, technology, care management and state of the art quality improvement programs essential to compete with nationally recognized care management organizations. Ultimately, in the fall of 1998, the Board directed management to explore the opportunities for affiliation with other companies, including affiliation by merger or consolidation. The Company retained Mintz, Levin as its special counsel for this purpose, and later retained Salomon Smith Barney as its investment banker for this purpose. Based on this direction, the Company solicited and entertained proposals from various Blue Cross-affiliated companies. Formal proposals were solicited and reviewed in the first quarter of 1999.
Q: Did the Board establish any criteria for an acceptable affiliation?
A: Yes. At its September 1998 strategic planning meeting, which focused on the future of the Company, the Board agreed on guiding principles to direct management in its assessment of long term strategic options. They were that:
At its November 10, 1998 meeting, the Board of Directors expanded on the planning session discussion held in September and established the following management and Board objectives for the assessment of the Companys strategic options:
Finally, in December 1998, the Board approved an Executive Committee recommendation to require that any potential affiliation partner meet the following criteria:
Q: What was the rationale for the Boards determination to focus the search for affiliation partners on Blue Cross Blue Shield organizations?
A: Pursuing an alternative strategy, that is, solicitation of affiliation proposals from competing health insurers, involved the substantial risk of adverse impact on services, Maine people and BCBSME policyholders. Had a merger or acquisition with a non-Blue insurer or other entity been announced, BCBSA licensing requirements would likely compel the revocation of the Companys license as a BCBS plan and the award of the Maine "franchise" to another BCBS licensee. The precedent for such action is clear based on the licensure revocation activity pursued by BCBSA when the Ohio BCBS plan proposed an acquisition by Columbia HCA. Furthermore, approximately 800 of BCBSMEs 1600 employees are engaged in activities such as processing claims for BCBS Minnesota, Medicare intermediary functions and administration of the BCBSA governed Federal Employees Health Program all of which are directly related to the companys BCBS licensure status. Forfeiture of the license would not only jeopardize these Maine jobs, but create an unnecessary disruption in the Maine health care market, potential damage to the BCBS name and mark, and a likely decline in the value of the surviving company were its customers to erode through migration of enrollment based on brand loyalty and image.
Q: How were the proposals from other Blue plans evaluated?
A: Salomon Smith Barney evaluated all of the proposals and made recommendations to the Board for further negotiations. Board discussions ensued, and bidders made presentations of their proposals to the full Board during April and May of 1999. Based upon the proposals received, the Board authorized BCBSMEs management to initiate negotiations with Anthem relating to a number of proposal terms, the successful modification of which might lead to an acquisition agreement that the Board could support.
Q: What was the basis for the Boards decision to select Anthem as the company with which to negotiate?
A: The Board narrowed the field of potential affiliation partners to Anthem for several reasons. Only Anthems proposal included the endowment of a charitable foundation for the citizens of Maine. Anthem offered the strongest financial proposal and demonstrated superior financial and management resources that would support both the transaction and the long-term business strategies of the Maine plan. Unique among the potential affiliation partners, Anthem had a demonstrated a successful track record with other Blue Cross acquisitions and consolidations, was willing to take a balanced approach to maintaining local employment and expressed a willingness to work with and support BCBSMEs managed care joint venture partnerships, Maine Partners Health Plan and Central Maine Partners Health Plan. Beyond its proposal, Anthem met the Boards criteria for a potential affiliation partner in that the company possessed adequate surplus to address BCBSMEs short-term capital needs as well as assure on-going access to capital to remain competitive. Anthem was and is pursuing a strategy to consolidate BCBS plans to attain financial soundness and operating efficiencies in New England. Anthems integration model demonstrated its commitment to quality driven locally managed health care. And finally, Anthem willingness to provide financial support to community organizations at or above BCBSMEs historical contribution levels demonstrated an acceptance of BCBSMEs role as a corporate citizen as well as its statutory charitable obligation.
Q: Did the Board obtain a fairness opinion concerning the final terms of the Anthem proposal?
A: Yes. Salomon Smith Barney, the investment banking firm advising BCBSME in this process, provided the BCBSME Board with a fairness opinion on the terms of this transaction. A copy of this fairness opinion and the accompanying report appear respectively as Applicants Exhibit 49 and Applicants Exhibit C-48. As a result of the process, and informed by the Salomon Smith Barney fairness opinion, BCBSMEs management recommended to the Board the adoption of the Asset Purchase Agreement that it had negotiated with Anthem.
Q: How did the Board respond to this recommendation?
A: On July 13, 1999, the board unanimously approved the Asset Purchase Agreement. The basis for managements recommendation and the Boards decision is summarized in the record of the July 13, 1999 Board meeting, which appears as Applicants Exhibit C-22
Q: Will the affiliation with Anthem have any adverse affect on services?
A: No. As a result of the transaction, Anthem Health Plans of Maine, Inc. will assume all of BCBSMEs contracts with its insured. Anthem Health Plans of Maine, Inc., as was its predecessor BCBSME, will be operated under the Blue Cross and Blue Shield trademarks, and subject to membership requirements of that Association, which appear as Applicants Exhibits 27 and 28. Many of these membership standards such as the capital requirements for maintaining the trademark license -- redound to the benefit of policyholders and others who do business with Blue Cross licensees. Anthem Insurance Companies, Inc., the parent of Anthem Health Plans of Maine, Inc., is well capitalized, with the ability to invest in new care management technologies and systems, and to withstand underwriting cycles and competitive pressure. Unlike BCBSME, Anthem and its subsidiaries are geographically diversified and enjoy economies of scale as a result of their larger customer base.
Q: What other public benefits result from this transaction?
A: This transaction will result in approximately $80 million being paid into a charitable foundation. That foundation has as its court approved mission to serve Maines unmet health care needs, particularly and primarily with regard to medically underserved and uninsured populations, and to provide access to care and improve the quality of care for those populations. Unlike a company such as BCBSME, which was required to balance its charitable mission against financial and regulatory constraints as an insurer, the Foundation may directly pursue its mission without regard, or with much less regard to countervailing factors such as marketing, competition, maintenance or reserves for statutory or trademark licensing standards and rate adequacy.
Q: What will be the relationship between Anthem Health Plans of Maine and the Partners Plans?
A: Speaking first about Maine Partners Health Plan, BCBSME is a 50% stockholder in Maine Partners Health Plan, and Maine Medical center is the other 50% shareholder. Under the Asset Purchase Agreement, BCBSME will transfer its 50% interest in Maine Partners Health Plan to Anthem Health Plans of Maine, Inc. Pursuant to the terms of the original shareholder agreement between BCBSME and Maine Medical center, Maine Medical center has consented to the transfer of BCBSMEs stock in Maine Partners Health Plan to Anthem Health Plans of Maine, Inc., and has accepted Anthem Health Plans of Maine, Inc. assumption of BCBSMEs rights and obligations under the shareholders agreement and management services agreement, as amended. These consents are reflected in the Second Amendment to the Revised Shareholders Agreement, which appears as Applicants Exhibit C-31. The BCBSME and Maine Medical center boards of directors actions approving this amendment to the Revised Shareholders Agreement appear as Applicants Exhibits C-32 and C-33, respectively.
Q: What about Central Maine Partners Health Plan?
A: BCBSME is also a 50% stockholder in Central Maine Partners Health Plan (CMPHP), and Central Maine Health Care is the other 50% shareholder. Under the Asset Purchase Agreement, BCBSME will transfer its 50% interest in Maine Partners Health Plan to Anthem Health Plans of Maine, Inc. Central Maine Health Care has advised BCBSME that it intends to exercise its right under the shareholders agreement with BCBSME to acquire BCBSMEs 50% stock interest in CMPHP. This will entail the payment by Central Maine Health Care to BCBSME of approximately 50% of the book value of Central Maine Partners Health Plan. Anthem has agreed that Central Maine Health Cares exercise of this option under these circumstances will not affect Anthems plan to close on the Asset Purchase Agreement. BCBSME and Anthem will cooperate with Central Maine Health Cares efforts to arrange for new management services for CMPHP to replace those services heretofore provided by BCBSME. BCBSME and Anthem will also cooperate with CMPHPs efforts to obtain regulatory approvals for this change in control through separate filings with the Superintendent.
Q: Please identify the BCBSME submissions that are part of the requests for approval in this case.
A: BCBSME submitted to the Superintendent a Plan of Recapitalization and Conversion. As required by statute, the Plan of Conversion was supported by an independent valuation of the Company prepared by the firm of Houlihan Lokey Howard and Zukin and a Comparative Premium Rate Analysis prepared by Milliman and Robertson. The Conversion Plan, as originally filed with Superintendent, appears behind Tab 2 in Volume 1 of Applicants Initial Consolidated Filing of September 15, 1999 (Applicants Exhibit 1A).
As required by the statute, BCBSME submitted a Charitable Trust Plan providing for the formation of foundation to take delivery of the proceeds of the transaction and to use those proceeds to meet the unmet health care needs of the citizens of Maine as described previously. The Charitable Trust Plan, as originally filed, was included with the Plan of Conversion at Tab 2 in Volume 1 of Applicants Initial Consolidated Filing of September 15, 1999 (Applicants Exhibit 1A).
BCBSME submitted a Plan of Complete Liquidation and Dissolution which provides the mechanisms for the transfer of assets and funds in accordance with the Asset Purchase Agreement, the establishment of reserves for the payment of taxes and expenses following the closing and the winding up and dissolution of the converted company, to be named AHS Liquidating Corp. The Plan of Liquidation, as originally filed, is at Tab 3 in Volume 1 of Applicants Initial Consolidated Filing of September 15, 1999 (Applicants Exhibit 1A).
The Conversion Plan, Charitable Trust Plan and Plan of Liquidation were approved by the Board of Directors of BCBSME by unanimous vote on September 15, 1999. The Boards approvals are recorded in Applicants Exhibit C-23.
BCBSME caused the Conversion Plan, Charitable Trust Plan and Plan of Liquidation to be filed with both the Bureau and the Department of Attorney General on September 15, 1999. A copy of the filing has been available for public inspection and copying at the offices of BCBSME in South Portland, Maine continuously since September 15, 1999.
Q: Was the Charitable Trust Plan submitted to and approved by the Superior Court?
A: Yes. On November 15, 1999, the Attorney General filed the Charitable Trust Plan with the Superior Court in Kennebec County. A Modified Charitable Trust Plan was approved by the Court on December 27, 1999. A copy of the Superior Court Decision and Order appears as Applicants Exhibit 20.
Q: Do you have anything further?
A: Not at this time.
Date: March 28, 2000
Last Updated: August 22, 2012
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