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> Document 632 : INS 99-14 : Hearing Decision
CERTIFICATE OF SERVICE The undersigned hereby certifies that on March 28, 2000, a copy of Applicant’s 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 Pierce Atwood One Monument Square Portland, Maine 04101 e-mail: jzimpritch@pierceatwood.com Judith Chamberlain, Esq. State of Maine Department of the Attorney General 6 State House Station Augusta, Maine 04333-0006 e-mail: judy.chamberlain@state.me.us (Bureau of Insurance) William H. Laubenstein, Esq. State of Maine Department of the Attorney General 6 State House Station Augusta, Maine 04333-0006 e-mail: bill.laubenstein@state.me.us (Office of the Attorney General) Gregory A. Brodek, Esq. Duane, Morris & Heckscher, LLP 15 Columbia Street, 4th Floor Bangor, Maine 04401-6355 e-mail: gabrodek@duanemorris.com (Maine Health Alliance) Joseph P. Ditre, Esq. Consumer Health Law Program One Weston Court, Level One P.O. Box 2490 Augusta, Maine 04338-2490 e-mail: jditre@mainecahc.org (Consumers for Affordable Health Care Foundation/Coalition) Michele M. Garvin, Esq. Ropes & Gray One International Place Boston, Massachusetts 02110-2624 e-mail: Mgarvin@Ropesgray.com (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 e-mail: Rgoldma1@maine.rr.com (Maine Council of Senior Citizens) Bonnie Post Executive Director of the Maine Ambulatory Care Coalition P.O. Box 390 Manchester, Maine 04351 e-mail: bdpmacc@mint.net (Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition) John Dieffenbacher-Krall Executive Director Maine People’s Alliance 192 State Street Portland, Maine 04101 e-mail: MPA@gwi.net (Maine People’s Alliance) Gordon H. Smith, Esq. Maine Medical Association 30 Association Drive P.O. Box 190 Manchester, Maine 04351 e-mail: gsmith@ctel.net (Maine Medical Association)
Donald E. Quigley, Esq. General Counsel 465 Congress Street, Suite 600 Portland, Maine 04101-3537 e-mail: quigld@mail.mmc.org (Maine Medical center) Sandra L. Parker, Esq. Attorney for MHA, Inc. 150 Capitol Street Augusta, Maine 04330 e-mail: sparker@themha.org (MHA, Inc.)
Kellie P. Miller, M.S. Executive Director Maine Osteopathic Association 693 Western Avenue Manchester, Maine 04351 e-mail: meosteo@mint.net (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)
Michel LaFond Sulloway and Hollis, P.L.L.C. 9 Capitol Street Box 1256 Concord, New Hampshire 03302-1256
Applicants’ Exhibit 38
STATE OF MAINE DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION BUREAU OF INSURANCE
Non-Confidential March 28, 2000 Q. Please state your name, employer, and title. A. My name is Frank McGinty. I am employed by Blue Cross and Blue Shield of Maine ("BCBSME" or "the Company"). I am the Company’s Senior Vice President and Treasurer. Q. What are the subjects of your testimony ? A. My testimony concerns the Company’s Conversion Plan as it relates to Chapter 344 of the Public Laws of 1997, the recent, current and prospective performance of the Company, the financial terms of the Asset Purchase Agreement, the fair value of the Company in light of the work that has been performed by SalomonSmithBarney and Houlihan Lokey and with a view to recent performance by the Company, the Comparative Premium Rate Analysis, and the relationship between BCBSME with Patriot Mutual going forward. Q. Concerning the first of these subjects, please describe how the Conversion Plan relates to Chapter 344 ? A. In very general terms, P.L. 1997, Chapter 344, authorizes BCBSME to convert to a for-profit stock corporation subject to a number of conditions. The key conditions are that the Superior Court approve a Charitable Trust Plan for the preservation of the charitable value of the Company and that the Bureau of Insurance review and approve the Plan of Conversion subject to the standards set forth in the statute. Q. Prior to the enactment of Chapter 344 , what efforts did the Company make to obtain the type of authority that this statute contemplates ? A. The competitive disadvantages created by the Company’s small size and limited access to capital have been matters of significant concern to BCBSME’s Board of Directors and management for the better part of the past ten years. In 1993, the Company sought and received statutory authorization to convert to a mutual insurance company. There were at least three possible advantages to be gained by such a conversion. First, it would facilitate a merger of BCBSME and its affiliate, Blue Alliance Mutual Insurance Company (now Patriot Mutual Insurance Company). Second, it would facilitate a merger with one or more other Blue Cross and Blue Shield Plans organized as mutual insurance companies. Third, it appeared that mutual insurance companies might have greater flexibility in raising capital. In 1996, the Company sought clarification of its subscribers’ ownership interest in the event it converted to a mutual insurance company. This legislative proposal generated a firestorm of controversy, the opponents arguing that the Company was not owned by its subscribers but instead was a charity owned by the public and its conversion to a mutual insurance company should result in the distribution of its "fair market value" to an existing or new charity. The Legislative proposal was withdrawn after the Company committed that it would not seek to convert to a mutual insurance company before the 118th Legislature convened and had the opportunity to address the legal and policy issues in dispute. In the summer of 1996, BCBSME proposed the creation of Maine Partners Health Plan ("MPHP") and Central Maine Partners Health Plan ("CMPHP"), two for-profit managed care organizations it was to own jointly with Maine Medical center and Central Maine Medical center, respectively. These proposals also sparked considerable controversy, the opponents alleging that BCBSME was seeking to accomplish a conversion to for-profit form or, alternatively, using "charitable assets" inappropriately. Thus, by the time the 118th Legislature convened, the questions regarding BCBSME’s ownership, authority to convert to mutual form, and make investments in for-profit affiliates such as MPHP and CMPHP had become hotly contested issues. Early in 1997, after consultation with representatives of the Legislature, the Attorney General, and Governor King’s Administration, BCBSME entered into negotiations regarding a legislative proposal that would resolve these controversies. P.L. 1997, Chapter 344, is the product of that effort. This law defined BCBSME as a public charity, expressly authorized its Board to convert the Company to stock, for-profit form subject to the protections set forth in the statute, clarified the conditions under which the Company could invest in for-profit affiliates such as MPHP and CMPHP, and spelled out the responsibilities of the Company, the Attorney General and the Superintendent of Insurance in the event the Board decided to convert to stock, for-profit form. Q. What economic factors motivated BCBSME to consider more recently alternative courses of action that included conversion to stock, for-profit form and sales of the Company’s assets to another Blue Cross and Blue Shield Plan? A. Three related factors led the Company to seek a merger or some other form of affiliation with another Blue Cross and Blue Shield Plan. First, the Company sustained a loss of approximately $45 million during 1997 as it sought to prevent new entrants into the Maine managed care market from significantly diminishing its market share by pricing their products below cost to attract new customers. This loss severely depleted the Company’s surplus capital and placed it in jeopardy of losing the right to use the Blue Cross and Blue Shield names and trademarks and derive the competitive advantages of being part of the Blue Cross and Blue Shield system. Second, as the Company restructured its prices to bring them back into line with its expenses, it suffered a significant loss of membership to competitors that continued to offer Maine employers prices that were inadequate to cover their cost of doing business in this State. With prices artificially constrained, this loss of membership compounded the Company’s financial problems, driving up its administrative expenses per member per month and thereby eroding the benefit of the claims trend margins and contribution to reserves reflected in its prices. Third, and perhaps most importantly, as we explored potential opportunities to improve the Company’s capital position, it became clear to our Board and management that we lack, and cannot realistically hope to attain, either the scale or the financial resources required to be a successful competitor over the long term. Becoming part of a larger, stronger Blue Cross and Blue Shield organization is the only way we can gain access to state-of-the-art administrative systems and disease management programs while reducing our administrative expenses to the levels of our best competitors.
A. Anthem has both the scale and financial strength to be a successful competitor in the markets in which it elects to do business. The acquisition of BCBSME’s assets by Anthem will have the immediate effect of significantly increasing the security of every BCBSME member’s coverage. Any questions regarding our ability to remain a Blue Cross and Blue Shield Plan will be eliminated. As Anthem’s East region evolves, and Anthem Health Plans of Maine’s product lines are migrated to common operating systems, I expect significant savings to be realized. When those systems must be enhanced or replaced, I expect that Anthem will be able to provide or raise the needed capital at a much lower cost. Of even greater importance, the cost of those improvements would then be spread over millions of members rather than hundreds of thousands of members. I also believe we can expect similar benefits in the development of disease management and health improvement programs. While such programs must be implemented at the local level, it will be much easier for Anthem to maintain the intellectual capital required to design such programs, or develop the technologies to support them, at a competitive cost. Q. Does the consideration offered by Anthem constitute fair market value for the Company? A. Yes, Anthem originally agreed to pay up to $120 million for BCBSME’s assets and Patriot Mutual Insurance Company’s 43% ownership interest in Machigonne, Inc. Had BCBSME’s financial performance met or exceeded the financial projections on which Anthem’s offer was based, the net proceeds of the transaction (before consideration of conversion expenses and taxes) would have been $110.3 million. This sum was determined by subtracting the estimated payment to Patriot Mutual for its Machigonne stock ($4.2 million) and the outstanding principal and interest on the surplus notes issued to Patriot Mutual ($3.7 million) and Patriot Life Insurance Company ($1.0 million) from the agreed upon purchase price of $120 million. The net proceeds of $110.7 million compares favorably to Houlihan Lokey’s $102.5 million valuation of the aggregate equity of the Company as of July 13, 1999. In addition, Salomon Smith Barney had advised the BCBSME Board of Directors that the offer by Anthem reflected in the Asset Purchase Agreement, including the potential adjustments for shortfalls in the Company’s book value and earnings, was fair. Salomon’s opinion was based on a detailed analysis set forth in its presentation to the BCBSME Board on July 13, 1999, and which appears as Applicants’ Exhibit C-48. Q. Will the purchase price be reduced due to shortfalls in the Company’s book value and earnings? A. Yes. As a result of BCBSME’s financial performance during 1999 and expected performance during the first six months of 2000, the purchase price will be reduced by $17.5 million, the maximum reduction permitted under the Asset Purchase Agreement. Q. Is the magnitude of this adjustment fair? A. Yes. The financial forecast provided to Anthem and other prospective bidders anticipated a net gain of during 1999 and a net gain of $9.9 million during 2000. By contrast, the Company during 1999 and is now projecting a during 2000. As a result of the disparity between the Company’s forecasted performance during 1999 and its actual performance, the Company’s book value at December 31, 1999 was $ , which was a $ than the book value reflected in the forecast on which Anthem’s offer was based. If the Company’s financial performance during 2000 matches its current forecast, its book value at December 31, 2000 will be $ , which is $ than anticipated at the time Anthem’s offer was developed and the Asset Purchase Agreement was negotiated. The $17.5 million reduction in the purchase price due to the book value and earnings shortfalls to the actual reduction in the Company’s book value. Q. Is the portion of the purchase price allocated to the acquisition of Patriot Mutual’s ownership interest in Machigonne, Inc. fair? A. Yes, the amount identified in the amended Asset Purchase Agreement, $4.2 million, is equal to the book value of Patriot Mutual’s Machigonne stock as of February 29, 2000. It is also well below the upper end of the range of values assigned to this stock by PricewaterhouseCoopers LLP in the valuation which appears as Applicants’ Exhibit C-29. Q. Is the recent reduction of the purchase price due to the restructuring of the allocation of liabilities under the Asset Purchase Agreement fair? A. Yes. Anthem’s offer was predicated on the requirement that BCBSME and its successor-in-interest, the charitable foundation, would bear liabilities in excess of $3.0 million arising out of BCBSME’s activities as a Medicare fiscal intermediary prior to the closing. The Attorney General insisted that the charitable foundation not be exposed to such potential liabilities, making it necessary for Anthem to assume a risk it had not contemplated when it developed its offer and negotiated the original Asset Purchase Agreement. Q. Is the amount to be paid to the charitable foundation approved by the Superior Count in its Order dated December 27, 1999 fair? A. Yes, the purchase price, adjusted in the manner described above, will be equal to or greater than the fair market value of the Company as of July 13, 1999. As previously indicated, had the Company’s financial performance matched the forecasts on which Anthem’s offer and Houlihan Lokey’s valuation were predicated, the net proceeds of the transaction (before consideration of conversion expenses and taxes) would have exceeded Houlihan Lokey’s valuation of the aggregate equity of the Company as of July 13, 1999 by $7.8 million. While the purchase price will be reduced by $17.5 million due to the book value and earning shortfalls, that reduction compares between the book value of the Company at December 31, 1999 reflected in the forecast on which Houlihan Lokey relied and its actual book value as of that date. The reduction of the purchase price by $5 million (or less if adequate insurance coverage can be obtained by Anthem at a lesser cost) as a result of the reallocation of potential Medicare liabilities from BCBSME and the charitable foundation to Anthem should not affect this analysis. The reallocation of these potential liabilities has the same impact on BCBSME’s fair market value and the purchase price. Nor should this analysis be affected by the fact that certain expenses related to BCBSME’s conversion and taxes must be paid from the proceeds of the transaction with Anthem. Houlihan Lokey valued the Company hypothetically, as if it had converted to a for-profit stock corporation on July 13, 1999 without incurring any expenses to accomplish such a conversion. However, in order for there to be a fair market value for BCBSME stock, the Company would have to convert its corporate form and thus the expense of converting would have to be considered in gauging its value at the time of conversion. This also would be true if the Company was making a public offering in the course of its conversion. In that instance, while the stock of the Company may be sold in the initial public offering at "fair market value," expenses of the stock offering such as legal, accounting and underwriters’ fees would have to be paid from the proceeds of the sale. Q. What are the transaction expenses? A. These expenses can be divided into two categories. The first includes the consulting, legal, and other expenses incurred by BCBSME in the course of the transaction, including its share of the expenses incurred by the Bureau of Insurance and the Department of the Attorney General. We estimate that these expenses will reach $3.9 million by the closing. The second category includes the tax consequences of the transaction as reflected in the closing tax reserve, which is currently estimated to be approximately $3.0 million. The components of the estimated transaction expenses are set forth on the last page of Applicants' Exhibit 55. Q. Knowing what you know today about the Company’s recent and expected financial performance and the expenses related to this transaction, what do you believe is the proper comparison between the amount to be made available to the charitable foundation and the Company’s fair market value as of July 13, 1999? A. I would calculate the amount to be made available to the foundation in the following manner:
I would then calculate the fair market value as of July 13, 1999 in the following manner: Houlihan Lokey Valuation $102.5 million Adjustments Financial shortfalls (17.5) Medicare liability (5.0) Transaction expenses (6.9) Fair Market Value $73.1 million As these calculations indicate, the net proceeds to the foundation will exceed the value of the Company determined by Houlihan Lokey as adjusted for the Company’s financial performance, the reallocation of Medicare liabilities, and transaction expenses. The difference is $ . I believe this is a conservative calculation. It assumes that both the purchase price and the Company’s value are reduced by $17.5 million as a result of the financial performance during 1999. The forecast on which Houlihan Lokey’s valuation was based anticipated that the Company’s book value as of December 31, 1999 would be . The actual book value was $ , a difference of $ adjustment assumed in this calculation. Similarly, this calculation does not reflect the fact that the Company now anticipates a than was reflected in the forecast on which Houlihan Lokey relied. Q. What is your view regarding the impact of events that have occurred since July 13, 1999 on BCBSME’s value at the closing, assuming for the purposes of discussion that the Company’s value at the closing is relevant? A. I believe the Company will be significantly less valuable at the time of the closing than it was on July 13, 1999. I base this conclusion on three related reasons. First, as noted above, the Company’s financial performance has been than had been expected. Assuming that the closing occurs on or about June 30, 2000, and also assuming that the Company’s financial performance during 2000 matches its most recent forecasts, the Company’s book value at the time of the closing will be approximately $ , which is than the book value on that date reflected in the forecasts on which Houlihan Lokey relied in its valuation. In addition to this in the Company’s net book value, .
Second, there has been a significant reduction in the market capitalization of the comparable companies cited by Salomon Smith Barney in its fairness opinion and Houlihan Lokey in its valuation. For example, according to data provided by Houlihan Lokey (Applicants’ Exhibit 75), the median decrease in the stock prices of the companies cited in its valuation from July 13, 1999 to March 22, 2000 was 22%. The average decrease was 23.5 %. Third, although Tufts Health Plan of New England’s insolvency and Harvard Pilgrim Health Care’s financial problems may have created opportunities for BCBSME and its affiliates to grow, and the recent award of the State of Maine contract will further increase BCBSME’s membership, than those reflected in the forecasts on which Anthem, Salomon Smith Barney, and Houlihan Lokey relied. In the short term, the increase in membership.
Q. Has the Company considered whether to ask for another appraisal of its value? A. Yes. We considered it. Based on all of the factors known to us, we concluded that to do so would not be the best use of our resources and time. . A formal appraisal of a company’s fair market value such as that performed by Houlihan Lokey is a complex and expensive task. We do not believe that the statutory scheme requires it. . Q. Please describe the Comparative Premium Rate Analysis ("CPRA") included with the Plan of Conversion. A. The Conversion Plan, as supplemented by a filing of November 4, 1999, also includes a Comparative Premium Rate Analysis prepared by Milliman & Robertson. The CPRA comprises an analysis of Blue Cross and Blue Shield of Maine’s plans and product offerings, comparing actual premium rates for Blue Cross and Blue Shield of Maine for the three years prior to the filing of the conversion plan and three years thereafter, and addresses the projected impacts of the proposed conversion and sale of assets to Anthem Health Plans of Maine on the cost to subscribers, and the organization’s underwriting profit, investment income, tax position and loss and claim reserves, including prospects for adverse market or risk selection on reserves. I believe the CPRA demonstrates conclusively that Anthem Health Plans of Maine will not have to increase its prices significantly in order to generate reasonable operating profits in future years. Q. What will the status of Patriot Mutual Insurance Company be after the closing? A. Patriot Mutual is a mutual insurance company licensed to sell certain health insurance products in Maine. Its wholly owned subsidiary, Patriot Life Insurance Company, is licensed to sell life insurance products in Maine and also reinsures certain group and individual life and disability insurance contracts. Patriot Mutual is considered a controlled affiliate of BCBSME by the Blue Cross and Blue Shield Association and, consequently, is currently authorized to use the Blue Cross and Blue Shield names and trademarks. BCBSME and Machigonne, Inc. (or subsidiaries of Machigonne) currently provide management and administrative services to Patriot Mutual and Patriot Life. Patriot Mutual will remain a separate company after the closing. It will not be affiliated with Anthem Health Plans of Maine and, consequently, will no longer have the right to use the Blue Cross and Blue Shield names and trademarks. However, the parties recently negotiated Memoranda of Understanding that commit Anthem Health Plans of Maine and Machigonne to continue to provide management and administrative services to Patriot Mutual and Patriot Life, thereby assuring that the companies’ activities continue without disruption. These Memoranda of Understanding, which are included as Applicants’ Exhibit 14, also assure that Patriot Mutual and Patriot Life have the flexibility to implement alternative arrangements for their management or necessary administrative services. In anticipation of the approval of the transaction between BCBSME and Anthem and the closing, the Board of Directors of Patriot Mutual recently approved a Succession Plan (Exhibit A attached to Applicants’ Exhibit 14) that describes the manner in which the Patriot Mutual Board is to be reconstituted. The company will not have common directors or common officers with Anthem, Anthem Health Plans of Maine, Machigonne, or Northern General Services (a subsidiary of Machigonne). Initially, its Board of seven members will include four current directors who are not members of BCBSME’s management team and three new directors who are not affiliated with BCBSME, Anthem, or Anthem Health Plans of Maine. As indicated in the Succession Plan, it is anticipated that the reconstituted Board will choose a President, who will be a full-time employee of the company. Patriot Mutual’s current business plan will continue to govern the company’s activities following the closing until such time as the Board, working in concert with the President and independent advisors, formulates an alternative business plan, which will be submitted to the Bureau of Insurance. Q. Do you have anything further? A. Not at this time. Date: March 28, 2000 Last Updated: August 22, 2012 |
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