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Maine.gov > PFR Home > Insurance Regulation> Administrative & Enforcement Actions > Document 640 : INS 99-14 : Hearing Decision
STATE OF MAINE
March 28, 2000
Q. Please state your name and your position with Anthem.
A. My name is David Frick. I am the Executive Vice President and Chief Legal and Administrative Officer of Anthem Insurance Companies, Inc.
Q. What topics will your testimony cover?
A. My testimony will provide an overview of the transaction between Anthem and Associated Hospital Service of Maine, d/b/a/ Blue Cross and Blue Shield of Maine ("BCBSME") as contained in the Asset Purchase Agreement, as amended, and will address the principal terms and conditions of the proposed transaction.
Q. Would you provide a general overview of the transaction between Anthem and BCBSME?
A. First let me start by noting that the details of the transaction are described in the following major documents filed with the Maine Bureau of Insurance in this proceeding:
1. BCBSMEs Plan of Recapitalization and Conversion, dated September 15, 1999;
2. BCBSMEs Plan of Complete Liquidation and Dissolution of AHS Liquidating Corp. (formerly known as Associated Hospital Service of Maine, d/b/a/ Blue Cross and Blue Shield of Maine), dated September 15, 1999;
3. Amended Form of Bulk Reinsurance Agreement, Bill of Sale and Assumption of Liabilities between BCBSME and Anthem Health Plans of Maine, Inc., as amended and filed on March 7, 2000;
4. The Modified Charitable Trust Plan approved by the Decision and Order of the Maine Superior Court, dated December 27, 1999, pursuant to 5 M.R.S.A. 194-A(5);
5. Application for Certificate of Authority of Anthem Insurance Companies, Inc. in the name of its wholly owned subsidiary Anthem Health Plans of Maine, Inc., dated September 15, 1999, together with all materials filed therewith, and all materials filed with the Maine Bureau of Insurance in supplementation or amendment thereof;
6. Form A Statement Regarding the Acquisition of Control of Domestic Insurers, Anthem Insurance Companies, Inc. in the name of its wholly owned subsidiary Anthem Health Plans of Maine, Inc., dated September 15, 1999, together with all materials filed therewith, and all materials filed with the Maine Bureau of Insurance in supplementation or amendment thereof, including the Asset Purchase Agreement and the First Amendment to the Asset Purchase Agreement;
7. Comparative Premium Rate Analysis of Milliman and Robertson, dated November 4, 1999;
8. Independent Valuation of Blue Cross Blue Shield of Maine by Houlihan Lokey Howard & Zukin Financial Advisors, Inc., filed September 15, 1999;
9. Application of Anthem Health Plans of Maine, Inc. for Certificate of Authority to Operate a Health Maintenance Organization, filed February 1, 2000.
These documents, and other documents comprising the Initial Consolidated Filing, including all supplements and amendments, are incorporated by reference as part of this testimony.
Pursuant to the Asset Purchase Agreement, as amended, Applicants Exhibit 1A, Tab 6A and Applicants Exhibit 13, Anthem Health Plans of Maine, Inc., a Maine stock corporation, will acquire substantially all of the business and assets of BCBSME and assume substantially all of its obligations, except as specifically set forth in the amended Asset Purchase Agreement. Anthem Health Plans of Maine will be a wholly owned subsidiary of Anthem East, Inc., a Delaware stock corporation ("Anthem East"), which, in turn, is a wholly owned stock subsidiary of Anthem Insurance Companies, Inc., an Indiana mutual insurance company ("Anthem"). The transaction, as reflected in the amended Asset Purchase Agreement, was approved by the Board of Directors of Anthem.
Prior to the closing of the acquisition by Anthem BCBS, BCBSME will convert to a Maine stock insurer. The Plan of Recapitalization and Conversion of BCBSME describes this process in detail. Thereafter, at the closing, Anthem Health Plans of Maine will assume substantially all obligations and liabilities of BCBSME, including the assumption of all of BCBSMEs insurance obligations and liabilities pursuant to the Amended Bulk Reinsurance Agreement, Bill of Sale and Assumption of Liabilities between BCBSME and Anthem Health Plans of Maine. The assets to be transferred to Anthem Health Plans of Maine are more specifically described in the Asset Purchase Agreement, and include the ownership interests of BCBSME in its subsidiaries and affiliates, including 50% of the common voting stock of each of Maine Partners Health Plan, Inc. and Central Maine Partners Health Plan, Inc. As reflected in the testimony of Keith Vangeison, Central Maine Health Care, the other 50% stockowner of CMPHP, has advised BlueCross BlueShield of Maine that it intends to exercise its right under the shareholders agreement with BlueCross BlueShield of Maine to acquire BlueCross BlueShield of Maines 50% stock interest in CMPHP from Anthem post-closing. The details of such a transaction are discussed in Mr. Vangeisons testimony.
Q. Does CMHCs intention to exercise its option to acquire BCBSMEs 50% stock interest in CMPHP from Anthem affect Anthems willingness to complete the proposed transaction?
Q. What provisions have been made with respect to the business of Patriot Mutual Insurance Company and Patriot Life Insurance Company?
A. The acquisition does not include the purchase of Patriot Mutual Insurance Company, d/b/a Blue Alliance Mutual Insurance Company ("Patriot Mutual"), and its subsidiary, Patriot Life Insurance Company (referred to collectively as "Patriot"). However, the Asset Purchase Agreement does provide that Anthem Health Plans of Maine, if requested by Patriot, will continue to provide to Patriot, for at least two (2) years after the closing, the management, administrative and other services covered by existing service agreements with BCBSME, Machigonne, Inc. and Northern General Services on the same terms and conditions as provided in those agreements.
Pursuant to this provision, and discussions between Anthem and Patriot, the companies have entered into a Memorandum of Understanding, Applicants Exhibit 14, in which Anthem has agreed to cause Anthem Health Plans of Maine to assume and perform, and Machigonne and Northern General Services to perform, the obligations under each of the service agreements. In the Memorandum of Understanding Anthem agreed to amend all of the service agreements by permitting Patriot to terminate them at any time with 30 days prior written notice. Anthem also agreed in the Memorandum of Understanding to cause Anthem Health Plans of Maine, Machigonne and Northern General Services, as the case may be, to negotiate in good faith, if Patriot desires to renegotiate the terms of any of the service agreements after the closing. The Memorandum of Understanding incorporates a Succession Plan for Patriot Mutual Insurance Company and Patriot Life Insurance Company which describes the steps that will be taken at or before the closing to ensure that those companies will not have common directors or officers with Anthem, Anthem Health Plans of Maine, Machigonne or Northern General Services, to eliminate existing bylaw requirements for common directors and officers with BCBSME, and to enable the Patriot companies to develop independent plans for the future conduct of their business.
Q. What provisions have been made with respect to the potential acquisition by Anthem of Patriots ownership interest in Machigonne, Inc.?
A. BCBSME currently owns 57% of the stock of Machigonne, Inc. and Patriot owns 43% of the stock. Under the amended Asset Purchase Agreement, BCBSMEs interest in Machigonne will be transferred to Anthem Health Plans of Maine at the closing. Under Section 8.03(n) of the original Asset Purchase Agreement, it was a condition to Anthems obligation to close the purchase of the BCBSME assets that there be a contemporaneous closing of the purchase by Anthem Health Plans of Maine of Patriots 43% interest in Machigonne, so that Machigonne would then operate as a wholly owned subsidiary of Anthem Health Plans of Maine. Anthems interest in the transaction with BCBSME, and its willingness to pay the total purchase price, subject to adjustments, was based on this condition, as we did not desire to have only partial control of the significant, complimentary functions of Machigonne. Section 2.03 (a) of the original Asset Purchase Agreement further provided the consideration to be paid to BCBSME was to be reduced by the amount to be paid for Patriots 43% interest in Machigonne.
Over the last several months, a valuation of Patriots 43% interest in Machigonne was performed by PricewaterhouseCoopers, LLP, Applicants Exhibit C-29, and representatives of Anthem have engaged in negotiations with Patriots counsel, who is working with the independent Patriot directors. Despite good faith negotiations, the parties have not yet reached agreement on the price Patriot would accept for its Machigonne stock. In light of these circumstances, and based on the PricewaterhouseCoopers valuation, the Asset Purchase Agreement has been amended by Amendment No. 1 to provide that the amount of $4.2 million, attributable to Patriots Machigonne stock, will be deducted from the total purchase price, unless prior to the closing Anthem and Patriot agree (subject to BCBSMEs and the Superintendent of Insurances approval) on a different purchase price and terms for the purchase of the stock, in which case the deduction would be the amount agreed upon. In our view, $4.2 million, which is the value of the stock as carried on Patriots books, is fair and reasonable, particularly in light of the PricewaterhouseCoopers valuation. In the event that no agreement is reached with Patriot prior to the closing, Anthem will waive the closing condition in Section 8.03(n).
Q. Please describe the manner by which Anthem BCBS will assume the existing obligations of BCBSME to its policyholders.
A. The Amended Bulk Reinsurance Agreement, Bill of Sale and Assumption of Liabilities, which has been filed with the Maine Bureau of Insurance, will be executed by Anthem Health Plans of Maine at the closing. This document provides that, immediately after the closing, all of the policy and contract holders of BCBSME will become policy or contract holders of Anthem Health Plans of Maine, without any break in continuity of benefits and services, and Anthem Health Plans of Maine will assume the obligations of BCBSME under the policies and contracts. In addition, all of the policy and contract holders of Maine Partners Health Plan and Central Maine Partners Health Plan will continue, without interruption of benefits or service, as policy and contract holders of those HMOs. Anthem Health Plans of Maine will also assume the obligations of BCBSME under the Shareholders and Management Services Agreements with Maine Partners and Central Maine Partners.
In this way, adequate provisions for the continuation of all existing coverages of BCBSME, Maine Partners and Central Maine Partners policyholders have been made. The policyholders will have the added benefits of the acquisition described in the testimony of Messrs. Glasscock, Smith and Parker, including the financial stability, systems, management experience and other resources offered by the Anthem organization.
Anthem Health Plans of Maine expects to offer the same range of products after the acquisition as those currently offered by BCBSME, and expects to continue offering products throughout the State. No significant changes to BCBSMEs product families HMO POS, and Indemnity are planned in the near term beyond those previously identified by BCBSME management. The market conditions in Maine, customer needs, and the regulatory environment will ultimately determine Anthem Health Plans of Maines product portfolio. Our expectations concerning specific products are described in more detail in the Form A Application.
Q. How will the transaction affect the existing provider network of BCBSME?
A. BCBSME currently has managed care contracts with approximately 1000 primary care physicians, 1370 specialists and 935 other health care professionals such as optometrists, physical therapists, chiropractors and audiologists. It also has existing contracts with hospitals throughout the State, and with skilled nursing facilities, home health agencies, imaging centers and infusion providers. After the closing, Anthem Health Plans of Maine intends to assume and honor BCBSMEs existing provider contracts for the duration of their existing terms, including those with physicians and hospitals. Thus, it expects to acquire BCBSMEs (and, indirectly, the Partners) existing networks of providers, who will continue to provide service to the policy and contract holders of Anthem Health Plans of Maine, and Maine Partners and Central Maine Partners.
Anthem Health Plans of Maines contracting philosophy will be to maintain cost effective provider networks in local markets to provide access and value -- that is, a combination of benefits and price, for its customers in Maine.
Q. Would you comment on the purchase price to be paid by Anthem for the business of BCBSME, and describe any adjustments to the purchase price provided for in the Asset Purchase Agreement.
A. Under the Asset Purchase Agreement, the amount to be paid by Anthem BCBS for the business and assets of BCBSME will be $120 million, less the following adjustments or allocations:
1. In the event that BCBSME has failed to achieve consolidated financial projections, the purchase price will be reduced by $5.00 for each $1.00 of earnings shortfall, and by $1.00 for each $1.00 of book value shortfall, up to a maximum reduction of $17.5 million. Under the Asset Purchase Agreement, the amount of the shortfalls will be determined by BCBSMEs public accountants within 120 days of the closing, subject to certain dispute resolution procedures. $17.5 million of the purchase price will be placed in escrow pending the determination of the earnings and book value shortfalls. Given the recent disappointing financial results of BCBSME, which are substantially poorer than projections, we expect that the purchase price will be reduced by the full $17.5 million. The consolidated financial projections on which we based the purchase forecasted a net income of [REDACTED] for 1999. BCBSMEs most recent estimate for the year, however, is a loss of [REDACTED], a negative swing of more than [REDACTED]. This will result in a corresponding reduction in net worth of the balance sheet, and will make it more difficult to achieve expected earnings going forward, which together substantially reduce the value of the company we expected to purchase at the closing. Also, BCBSME is currently projecting about [REDACTED] in net income for the year 2000, instead of the originally projected [REDACTED]. This further reduces the projected net worth of the company from that which we bargained for.
2. Under Amendment No. 1 to the Asset Purchase Agreement, the purchase price will be reduced by the amount of the Medicare Liability Assumption Cost, which will be $5 million, unless prior to the closing Anthem is able to secure coverage acceptable to it insuring against liabilities, in excess of a $3 million deductible, resulting from, relating to or otherwise associated with services or actions of BCBSME under Medicare. If such coverage is procured, the Medicare Liability Assumption Cost would be the lesser of (1) the aggregate, expressed as present value, of all premiums which would become due in order to secure the coverage for the applicable statute of limitations, and (2) $5 million.
Under the original Asset Purchase Agreement, BCBSME Medicare liability above 3% of the adjusted purchase price was to be assumed by the charitable foundation created in connection with the BCBSME conversion (the "Foundation"), to which the net proceeds of the sale will be distributed. At the insistence of the Maine Attorney General, the Foundation, as approved by the Maine Superior Court, will not be assuming the Medicare liability risk. That risk will now be assumed by Anthem, subject to the foregoing reduction in the purchase price. In Anthems view, this adjustment is quite frankly advantageous to the Foundation and to BCBSME. In fact, we would be pleased to reinstate the $5 million amount to the purchase price if the Foundation were willing to assume the risk of liabilities related to Medicare.
Anthem had limited its exposure to Medicare liabilities associated with BCBSMEs Medicare fiscal intermediary operations in the Asset Purchase Agreement to 3% of the purchase price. It deemed this in its interest because of the uncertainty of the risk and the substantial liabilities attendant to the risk. For instance, we had the unfortunate experience after closing the Connecticut plan acquisition of having to pay a $41.9 million Medicare settlement arising from conduct of the plan before the closing. Indeed, the Maine Attorney General assessed the Medicare liability risk as follows in opposing the assumption by the Foundation of potential Medicare liabilities:
"The indemnification and assumption of liabilities provisions in BCBSMEs proposed Charitable trust Plan have been uniformly criticized, and raise serious concerns about the Foundations ultimate viability because the liabilities are speculative and unlimited. The biggest speculative liability flows from the proposal to have the Foundation be responsible for any liability to the federal government for fraud or mismanagement which BCBSME may have incurred as a fiscal intermediary under the Medicare program above 3% of the purchase price (or approximately $3.6 million). Given that in other states insurance companies have had to pay reimbursement to the federal government for mismanagement and abuse in operating as fiscal intermediaries in amounts ranging from $4 million to $144 million, we believe that this provision leaves the Foundation exposed to far too great a potential liability Thus, the Attorney General seeks to Modify the Charitable Trust plan to eliminate all indemnification and assumption of liabilities provisions."
(See Applicants Exhibit 21, Memorandum in Support of Petition for Approval of Attorney Generals Modified Charitable Trust Plan at 3.)
Anthem has attempted to obtain acceptable insurance covering the Medicare risk, but has been unable to do so to date. AIG, one of the largest insurers in the world, with whom Anthem regularly does business, has, after review, indicated that it is unwilling to underwrite the risk in this case.
I also note that the original Asset Purchase Agreement provided that the Foundation would assume any liabilities of BCBSME relating to the management of Patriot Mutual (Blue Alliance). BCBSME has controlled the management of that company through common officers and directors. Since Anthem is not purchasing any interest in Patriot Mutual, it wanted to protect against any claims relating to BCBSMEs former management of the companies. At the request of the Attorney General, the Foundation will not assume that liability. This change creates additional and unknown risk to Anthem, which also reduces the value of the transaction to it.
(3) I have previously described the purchase price deduction attributable to Patriots 43 % interest in Machigonne.
Q. How will the net proceeds of the sale be distributed to the charitable foundation created in connection with the conversion of BCBSME?
A. Following the closing of the transaction, BCBSME will liquidate and dissolve in accordance with the Plan of Complete Liquidation and Dissolution . Consistent with 5 M.R.S.A. § 194-A(5), all of the net cash proceeds of the asset sale paid to BCBSME, after appropriate reserves are established for payment of BCBSMEs remaining obligations and expenses, will be paid to the Foundation in accordance with the Modified Charitable Trust Plan approved by the Decision and Order of the Maine Superior Court, dated December 27, 1999. As explained in the testimony of Frank McGinty of BCBSME, the amount of money which will fund the Foundation after payment of BCBSMEs obligations is expected to be $81.7 million. Anthem will have no involvement in the administration or management of the Foundation.
Q. Has BCBSME made warranties and representations in the Asset Purchase Agreement which extend beyond the closing?
A. It is customary in transactions of this type for the company selling its assets to make important representations and warranties regarding, among other things, the condition of its business, its financial condition, and similar matters. BCBSME has made such representations and warranties in the Asset Purchase Agreement, but, unlike in many transactions, Anthem has agreed that the representations and warranties generally do not continue beyond the closing of the acquisition. This increases the risk to Anthem, but it provides a significant benefit to the Foundation and the citizens of Maine in that it reduces the potential liabilities of BCBSME in liquidating and distributing the net proceeds to the Foundation.
Q. Please address the impact of the proposed transaction on competition in insurance in the State of Maine.
A. The marketplace for health care financing includes health and accident insurers, health maintenance organizations, preferred provider organizations, employers, self-funded programs and government programs (including Medicaid and Medicare). As of March 31, 1999, BCBSMEs approximately 365,000 members or covered persons represented approximately 38% of the covered lives in Maine. I would also note that BCBSMEs market share has substantially decreased in recent years. Anthem has no policy or contract holders in Maine. In light of this, the transaction will not result in any increase in market share or concentration in the Maine market. Thus, it will not tend to substantially lessen competition or tend to create a monopoly in Maine. Indeed, by enhancing BCBSMEs long-term viability, this transaction will actually help sustain health insurance competition in Maine, and may even increase it, since over time new health care insurance products not presently offered in the marketplace may be introduced. The United States Federal Trade Commission and Department of Justice have issued an "early termination letter" pursuant to the federal Hart-Scott-Rodino Premerger Notification requirements, indicating they have no intent to question the transaction on antitrust grounds. (Applicants Exhibit 74).
Q. Can you comment on the overall fairness of the transaction?
A. I believe that the terms and conditions of the proposed transaction between Anthem and BCBSME are fairly structured and protect and benefit BCBSME, the policyholders, the insurance buying public and the citizens of Maine. Competition in the health care marketplace and the tradition of BCBSME of making affordable health care financing available will be continued and enhanced as a result of the proposed transaction. It is our firm belief that the terms and conditions of the Asset Purchase Agreement, as amended, and the transaction overall, are fair and reasonable, both from the perspective of similar commercial transactions which are undertaken on a regular basis and from the perspective of BCBSME and its current policyholders. The transaction negotiated by both sides is structured to provide the policyholders with full continuity of coverage and the benefits of enhanced financial strength of Anthem Health Plans of Maine.
Q. Is it important to Anthem that the purchase of BCBSME be completed promptly?
A. An expeditious closing, in accordance with the terms of the Asset Purchase Agreement as they were negotiated between the parties, is very important to us. We are excited about the opportunity to work collaboratively with the local management and employees of BCBSME to improve the financial stability of the company, to bring the support which Anthem will provide in other areas, and to move forward to meet the other challenges the company faces in the Maine health insurance market. Further delay in a closing would delay these activities to the detriment of all. We are concerned about the loss of good BCBSME employees to other companies, and we are also concerned about further erosion of the value of the company. Finally, I would also note that delay in closing also delays the distribution of the net proceeds of the sale to the Foundation, resulting in the loss of investment returns of at least several hundred thousand dollars a month.
Q. Does this conclude your testimony?
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 28, 2000, a copy of Anthems Prefiled Testimony of David Frick was served by electronic mail, overnight mail, or via hand delivery on each of the persons listed below.
Robert S. Frank, Esq.
Harvey & Frank
Two City center
P.O. Box 126
Portland, Maine 04112
(Blue Cross/Blue Shield of Maine)
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)
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)
Maine Peoples Alliance
192 State Street
Portland, ME 04101
(Maine Peoples Alliance)
Kellie P. Miller, M.S.
Maine Osteopathic Association
693 Western Avenue
Manchester, Maine 04351
(Maine Osteopathic Association)
Michele M. Garvin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)
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)
Gordon H. Smith, Esq.
Maine Medical Association
30 Association Drive
P.O. Box 190
Manchester, Maine 04351
(Thomas D. Hayward, M.D.,
Maroulla S. Gleaton, M.D.,
And the Maine Medical Association)
Donald E. Quigley, Esq.
465 Congress Street, Suite 600
Portland, Maine 04101-3537
(Maine Medical center)
Sandra L. Parker, Esq.
John Doyle, Jr., Esq.
Attorneys for MHA, Inc.
150 Capitol Street
Augusta, Maine 04330
DATED: March 28, 2000
James B. Zimpritch, Esq.
Jeffrey M. White, Esq.
Catherine R. Connors, Esq.
Portland, Maine 04101
Attorneys for Anthem Insurance Companies, Inc.
Last Updated: January 22, 2014
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