STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE

 

In Re: Application of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine to convert to a Stock Insurer and Voluntarily Liquidate and Dissolve	)))))))
and	)))	BLUE CROSS AND BLUE SHIELD OF MAINE’S CLOSING STATEMENT
In Re: Application of Anthem Health Plan of Maine, Inc. to Acquire the Assets of Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine and Related Transactions Docket No. INS-99-14 (CONSOLIDATED)	))))))))))
		April 14, 2000

I. INTRODUCTION

The Board of Directors of Blue Cross Blue Shield of Maine ("BCBSME") determined that it was and is in the best interests of the Company, its subscribers and the people of Maine for the Company to affiliate with Anthem Insurance Companies, Inc. The Board that made this decision is made up of dedicated Maine citizens with records of achievement and community involvement. These are the people who know the Company’s history, inner workings and prospects. More than any other group of citizens, they are in the best position to make informed decisions about this Company’s future. Their decision will prove over time to be both courageous and a positive contribution to the quality and stability of the health care delivery system in Maine.

The affiliation with Anthem will ensure that Maine’s largest health insurer and managed care company will have the resources to prepare itself for the demands that the citizens of Maine will make on their health care system in this new century. The arrangement brings to Maine a company with a solid track record, a commitment to and a substantial presence in New England, enormous financial strength, and the values and traditions of the Blue Cross Blue Shield system.

The transaction also fully satisfies the charitable obligations of BCBSME. With the $81 million-plus in proceeds from this transaction, the Charitable Foundation funded by this transaction can accomplish enormous good that would not otherwise be possible.

The Board’s decision was careful and deliberate. Following a string of annual losses, the Board recognized that the Company needed to be larger – or part of a larger organization – to remain competitive. The Board directed management to explore alternatives. Management hired experienced counsel and an investment banking firm to assist in the exploration. This process generated competitive proposals and alternatives.

Anthem’s proposal was, in the Board’s view, clearly superior to the others. Even so, the Board directed management and its advisors to negotiate additional points to improve Anthem’s proposal. In July 1999, ten months after the Board decided that the Company needed to change, the Board unanimously approved the agreement with Anthem. The Board has twice since re-affirmed its decision.

The applications pending before the Superintendent – principally, BCBSME’s application to convert, and Anthem’s application to acquire BCBSME’s assets -- have undergone remarkable scrutiny. Seven months have elapsed since Anthem and BCBSME made their initial joint filings with the Superintendent. In that time, the proposed transactions have received exhaustive study by the Maine Superintendent of Insurance, his staff and his consultants; by the Maine Attorney General, his staff and his consultants; and by counsel, representatives and experts retained by the intervenors who participated in this proceeding. Anthem and BCBSME made available for review by the Superintendent, Attorney General and intervenors thousands of pages of documents and written responses to more than 300 multi-part information requests. Through the Bureau’s internet web site, the Superintendent has made available an unprecedented amount of information for general public review. The Superintendent held public hearing sessions at five locations around the State. At the request of the Attorney General, the Superintendent scheduled an additional public hearing on Saturday, April 8. Yesterday, in response to still another request of the Attorney General, the Superintendent allowed the record to remain open for more written public comment for an additional two weeks – until April 28, 2000.

The public has had ample opportunity to witness and participate in this matter. No administrative or judicial proceeding in recent memory has entailed such opportunities for public information and input.

When the period for written public comments closes, the time will be at hand for the Superintendent, who is the sole person authorized by law to consider approval of the applications, to make his decision.

The statutory standards under which the Superintendent must review the pending applications have previously been determined by the Maine Legislature, and are specifically set forth in Titles 5, 24 and 24-A of the Maine Revised Statutes. The standards were identified in the Superintendent’s Notice of Hearing issued on November 4, 1999. Each of these statutory standards has been met, supporting approval of the applications without further delay or condition.

II. THE TRANSACTION IS FAIR AND EQUITABLE, WITH BCBSME’S FAIR MARKET VALUE FLOWING TO THE FOUNDATION

Under 24 M.R.S.A. §2301(9-D)(E)(1), the Superintendent is directed to determine whether the terms and conditions of this conversion are "fair and equitable." As one part of this determination, the Superintendent examines the value received for BCBSME. Under the relevant statutes, if the Charitable Foundation receives 100% of the converted entity’s stock, then the trust is deemed to have received fair market value for the entity, "unless the [s]uperintendent finds that such outstanding stock does not represent the fair market value of the organization." 5 M.R.S.A. § 194-A(1)(G),

Here, all of the stock of the converted BCBSME will be issued to the Charitable Foundation. None will be issued to any other person. As a matter of law, trust Foundation is deemed to have received fair market value for its interest in BCBSME, unless "the [s]uperintendent finds that such outstanding stock does not represent the fair market value of the organization." Id.

No intervenor party has adduced competent evidence directly establishing that the stock of the converted BCBSME will not represent the fair market value of the organization. The contentions of some intervenors, when properly re-cast against the structure of the transaction at issue, is that the price at which the assets will be sold by the converted BCBSME to Anthem does not reflect the hypothetical fair market value of the Company on a going concern basis. In terms of the relevant statute, we interpret these contentions as a request for the Superintendent to find that the stock received by the Foundation would not represent fair market value. As described below, however, there is no basis for such a finding. On the contrary, the great weight of the evidence points against such a finding.

The Superintendent’s analysis on this issue is informed by 24 M.R.S.A. §2301(9-D). This sub-section requires an independent appraisal that enables a determination of the value of the organization’s stock.

Houlihan Lokey prepared such an appraisal. That appraisal established that, as of July 13, 1999, the fair market value of BCBSME’s stock, assuming hypothetically that BCBSME could convert to stock form without any transaction expense, would have been $102.5 million. This figure is a benchmark against which fairness of the purchase price to be paid by Anthem for BCBSME’s assets can be measured. The Superintendent’s and the Attorney General’s consultants each agreed that the Houlihan Lokey appraisal was a reasonable appraisal based on reasonable methodologies.

One or more intervenors have argued that the Houlihan Lokey appraisal does not satisfy the requirements of the conversion statute, 24 M.R.S.A. §2301, sub-§ 9-D(I), because it was not an appraisal of value as of the date of conversion. The statute, however, does not require an appraisal of value as of the conversion date. Rather, the statute requires a valuation of the aggregate equity of the converted stock insurer "to be outstanding upon completion of the conversion plan .…" Id. The phrase "upon completion of the conversion plan" modifies the term "aggregate equity", not "fair market value."

It could not be otherwise. The statute requires that an appraisal be filed when the conversion plan is filed. 24 M.R.S.A. § 2301, sub-§ 9-D(I). In a transaction such as this, the conversion plan is filed many months before the conversion will occur. It would be impossible for an applicant to comply with the statutory requirement to file an appraisal as part of the conversion plan if the statute were interpreted to require an appraisal of value as of a time post-dating approval of the conversion plan -- some indeterminate time in the future.

The statute requires only that the "appraisal must enable determinations of value for purposes of: (a) the amount of cash or other assets that subscribers or the charitable trust will be entitled to receive, without consideration, under the provisions of the conversion plan . . . ."

24 M.R.S.A. § 2301, sub-§ 9-D(I)(1). The Houlihan Lokey appraisal was more than sufficient for this purpose.

Although some intervenors complained that the appraisal should have set forth even more information than it did, only one witness, Professor Robert Strong, asserted that it was not sufficient for its purposes. The Attorney General’s expert gave an exhaustive review of the report, and considering the same types of criticisms, nevertheless concluded that the report was adequate for its purposes.

III. EVENTS SINCE JULY 1999 CONFIRM THAT RECEIPT OF 100% OF BCBSME’S STOCK EQUATES TO RECEIPT OF THE FAIR MARKET VALUE OF BCBSME

Since the Houlihan Lokey appraisal of July 13, 1999, the following has occurred:

• BCBSME failed – by a wide margin – to meet its projections upon which the Houlihan Lokey appraisal (and the Anthem offer) were based, losing a significant portion of its surplus as of year end 1999. At the time of the appraisal, the projections assumed that by year end 1999, the Company’s surplus would rise to $61.921 million. In fact, the Company surplus declined to $43.153 million.
• The stock of comparable companies on which the appraisal relied declined by 22% from the as-of date of the Houlihan Lokey appraisal.
• Despite a fiduciary-out clause in the Asset Purchase Agreement, and the substantial and ongoing publicity surrounding this transaction, no entity has made any higher offer to purchase BCBSME. There is no "willing buyer" that has stepped forward to offer BCBSME, certainly a "willing seller," a higher price.

Each of these singular developments – and a fortiori when considered in combination – indicate that BCBSME’s market value as a going concern has declined from the date of the Houlihan Lokey appraisal, and by a magnitude of at least 20%. This would place value for BCBSME stock (assuming that it could have converted without cost to stock form) in late March 2000 at no higher than $81 million.

There is more than adequate basis for finding that the value of the stock to be delivered to the Foundation, even at closing, is no more than $81 million dollars.

The only expert to argue for a higher valuation was Professor Strong. His opinion cannot be credited for several reasons. He has no experience – none – in evaluating insurance companies or managed care companies. He disregarded market based indicators of value for such companies, such as trading multiples for stocks of comparable companies and recent merger and acquisition transactions, even though the governing statute directs the appraiser to consider such indicators. 24 M.R.S.A. § 2301, sub-§ 9-D(I)(4). Professor’s Strong’s position was founded ultimately on speculation about the future -- assumed stability or increase in the number of BCBSME’s enrollees and its market share, and resultant projections of profitability. The reliability of Professor Strong’s assumptions in this regard was undercut by the reality-checks of recent history:

• The market has been so volatile that the Company has been unable to meet its projections. As late as spring 1999, the Company was projecting a $6 million gain for year end 1999; by year end 1999, it had sustained over a $17 million loss;
• BCBSME could again sustain serious losses in enrollment, as it had in the recent past, as a result of competition and/or loss of the State contract, which is terminable after one year;
• The link between higher market share and higher value was refuted by BCBSME’s recent experience. In 1997, when BCBSME's market share was at its peak, BCBSME lost over $45 million; in 1998, BCBSME suffered smaller losses while reducing the number of its insureds; and
• No other company was willing to match, let alone exceed, Anthem’s offering price.

IV. BECAUSE THE FOUNDATION WILL RECEIVE THE CURRENT FAIR MARKET VALUE OF BCBSME’S ASSETS, EXAMINATION OF INDIVIDUAL DEDUCTIONS IS UNWARRANTED; IF THEY WERE EXAMINED, HOWEVER, THEY WOULD CONFIRM THAT THERE IS NO REASON TO FIND THAT THE FOUNDATION IS NOT RECEIVING THE FAIR MARKET VALUE OF BCBSME.

With the adjustments agreed upon by the parties, at least $81 million will go to the Charitable Foundation. As noted above, the evidence warrants the conclusion that this sum is equal to or exceeds the current (albeit hypothetical) market value of the stock to be received by the Foundation in the conversion. As such, there is no reason to carry the inquiry further to appraise the value of the individual adjustments to the purchase price, such as the adjustment for Medicare liability. The adjustments should not matter, so long as there is no basis for determining that the stock of the converted BCBSME issued to the Foundation does not represent fair market value. However, assuming arguendo that the adjustments provide an alternative method for determining values for which the Foundation should receive, the evidence warrants the Superintendent’s conclusion that the adjustments to the purchase price were reasonable and reflective of the fair market value of the organization.

1. The $17.5 Million Escrow Account

   BCBSME’s losses for 1999 alone were equivalent to the maximum $17.5 million purchase price reduction provided for in the Asset Purchase Agreement. Given that the market bases its assessment of value in part on a multiple of the most recent year’s earnings, the reduction of $17.5 million was assuredly less than "market." The use of the $17.5 million cap was a reasonable mechanism to liquidate such potential future diminution in value.

2. The Up-to-$5 Million Medicare Liability Adjustment

   The maximum $5 million value placed on this risk by BCBSME and Anthem was fair. The parties had originally agreed that Anthem would not be liable for more than approximately $3 million of the risk. As a result of changes in the Charitable Trust Plan requested by the Attorney General, Anthem was required to assume the entire liability, without limit and without risk to the Foundation. The risk is substantial enough that the Attorney General insisted that it could not be left with the Foundation.

   This shift in the risk to Anthem diminished the value of what Anthem was paying for. To avoid this risk, Anthem has offered to pay $5 million more to the Foundation if the Foundation would accept the risk, as per the original Asset Purchase Agreement. Anthem’s willingness to do so – and the Attorney General’s refusal to entertain the offer – is a telling indicator of the value of the risk.

   The parties’ assignment of value for this risk is also supported by the cost of insuring the risk. Mr. Smith discussed at length BCBSME and Anthem’s attempts to procure insurance, and the cost of even insufficient insurance. He also explained how the parties arrived at the $5 million figure.

3. Transaction Expenses and Closing Tax Reserve

   Transaction expenses are an appropriate adjustment for a transaction in which the charity’s ownership interest is being monetized. By way of illustration, had the conversion taken the form of an initial public offering, the Foundation would have received the proceeds from a sale of the stock of fair market value, net of the underwriters’, lawyers and accountants fees. No one has argued that the transaction fees are inordinately high for a transaction of this sort. The $3.9 million of transaction expenses – essentially 4% of the purchase price – is reasonable.

   Similarly, the closing tax reserve is just that – a temporary reserve against tax liabilities –the unexpended balance of which will be paid to the Foundation. Mr. McGinty explained that $1.25 million of this reflects what Deloitte & Touche has already opined is an unlikely event – that BCBSME will lose late 1980’s tax benefits as result from the conversion. There is also a $500,000 margin in the account. Because the IRS would likely pursue the Foundation if the tax reserve were insufficient, the reserve is an appropriate closing adjustment.

   The Liquidating Trust is also receiving from the Company its claims for tax refunds for $3.1 million. If these sums are realized, in whole or in part, the Foundation will be the beneficiary, and the proceeds payable to the Foundation ultimately could approach $84 million.

4. The $4.2 Million Adjustment for the Stock of Machigonne not owned by BCBSME

The Houlihan Lokey appraisal of BCBSME included the 57% of Machigonne owned by BCBSME directly. Under the Asset Purchase Agreement, Anthem agreed to purchase both BCBSME’s 57% interest and the remaining 43% owned by Patriot Mutual. Because Anthem and the independent directors of Patriot Mutual have not been able to agree on a price for that 43% share, Anthem and BCBSME have agreed to deduct $4.2 million from the $120 million APA for that purchase.

This is an appropriate adjustment. The number falls squarely within the range of values identified by PricewaterhouseCoopers in its appraisal of the 43% interest, which no intervenor has questioned. It is almost by definition less than a "willing seller" would accept, because the independent directors have rejected a $4.2 million offer.

6. THE OTHER STATUTORY REQUIREMENTS FOR CONVERSION ARE SATISFIED.

No party has contended that the transaction does not otherwise conform to the Charitable Trust plan. It is undisputed that BCBSME’s Board of Directors unanimously voted for the conversion plan, a margin exceeding the 2/3^rd’s required by statute. No director, officer or employee of BCBSME will receive any compensation if and when BCBSME converts to stock form and sells its assets to Anthem. The conversion does not trigger any payments to management under change of control agreements. Payments under these agreements are conditioned on two events -- there must be both a change of control and an adverse job action. If Anthem later takes such an action, it is Anthem – not the Foundation – that bears the liability. Even the first "trigger" is not specific to conversion – a merger with a non-profit would satisfy one of the conditions. The concept of such agreements originated in 1996, predating the transaction at issue and P.L. 1997, ch. 344.

VII. THE PLAN FOR LIQUIDATION AND DISSOLUTION CONFORMS TO STATUTORY REQUIREMENTS, AND IS FAIR AND REASONABLE.

The Plan of Liquidation and Dissolution is intended to meet the statutory requirements and speed the final distributions to the Foundation. There are relatively few liabilities that will not be assumed by Anthem – only BCBSME’s transaction expenses, and the taxes for pre-closing operations and the conversion and asset sale. Anthem is paying its own transaction-related expenses.

The Liquidating Trust provides a mechanism for the Dissolution Trustee to satisfy the Superintendent under 24 M.R.S.A. §3484 that these liabilities have been adequately provided for. Specifically, by virtue of

1. the assumption of liabilities by Anthem Health Plans of Maine, Inc.;
2. the repayment of the Patriot Mutual surplus notes;
3. the payment of all transaction expenses accrued through closing;
4. the general reserve held by the Liquidating Trustee;
5. the Closing Tax Reserve held by the Liquidating Trustee; and
6. the distribution to the Foundation of the net proceeds of the sale (less the reserves mentioned above),

the Dissolution Trustee will be in a position to make the certifications required by 24-A M.R.S.A. § 3484. Once the Superintendent issues the certificate of dissolution under Section 3484, AHS Liquidating Corp can formally liquidate and dissolve, whereupon the statute of limitations for claims against the Company will start to run. Because the Foundation is the residual beneficiary of this Liquidating Trust, the earliest start date for the statute of limitations is to its advantage.

The combination of the Liquidating Trust provisions, the governing statutes in the Insurance Code, and the controlling law of trusts make adequate provision for the Foundation’s interests following the dissolution and liquidation of BCBSME. The Foundation is the sole beneficiary of the Liquidating Trust, so it will be entitled to all of the reporting that a trustee must provide to its beneficiary and all of the prerogatives of a beneficiary under the Probate Code. See 18-A M.R.S.A. §§ 7-201, 7-205, 7-302, 303. The Foundation has a strong interest in insuring that the taxes for which BCBSME is responsible under the Asset Purchase Agreement are paid, because tax authorities could pursue the Foundation if a shortfall occurred.

CONCLUSION

The evidence developed over the course of the lengthy discovery period, and distilled and presented during the evidentiary hearing, is compelling – the proposed transaction joining Anthem and BCBSME meets all of the statutory criteria. The transaction is in the best interest of BCBSME, its subscribers, and ultimately the people of the State of Maine.

Date: April 14, 2000

	__________________________________
	Robert S. Frank
HARVEY & FRANK Two City center PO Box 126 Portland, Maine 04112-0126 207-775-1300

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on April 12, 2000 a copy of BCBSME’s Closing Statement were served by United States mail, first class postage prepaid and e-mail , or, where indicated, by hand delivery, 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)

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)

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)

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.)

John P. Doyle, Esq.

Preti, Flaherty, Beliveau & Pachios, LLC

One City center

PO Box 9546

Portland, Maine 04112-9546

Email: jdoyle@preti.com (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)

Michel A. LaFond, Esquire

Sulloway & Hollis, P.L.L.C.

9 Capitol Street, Box 1256

Concord, New Hampshire 03302-1256

Email: mal@sulloway.com

(Maine Medical Association)

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