Premera Blue Cross contends its racking up unnecessarily high expenses to pay consultants hired by the states Office of the Insurance Commissioner as it seeks to convert from nonprofit to for-profit status, which it hopes to do by early next year.


Premera, Washington states largest health insurer, says its incurring those costs while paying the Insurance Commissioners consultants to evaluate its conversion application and issue a report.


Premera executives say the Mountlake Terrace, Wash.-based company has spent more than $6 million just on the consultants since they were hired last fall, and has turned over 40,000 pages of documents, with no clear indication of when the evaluation might conclude.


Its been sort of a never-ending process, complains Yori Milo, Premeras chief legal and public policy officer. The Insurance Commissioners office, he asserts, essentially has given consultants an open checkbookdrawn on Premeras accountthrough its failure to set a deadline by which the consultants must complete their work.


Sandi Peck, spokeswoman for the Insurance Commissioner, counters that this is the first time ever the agency has conducted such a review process for a nonprofit health insurer seeking to go public and thatgiven the huge statewide implicationsits not about to rush to a decision.


Its a complicated process, and we do want to make sure we have access to the information we think is vital in making a decision, she says.


Of the sheer volume of data that Premera has provided as part of the process, she says, There may be 40,000 pages, but we still need the right pages. Part of the hang-up there, she says, has stemmed from disagreement over what is proprietary information and what isnt.


Premera is seeking to expedite the process. It is asking Thurston County Superior Court to declare that its filing is complete, or to get a definite indication of what remaining information is needed, and to get a formal hearing on its application scheduled. A hearing on the legal request is set for July 24 in Thurston County Superior Court.


Premera, which notified the Insurance Commissioner of its intent to convert to a for-profit on May 30, 2002, and filed a formal application with the agency on Sept. 17, insists it isnt trying to pressure the state into a quick decision. In support of a thorough review, it says, it sent a letter to the OIC last November expressing a willingness to extend a decision date on its application until March of this year.


That was despite disagreement about when the clock begins ticking on a statutory 60-day period after which a final administrative decision must be rendered.


Insurance Commissioner Mike Kreidler has contended that clock doesnt begin until he declares Premeras filing complete and the required formal legal hearing is held. Now, though, Premeras patience with the process clearly is beginning to wear thin.


Peck claims, nevertheless, that similar conversion processes in other states have taken up to two years or longer.


Huge implications


All of the procedural and legal wrangling is dwarfed by the potential long-term effects of the conversion on the states hospitals, physicians, and other health-care providers, and on Premeras roughly 1.2 million members across the state. That includes about 280,000 members in Eastern Washington, which represents a more than 30 percent market share.


Those various groups would feel the brunt of the impact if, as critics fear, Premeras conversion to for-profit status resulted in reduced payments to health-care providers and higher premiums for health-plan members as the new for-profit company sought to maximize earnings for its shareholders. Some opponents even have expressed concerns that such reduced payments by so large an insurer could lead to the closure of some rural hospitals that already are struggling financially.


Premera CEO Brereton Gubby Barlow said June 6 that he believes concerns about reduced payments and higher premiums are unfounded. The nonprofit-versus-for-profit question largely is irrelevant to such discussions because competitive market forcesnot corporate structuredictate pricing, he asserts.


This has been going on since time immemorial and will continue, he says of that market reality.


The conversion also arguably could have huge beneficial implications for some broad health care-related projects around the state. Premera is proposing that two stock sales be held when it goes public. One of them essentially would unlock the market value of Premera as a nonprofit company that technically had no owner, with all of Premeras stock going into a specially created foundation, from which it would be sold to the public to fund charitable health initiatives in Washington and Alaska. Those initiatives, Premera says, might include improving the availability of health-care services, supporting the education of health-care providers, and boosting research aimed at making health-care delivery more comprehensive, flexible, and efficient. The amount of money made available through the conversion to fund those initiatives, Premera executives suggest, could reach into the hundreds of millions of dollars.


Buyers of that stock still would be buying a piece of Premera; its just that the initial proceeds, based on a concept developed for and used in earlier Blue Cross and Blue Shield conversions, would be used for public benefit.


The other stock sale, to be conducted by the new for-profit Premera, would be used separately to bring in new money to the newly established private company, providing it with needed capital. Premera hopes to raise $100 million to $150 million in that offering, which it says would allow it to bolster reserves to prudent levels, to keep investing in the products and new technology it needs to stay competitive, and to boost membership.


The foundation would serve as the initial owner of all of Premeras stock, but it basically would be just a liquidation vehicle and would be required to reduce its holdings by 50 percent within three years and by 95 percent within six years. Stock sale proceeds devoted to health initiatives in Washington and Alaska would be funneled to newly created and independently managed charitable organizations set up to oversee disbursement.


We think the benefits far outweigh the disadvantages, Barlow says of the conversion. If youre a nonprofit, you have no flexibility. You have only one path.


That path is relying largely on the slim net operating margins that Premera derives from premiums paid by members as a source for capital, he says. Those margins have been in the 1 percent-to-2 percent range over the last four years, but have averaged a negative 2 percent over the last 10 years, he and Milo say. The ability to raise capital in the stock market, Barlow contends, would go a lot further toward ensuring that Premera remains an independent, Washington-based company well into the future.


Nonprofit Blues, as Blue Cross providers are known, have been losing their independence for more than a quarter-century, due to growing market pressures and inadequate access to capital, he says. In 1980, there were 115 independent, nonprofit Blues nationwide, but systematic consolidation has reduced that to 42 today, of which 38 have gone for-profit since 1994.


One key wellness barometer for Premera has been whats called a risk-based capital index. State regulators require that health insurers maintain 200 percentor twice the valueof their overall calculated claims risk in cash reserves. Thats a shaky, bare minimum, though, they say, and the association that licenses Blue Cross and Blue Shield plans requires its members reserves to exceed 375 percent. Premera was at 406 percent at the end of last year, which it claims is low enough that any number of individual downturns in its business could drop it below the mandated minimum level. Most Blue plans are in the 500 percent- to-550 percent range, and Premera says it hopes to boost that key indicator up to that level by going public, Barlow says.


Premera and its predecessors have operated in Washington since 1933. It employs about 3,200 people. For 2002, it posted net operating income of about $36 million on revenues of about $2.6 billion. The nonprofit has enough cloutwith some health-care providers complaining it approaches contract negotiations with an uncompromising take-it-or-leave it attitudethat at least some health-care executives here appear reluctant to talk publicly about its for-profit push.


Officials at Spokanes two largest hospitals, Sacred Heart and Deaconess medical centers, declined to comment on Premeras conversion proposal. However, the Washington State Hospital Association, of which the hospitals are members, and the Washington State Medical Association, which represents about 8,800 doctors, are among a number of groups that have voiced concerns about Premera going public.


At a public forum held here last fallone of four that the Insurance Commissioner scheduled statewide to receive public testimony on the proposalstate hospital association President Leo Greenawalt said he never had an issue where so many hospitals on the East Side called up and said, Youve got to stop this. This is bad for us. What I can tell you is that I have members who are petrified to even show up at this point.


Among others who testified against the proposal were Dr. Elizabeth Peterson, then-president of the Spokane County Medical Society, which represents more than 1,000 physicians in Eastern Washington.


Our members are concerned that it will not be possible for the (health plan) to maintain the current fee schedule when financial obligations to shareholders exist, she said. This may create a threat to the viability of physician practices in Eastern Washington, with subsequent access problems for patients who reside in our community.


Peterson said, Please look at actual experiences with conversion elsewhere, where payments to physicians declined 10 percent on average. Should it occur in Washington, practice destabilization will follow.


Some of the others who attended the meeting, though, spoke in favor of the merger and lauded Premeras community-focused efforts.


Brian McAlpin, president of Rockwood Clinic PS, the big Spokane-based multispecialty doctors group, didnt take a position on Premeras conversion. He urged the state, though, to seek assurances that Premera wouldnt allow itself to be acquired by a larger private insurance company for a period of time and that it commit to maintaining a minimum reimbursement level for providers.


Also, of the big charitable bounty that would be created through the conversion, McAlpin said, It must not be left unprotected to the whim of Olympia. Accordingly, there must be failsafe walls around these funds so they cannot follow the pathway of the tobacco monies being used (by state legislators) as easy fillers for budgetary gaps.


Barlow says opponents claims that payments to physicians declined an average of 10 percent in other states where for-profit conversions occurred is totally unsubstantiated and based on misleading calculations. Also, Premera notes that a case study done last year by professors at two universities for the North Carolina Department of Insurance found no evidence that the rate increases of converted Blues were higher than those of their competitors.


Adds Barlow, We do believe its in the best interests of everybody.