DMHC Hearing on Blue Shield Acquisition of Care1st Gets at Larger Questions on Nonprofit Obligations

Yesterday’s hearing (covered today in the LA Times) on nonprofit Blue Shield of California and its bid to acquire for-profit Medicaid managed care plan Care1st provided better clarity on the issues at stake in the $1.25 billion transaction, and little reason to doubt whether the assets Blue Shield proposes to use should be subject to charitable trust obligations.

The comment period is open through this Friday, June 12 (details below), for the public to raise their issues and concerns. Health Access submitted comments with Consumers Union and other consumer groups on the charitable trust issues, and also published a recent issue brief/discussion draft on the obligations of a non-profit insurer in a post-ACA world.

Requested by Consumers Union, Western Center on Law and poverty, CALPIRG, and Health Access, the hearing was intended to discuss DMHC’s jurisdiction and authority to oversee the transaction and to solicit public comment for DMHC’s consideration as it reviews the transaction and whether Blue Shield’s assets should be subject to charitable trust obligations as set forth in Article 11 of Chapter 2.2 of the California Health and Safety Code.

As clarified by DMHC Director Shelley Rouillard in her opening remarks, yesterday’s hearing was not the place to discuss whether or to whether Blue Shield should be a nonprofit or for-profit, though comments from consumer advocates made it clear that these issues are inextricable from  DMHC’s jurisdiction and whether it should approve Blue Shield’s acquisition of Care1st.

According to Tam Ma, Health Access’s policy counsel, Blue Shield has not demonstrated that its acquisition of Care1st is not a restructuring as defined by Article 11. Since the transaction involves a non-profit mutual benefit corporation establishing a holding company that is acquiring a for-profit company, Blue Shield must demonstrate that the transaction meets the conditions in Section 1399.71(e)(2) of the Health and Safety Code to avoid being deemed a restructuring. The law requires Blue Shield to show that:

  • there is no inurement of any individual,
  • that the transaction advances the plan’s nonprofit purposes,
  • that no officer or director has any financial conflicts of interest,
  • that the transaction is for fair market value, and
  • that the purchase does not adversely impact the plan’s ability to fulfill its mutual benefit purposes.

Almost all comments in support of the transaction came from organizations that are contractors or grant recipients of Care1st, Blue Shield, or the Blue Shield Foundation, including agencies serving domestic violence survivors, Federally-Qualified Health Centers, school-based enrollment entities, and Insure the Uninsured Project. They cited their valuable work with the support of the insurer and its foundation. Several of these groups also cited the advantages of having Blue Shield in both the Medi-Cal and commercial space in terms of minimizing churn and the disruption to families moving from Medi-Cal to Covered California plans and back again. Supporters argues that Blue Shield’s bset path into the Medi-Cal market is with an existing partner like Care1st.

While not questioning the value of the grantees’ work, there was discussion of the value of Blue Shield Foundation’s investments or commitments to populations in need is proportional to the massive scale of Blue Shield’s $10 billion in assets. Michael Johnson, recently resigned executive with Blue Shield, the answer was, again, no.

The bigger issue was whether Blue Shield had charitable assets, something that Blue Shield CEO denied but consumer groups say if evident from the law and history of the insurer. If we don’t resolve these larger questions before authorizing the transaction, said Julie Silas of Consumers Union, we won’t know whether the $1.25 billion bid to acquire a for-profit is appropriate or in line with Article 11 requirements with respect to restructuring nonprofit charitable obligations. Article 11, she explained, is in place to preserve charitable assets and make sure that charitable obligations are met in the disposition of assets. Just as the state protected Blue Cross’s considerable assets when it converted to for-profit in the 1990’s, so should DMHC step up to its responsibility in and around this transaction.

In addition to the Article 11 requirements,  a number of advocates (Health Access, Western Center on Law and Poverty, Greenlining Institute, SEIU, and others) raised concerns about how Blue Shield has struggled to provide its existing enrollees in the commercial market with adequate networks of providers—and whether the plan is equipped to serve Medi-Cal enrollees, a far more vulnerable population. Health Access director Anthony Wright pointed out that the insurers in their documents stated that the experience for the patients would be the same, and offered no benchmarks for better access, service, networks, or care for the Care1st patients.

Blue Shield CEO Paul Markovich responded that this is really a chicken-and-egg question: Blue Shield cannot know how it might improve access until it acquires Care1st and has more access to it’s internal information.

Consumer groups cited the track record of Blue Shield, which is attempting to get significantly bigger while at the same time:

  • Of insurers with more than 10,000 enrollees, Blue Shield has the highest number of complaints.
  • Blue Shield has withdrawn from over 200 zip codes in rural and other areas that desperately need more health coverage options.
  • Blue Shield has gone ahead with rate increases deemed unreasonable by state regulators.
  • After a non-routine survey of its networks, DMHC found that nearly 25% of Blue Shield’s provider directory was inaccurate.

Given this track record, it is time to ask hard questions about whether Blue Shield is meeting its obligations as a nonprofit—or its own mission. If this transaction is not the place to tackle this question, for example by attaching conditions (e.g. that Blue Shield should demonstrate how it will ensure access to care for current and new enrollees) to DMHC’s approval, what is?

If you or your organization has anything to say about this transaction or the larger questions at stake in the transaction, you have until this Friday June 12 5:00 PM to submit your comments. Comments are to be directed to