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Advocates Blast Amended Empire Blue Cross Conversion Plan

Wednesday, August 21, 2002

Suit Charges State Plan to Take Proceeds From Blue Cross Sale is Unconstitutional, Argues Funds Must Go to Expanding New Yorkers’ Access to Healthcare Coverage

Consumer and healthcare advocates filed suit today against New York officials to prevent the state from taking 95% of the proceeds from the sale of the nonprofit Empire Blue Cross and Blue Shield. At issue is whether the estimated $1 billion can be taken by New York State and used for purposes that are far removed from the nonprofit insurer’s original charitable mission –expanding and maintaining access to affordable health coverage. The suit was filed in the Supreme Court of the State of New York.
The lawsuit challenges the legislation that authorized Empire’s conversion to a for-profit company, which was negotiated in secret and passed in the middle of the night by the New York Legislature in early January. The suit charges that the state’s decision to give most of Empire’s assets to hospitals to fund a short-term labor contract violates the New York and U.S. Constitutions.
“The New York legislature’s approval of this secret Blue Cross deal was not only outrageous; we believe it was unconstitutional,” said Mark Scherzer, attorney for the plaintiffs. “The state cannot simply take $1 billion of charitable assets that were dedicated to increasing New Yorkers’ access to healthcare and divert those funds for other purposes.”
The lawsuit was filed by Consumers Union, Disabled in Action, Housing Works, the New York Chapter of the National Multiple Sclerosis Society, the New York StateWide Senior Action Council, and five individual Empire policyholders, who will be harmed by the loss of Empire’s assets, and the higher premiums that Empire may charge after the conversion.
Under long standing New York Law, when a nonprofit charitable corporation transfers its assets, the New York State Supreme Court must certify that “the terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation or the interests of its members will be promoted.” When the Empire Board first proposed a plan to convert to a for-profit corporation in 1997, it announced its intention to create a new foundation that would receive all of its assets to carry on the insurer’s mission of “improving the availability and accessibility of healthcare to the people of the State of New York.”
However, because of opposition from healthcare unions and hospitals, legislation to authorize the conversion remained stalled for years. In January 2002, Governor Pataki announced a deal with SEIU Local 1199 leader Dennis Rivera to authorize the state to take all of Empire’s assets (valued at $1 billion or more), primarily for $700 million in short-term payments to private hospitals to fund a contract with healthcare workers. The plan was later amended by the legislature to provide that five percent of the funds generated by the conversion of nonprofit Empire Blue Cross into a for-profit corporation would go to a charitable foundation to improve access to healthcare.
The bill authorizing the plan was hastily approved by both houses of the legislature and signed by the Governor, with no public hearings. On June 18, Empire filed its amended conversion plan with the New York Insurance Department, agreeing to surrender its assets to state control in exchange for permission to become a for-profit company.
The lawsuit charges that the conversion legislation is unconstitutional because it deprives New Yorkers of their stake in the assets held in trust to promote and maintain health coverage for Empire subscribers and others who need access to care, and usurps the New York State Supreme Court’s function to review and approve the conversion. Although the legislation “deems” the State’s taking of Empire’s assets to be fair and reasonable and consistent with the insurer’s original charitable mission, there is no factual or legal basis for that declaration. Additionally, the suit challenges the legislation’s constitutionality because it authorizes the taking of private property for public use without good cause or just compensation.
The suit also charges that Empire’s Board of Trustees violated its fiduciary duty to safeguard the assets of the nonprofit insurer for charitable purposes by abandoning its previous determination that the funds should go to a foundation dedicated to improving access to healthcare.
“The Governor and state lawmakers have conducted a billion dollar heist by siphoning funds from Empire Blue Cross that are supposed to remain dedicated to expanding New Yorkers’ access to healthcare.” said Charles Bell, Programs Director for Consumers Union. “This legislation sets a terrible precedent for New York and other states and should be thrown out by the court.”

Charles Bell
(914) 378-2000
Mark Scherzer, Attorney for Plaintiffs
(212) 406-9606
Laurie Sobel
(415) 431-6747
The Community Health Assets Project (CHAP) is a national effort that seeks to preserve community health assets at risk in health sector restructuring, with a particular focus on the conversion of nonprofit healthcare institutions to for-profit status. CHAP is a joint effort of Community Catalyst and Consumers Union. Since 1996, the project has provided technical assistance to community groups, philanthropic leaders, regulators, and legislators in 35 states and has helped to preserve billions of dollars in community health assets including at least 130 healthcare foundations.
Community Catalyst is a Boston-based national advocacy organization that builds consumer and community participation in the shaping of our health system to ensure quality affordable healthcare for all. Consumers Union is the nonprofit publisher of Consumer Reports magazine that was founded in 1936 to test products, inform the public, and protect consumers.