Wednesday, January 16, 2002
Consumer Advocates Call it a “Staggering Loss” for New York.
Consumers Union, the nonprofit publisher of Consumer Reports magazine, has called upon the New York Attorney General and Insurance Commissioner to block the conversion of Empire Blue Cross to for-profit status. The consumer group made its announcement following late-night action by the New York legislature to use 95 percent of the funds from the sale of Empire Blue Cross to fund existing state healthcare programs, primarily for healthcare workforce retention and salary increases.
The legislature’s action violates New York Not-for-Profit law and is contrary to established common law regarding nonprofit conversions. Consumers Union is investigating a variety of options to challenge the proposed conversion, including litigation and regulatory proceedings.
“When Empire Blue Cross announced its proposal to convert to a for-profit company in 1996, it stated that all of its assets would be transferred to a foundation to assist New York’s uninsured, ” said Charles Bell, Programs Director for Consumers Union. “We are outraged to learn that the Governor and legislature have eviscerated the foundation that Empire proposed to establish. This legally questionable decision contradicts the existing New York Not-For-Profit Law and the entire record of public participation regarding the conversion.”
Prior to the Legislature’s passage of this bill, nonprofit health plans in New York were prohibited from converting to for-profit status. Under established common law, the funds generated from a conversion of any nonprofit entity must continue to serve the organization’s original mission. Only five percent of Empire’s stock would go into a foundation to serve Empire’s original mission, with the rest going to fund salary increases for healthcare workers and other state health programs. Under the proposal, New York consumers would receive far less in the proposed Empire settlement than consumers in other states have received, despite the fact that Empire is much bigger than many converting plans.
“If this gravely flawed legislation is upheld, it would be a staggering loss for New York,” said Bell. “The state would squander a once-in-a-lifetime opportunity to create a permanent foundation that could make $50 million or more each year in grants, in perpetuity, to expand healthcare access in our state.”
Two attorney generals, Attorney General Dennis Vacco and Attorney General Eliot Spitzer, negotiated with Empire about the terms of its charitable settlement offer. Since the beginning, consumer organizations have insisted that, if conversion were permitted, all of the proceeds from the sale of Empire should create a new independent foundation for assisting the uninsured, and should not replace existing public and private spending for health programs.
“The small foundation created by this legislation is too small of a fig leaf to hide the state’s vast diversion of nonprofit assets,” said Laurie Sobel, staff attorney with the Community Health Assets Project. “Nobody should be proud of a conversion decision that is only five percent correct.”
The Governor and legislature were asked by Attorney General Spitzer to change one sentence of the state insurance law to allow the conversion to occur. But instead of improving the terms of the charitable settlement, Gov. Pataki and the legislature decided to liquidate it. Rather than helping to establish an appropriate framework for investment of the endowment and grantmaking, New York’s elected officials voted to directly award 95 percent of Empire’s assets to hospital and medical interests.
“We do appreciate the efforts of those legislators who worked hard to ensure that a small foundation was created,” continued Bell. “In particular, we commend the efforts of Assemblyman Pete Grannis and Assemblyman Richard Gottfried. However, we are outraged that hardly any of the money the state is taking would be spent for expanding access to health coverage, as we were assured as recently as a week ago.”
“Not only does the legislation violate established conversion law, but it also creates a politically controlled board for the foundation, and that raises serious concerns that grants will be driven by future political needs,” Sobel said. “Because the financial arrangements for holding and selling Empire’s stock are very unclear, it is very much an open question whether New York will receive the full fair market value of Empire’s assets.”
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.