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CU Files Compaint Challenging Constitutionality of Empire Blue Cross Deal

Monday, March 31, 2003

Advocacy Groups Also Plan to Push Forward With Broader Legal Challenge

The New York legislature violated the state’s constitution when it passed a statute last year strictly for the benefit of a single corporation — Empire Blue Cross and Blue Shield, according to an amended complaint filed today by Consumers Union and a group of the insurer’s policyholders with the New York Supreme Court. A group of consumer and health advocacy organizations also indicated that they plan to appeal the court’s earlier decision turning down their broader legal challenge of the law.
The statute in question authorized Empire to abandon its nearly 70-year history as a nonprofit insurer to become a for-profit corporation. The advocates maintain that the conversion will lead to higher insurance premiums for New Yorkers and the loss of billions of dollars in assets that should remain dedicated to expanding access to affordable healthcare coverage in the state.
“The New York constitution expressly bars state lawmakers from passing any statute that benefits one party exclusively to prevent the kind of special interest legislation that was passed for the Empire deal,” said Mark Scherzer, attorney for the plaintiffs. “There is no question that the law authorizing Empire to become a for-profit corporation applied to Empire alone, which makes it unconstitutional.” The statute authorizing the Empire sale was negotiated by Governor George Pataki in secret and passed by the legislature in the middle of the night in January 2002 without any public hearing.
The amended suit notes that the state constitution prohibits private laws “granting to any corporation, association or individual any exclusive privilege, immunity or franchise whatever.” The statute passed by the Legislature authorized nonprofit corporations to become for-profit insurers if they had secured an “initial” opinion and decision by the Superintendent of Insurance on or before December 1999 allowing such a conversion. No corporation other than Empire received any sort of opinion and decision by the Superintendent regarding a proposal to become a for-profit business prior to that date.
The original lawsuit was filed in August 2002 by Consumers Union and several other consumer and health advocacy organizations as well as individuals. The court dismissed the claims they asserted and found that the groups other than Consumers Union had no standing to sue. However, Judge Ira Gammerman invited the plaintiffs to file an amended complaint challenging the constitutionality of the statute since it benefited Empire exclusively. Gammerman extended a temporary restraining order blocking Empire from transferring to the state the proceeds that had been raised last fall from an initial public offering of stock in the newly formed for-profit corporation.
In addition to filing the amended complaint, the groups notified the court that they intend to appeal Gammerman’s earlier decision on their original lawsuit. The suit charges that the statute authorizing the conversion of Empire from a nonprofit insurer to a for-profit corporation overturns centuries of common law and statutory authority governing charitable assets. The groups maintain that the conversion legislation is unconstitutional because it deprives New Yorkers of their stake in the billions of dollars in assets held in trust by Empire to promote and maintain health coverage for its subscribers and others who need access to care, and usurps the New York Supreme Court’s function to review and approve such conversions.
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. Last June, Empire filed an amended conversion plan with the state agreeing to surrender its assets to state control in exchange for permission to become a for-profit company. The legislation authorizing the conversion gives most of Empire’s assets to hospitals to fund a private, short-term labor contract.
“Billions of dollars in charitable assets that are supposed to remain dedicated to helping New Yorkers gain access to affordable healthcare are at stake in this case,” said Charles Bell, Programs Director for Consumers Union. “We believe that the Legislature and Governor violated the state constitution by seizing these assets for other purposes and urge the court to strike down this statute.”
The original 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.

Charles Bell
(914) 378-2000
Mark Scherzer, Attorney for Plaintiffs
Laurie Sobel
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.