March 24, 2000
Plan Ignores Established Law and Would Establish a Dangerous Precedent for Future Nonprofit Conversion Transactions
San Francisco, CA – Consumers Union, the non-profit publisher of Consumer Reports magazine, urged Wisconsin Insurance Commissioner Connie O’Connell today to reject the proposed Blue Cross Blue Shield United of Wisconsin (BCBSUW) conversion plan because it ignores established law and would set a terrible precedent for similar transactions in the future.
“In the more than fifteen years that Consumers Union has monitored healthcare conversion plans across the country, this is one of the most troubling proposals we have encountered,” said Harry Snyder, Community Health Assets Project (CHAP) Director at Consumers Union. “If this plan is approved by Commissioner O’Connell, it will set a new low standard that will jeopardize the public’s ability to recover assets from nonprofits that abandon their charitable missions.”
Under the conversion proposal, BCBSUW plans to turn over its stock to a limited life foundation established to give the funds exclusively to the Medical College of Wisconsin and the University of Wisconsin Medical School. The new foundation will be controlled by a board of directors selected by BCBSUW and the two medical schools. The board will have no decisionmaking authority over the use of the funds and will function as a simple transfer mechanism for exchanging stock and conveying the proceeds to the schools.
In a letter to Commissioner O’Connell sent today, Consumers Union outlined its concerns about the proposal and emphasized how it ignores established practices for handling such transactions and would have an extremely negative impact on future nonprofit conversions in Wisconsin and other states. The letter notes that the plan violates established law governing nonprofit charitable organizations that convert to for-profit companies. Based on such law, other states have required charitable non-profits to turn over their assets to foundations dedicated to the historical mission of the nonprofit.
There is ample evidence in Wisconsin statutes and the national Blue Cross and Blue Shield Association membership rules to prove that BCBSUW is a charitable trust that was established to provide affordable healthcare coverage to Wisconsin’s citizens. Despite this record, BCBSUW denies that it is a charitable trust and insists that it is turning over 100 percent of the proceeds from the conversion to the medical schools simply because it is a good corporate citizen, not because it is obligated to do so. However, every time this issue has been litigated in other states, the final court decision has found that Blue Cross Blue Shield has a charitable trust obligation.
“Blue Cross’ claim that it is making a gift to the medical schools is ludicrous because the law requires the company to return these charitable assets to the public,” said Laurie Sobel, Staff Attorney and CHAP Coordinator at Consumers Union. “If this plan is approved, it would send a signal to other nonprofits that they can shirk their charitable obligations when they convert to for-profit companies.”
Consumers Union’s letter also maintains that the plan sets a bad precedent by failing to establish an independent board to govern the conversion foundation. In all other states that have handled Blue Cross conversion transactions, independent foundations have been established to determine the best use of the charitable assets.
“In order to be effective and enjoy broad-based public support, the conversion foundation must be governed by an independent board, not one that is hand-picked by Blue Cross and the medical schools,” said Kathy Lee, Philanthropic Policy Analyst at Consumers Union. “This plan establishes a foundation that is accountable to Blue Cross and the medical schools and not the public.”
Finally, the letter calls on Commissioner O’Connell to do an independent valuation of BCBSUW’s assets before she makes her final decision on the plan. BCBSUW has estimated that the value is somewhere between $150-600 million. Every other state that has considered a BCBS transaction has conducted a detailed independent valuation prior to reaching a decision on the conversion plan.
“The people of Wisconsin deserve to have an analysis of the value of the charitable assets that will go to the conversion foundation before OCI decides whether to approve this plan,” said Snyder. “It would be irresponsible to approve a plan that turns over all the funds to the two medical schools without having a more precise estimate of how much money is at stake.”
Since 1996, Consumers Union has worked with Community Catalyst to monitor healthcare conversion transactions nationwide. Together, the groups have provided technical assistance and legal and public policy analysis on healthcare conversions to public officials in more than 35 states. These efforts have helped to preserve more than $15 billion in charitable assets and establish 122 foundations.