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Suit Challenging NY Law Allowing Insurer to Go For-Profit Advances

Friday, May 21, 2004
Charles Bell, Programs Director
914-378-2507 / 914-830-0639 (cell)
Mark Scherzer, Attorney for Plaintiffs
212-406-9606 / 917-544-6464
Laurie Sobel, Staff Attorney
415-431-6747, ext 133 / 415-902-9537 (cell)

Advocacy Group Plans to Continue Broader Legal Challenge

A lawsuit challenging the 2002 conversion of Empire Blue Cross Blue Shield (Empire BCBS) to a for-profit company advanced on Thursday, when a New York appeals court upheld a lower court ruling that the case can go to trial. The lawsuit, brought by Consumers Union and five Empire BCBS policyholders against the State of New York, charges that the New York legislature may have violated the state’s constitution when it passed a law in January 2002 for Empire’s exclusive benefit.
The statute in question authorized Empire BCBS to abandon its nearly 70-year history as a nonprofit insurer to become a for-profit corporation, which is now known as Wellchoice. Consumers Union and other consumer organizations believe the Empire BCBS conversion will result in the loss of $3 billion in charitable assets that should remain dedicated to expanding access to affordable healthcare coverage in the state
On Thursday, the Appellate Division, First Department upheld an earlier ruling by Judge Ira Gammerman of the New York Supreme Court that Consumers Union and co-plaintiffs have stated a viable consitutional claim that the law is a “private law” for the exclusive benefit of one company, and can go to trial on the facts in the case.
“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 this law gave Empire an exclusive right to convert, and an exclusive exemption from the duty to turn its assets over to another nonprofit organization, when it stopped operating as a charitable organization.” 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 hearings.
According to the lawsuit, 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, 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. The suit charged 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 suit also stated that Empire BCBS’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 New York Supreme Court dismissed the original claims they the plaintiffs asserted, and found that the plaintiffs other than Consumers Union and the individual policyholders lacked standing to sue. The Appellate Division affirmed the lower court ruling on these issues, and also upheld Judge Gammerman’s ruling to dismiss the plaintiffs’ other constitutional claims relating to government taking of private charitable property, and breach of fiduciary duty by Empire BCBS. Consumers Union and co-plaintiffs expect to appeal these important claims to the state’s highest court, the New York Court of Appeals.
“Over $3 billion in charitable assets that can help New Yorkers gain access to affordable healthcare are at stake in this case,” said Charles Bell, Programs Director for Consumers Union. “The 2002 law that authorized the Empire conversion broke six years of promises to consumers and the community that those funds would be transferred to a charitable foundation. We will vigorously continue our fight in the courts and the legislature to ensure that Empire’s assets are protected for consumers who need affordable health coverage.”
In most states where nonprofit insurers have been permitted to convert to for-profit companies, the full value of the plan has been transferred to nonprofit charitable foundations dedicated to expanding access to healthcare. By contrast, the legislation authorizing the conversion earmarked most of Empire BCBS’s assets for hospitals to fund a private, short-term labor contract.