STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE
34 STATE HOUSE STATION
AUGUSTA, MAINE 04333-0034

Now come Consumers for Affordable Health Care (CAHC), by and through its counsel, and provide the following closing arguments to the Superintendent of Insurance to urge him to disapprove the conversion plan for failure to meet statutory requirements and to find that any future conversion plan submitted by the applicants must contain specific protections for the people of Maine and current BCBSME policyholders. In addition, CAHC requests that, to the extent that a future conversion plan contains certain harmful policies or provisions identified herein, it also be rejected.

I. Blue Cross and Blue Shield of Maine Is A Publicly Owned Asset Whose Value Requires the Highest Level of Scrutiny

Blue Cross and Blue Shield of Maine was declared a "charitable and benevolent institution" by the Maine Legislature in 1939 (P.L. 1939, Charitable trust plan. 24, §15 codified at 24 M.R.S.A. §2311. Prior to the adoption of 24 M.R.S.A. §2301(9-D), the Superintendent of Insurance required BCBSME’s to provide a proposed plan to guarantee that the charitable assets of BCBSME "will continue to be used in their entirety for charitable purposes." (see, In re Application of Maine Partners Health Plan, Decision and Order, April 18, 1997). The Maine Legislature codified that portion of the Superintendent’s ruling regarding the charitable mission and purposes of BCBSME in 24 M.R.S.A. § 2301(3-C) and public ownership of its assets in 24 M.R.S.A. §2301(9-D). See also, 5 M.R.S.A. §194-A

After a period of years in which BCBSME disavowed its charitable status and, hence, the public ownership of its assets, the Superintendent of Insurance and the Maine Legislature took a differing. The struggle was long and hard fought. The people of Maine, and their ownership rights to BCBSME’s assets, were vindicated. This history caused many legislators to approach the possible conversion of those assets with extreme care. The matter of the utmost importance to legislators was ensuring that the people of Maine got every penny that was due them. The Maine Legislature, having heard the repeated public denials by BCBSME officials that Maine people owned the company’s assets, enacted a law which laid out very strict standards to ensure that an independent appraisal of BCBSME’s assets was performed, that it was performed as near to the closing of the transaction as possible so that no potential gain in value would be lost, and that it provided detailed and complete information to the people of Maine as to how the value was determined. The record shows that that appraisal was not done.

II. BCBSME Failed to Meet the Statutory Requirement to Have An Appraisal Stating A Methodology Fixing the Final Value At A Time Coincident with the Closing of the Transaction

1. An Independent Appraisal Is Essential to Approval of the Conversion Plan

A non-profit health insurer like BCBSME may convert its corporate form to domestic stock insurer only by, inter alia, filing a plan of conversion which contains an independent appraisal of the fair market value (hereinafter "FMV") of the converting insurer. 24 M.R.S.A. §2301(9-D)(I). Such an appraisal is necessary to determine the amount of money which must go to the charitable trust established as a result of the conversion. 24 M.R.S.A. § 2301 (9-D) (I) (1). BCBSME Senior Vice President and Treasurer Frank McGinty testified about the "firestorm of controversy" which underlied the passage of the statute mandating the establishment of a charitable trust upon conversion. Prefiled testimony of Francis G. McGinty, pp. 2-3. The importance of an independent appraisal fixing the FMV of the converting insurer is underscored by 24 M.R.S.A. § 2301 (9-D) (I) (5), which allows the superintendent to "decline to further process or reject the application for conversion" if the the independent appraisal. An independent appraisal of the FMV of the converting insurer is the sine qua non of the right to convert.

B. Plain Language of the Statute Requires An Appraisal At the Time of Closing of the Transactions

BCBSME has the burden of proving that the conversion plan met the statutory requirements included in 24 M.R.S.A. §2301(9-D). See, e.g., 24 M.R.S.A. § 2301 (9-D) (B)(4). Those requirements include §2301(9-D)(I), which requires an appraisal:

The conversion plan must include an appraisal of the fair market value, or range of values, of the aggregate equity of the converted stock insurer to be outstanding upon completion of the conversion plan and, if a range of values, the methodology for fixing a final value coincident with the completion of the transactions provided for in the conversion plan. (Bold and italics added)

The language of the statute is unequivocal regarding the valuation date of the required appraisal - it must appraise the FMV of the insurer "upon completion of the conversion plan." Id. An appraisal which fixes the FMV of BCBSME as of July 13, 1999, nearly 10 to 11 months prior to the completion of the conversion flies in the face of the statute. The statutory valuation date cannot be ignored or amended by either the superintendent or a reviewing court. See Kimball v. LURC, 2000 ME 20, ¶ 26, 745 A. 2d 387 ("Just as we are not free to interpret a statute so as to render a provision a surplusage …, so too we are not free to substitute a different date for the existing one. Such speculation and legislative redrafting is wholly outside of our role as a court.") (bold added).

An appraisal fixing the FMV of BCBSME as of the completion of the conversion was never done. Robert Hoyer, the Superintendent’s expert from Arthur Andersen, confirmed by his testimony that no independent appraisal had been performed since the July 13, 1999 Houlihan, Lokey, Howard and Zukin (hereafter HLHZ) appraisal. He further confirmed by his testimony that he himself had not performed an appraisal. BCBSME Attorney Robert Frank further confirmed that no appraisal had been done as of March 28, 2000, the date on which the Superintendent deemed the application complete.

HLHZ fixed the value of BCBSME at $102.5 million as of July 13, 1999. Again, the statutory requirement is clear on its face. It is the appraisal that must provide the methodology for fixing a final value coincident with the closing of the transactions provided for in the conversion plan. In response to a question about the steps that would be required for the Superintendent to be able to determine the fair market value at the time of closing Mr. Hoyer stated:

"I believe there are alternatives as to how that can be shown. Clearly one way would be a full valuation as of the closing date. That was not done in this particular instance; however, given that we concluded that the Houlihan Lokey valuation was a reasonable representation of value in July of 1999, certain adjustments can be made to that figure which would give an estimated fair market value at the present." (Italics added)

Messrs. Collins and Krug stated, under questioning by the Superintendent, that they had not confidential redacted – confidential redacted. If the HLHZ appraised FMV of $102.5 million dollars no longer represents the FMV of BCBSME, then a new appraisal is required, before the the conversion plan may be approved.

III. The Superintendent Has No Authority To Lower The Independently Appraised Value By 20 Million Dollars.

Radical manipulations or "adjustments" to the appraisal are clearly not contemplated nor allowed by the statute. In fact, the need to make such "adjustments" and manipulations underscores the material deficiency of the appraisal. In other words, if the statutory requirement had been met, there would be no need to make adjustments to the July 13, 1999 appraisal in order to "fix a final value coincident with the closing of the transactions." In denying the Consumers for Affordable Health Care Motion to Dismiss, the Superintendent erroneously made up a new standard not found in the statute, by combining language from the controlling paragraph (I) with language from subparagraph (I)(1). In ruling on the motion the Superintendent said:

In determining whether the value of Blue Cross is consistent with section 2301

(9-D), the conversion plan must include an appraisal of the fair market value of the aggregate equity of the converted stock insurer, and I quote, the appraisal must enable the Superintendent to determine the value for purposes of determining the amount of cash the charitable trust is entitled to receive. Transcript of the Proceeding, April 5, 2000, Afternoon Session, pg. 45, lines 15 – 23 (Italics added).

The Superintendent of Insurance mistakenly interprets the statute that describes the purposes of the appraisal as amending the statute that mandates the timing of the appraisal. This is legal error. Subparagraph (I)(1) in no way limits the controlling language in paragraph (I). Rather, it simply states the purposes for which an appraisal and its methodologies are needed. Section 2301(9-D)(I)(1) makes clear that once a final value coincident with the completion of the transaction has been established in paragraph (I), then the amount of cash or other assets that the charitable trust is entitled to receive can be determined. The superintendent has no power to amend the statutory valuation date. See, Kimball, supra.

IV. If The July 13, 1999 Appraisal No Longer Represents the Fair Market Value of BCBSME, Then A New Appraisal Is Required

As stated above, 24 M.R.S.A. §2301(9-D)(I) requires that an independent appraisal be provided. The only appraisal on record was performed by HLHZ as of July 13, 1999. That appraisal values the assets of BCBSME at $102.5 million. Unless a new appraisal that values the company as of the date of the closing of the transactions is performed, the fair market value of BCBSME’s assets have been set at $102.5 million.

A. Mr. Hoyer Rejected BCBSME’s Attempt to Derive The Current FMV of BCBSME From The July 13^th FMV of $102.5 Million

Mr. Hoyer’s testimony dismissed the notion that the adjusted purchase price agreed to between BCBSME and Anthem could be used as a proxy or substitute for fair market value. The fact such adjustments were the product of negotiations between a buyer and a seller and were not necessarily related to the FMV of BCBSME formed Mr. Hoyer’s basis for rejecting each. Nevertheless, after rejecting Mr. McGinty’s attempts to divine a fair market value in such a manner, Mr. Hoyer comes up with his own amorphous estimate of what the current FMV of BCBSME might be:

Q: Based upon your analysis, what do you then conclude the fair market value to be as of the closing date?

A: I do not have a quantification specific to fair market value on the closing date. The three adjustments shown on Mr. McGinty’s analysis are improper and incorrect, and, therefore, his conclusion that fair market value is 73.1, even reflecting the misstatement of the date of that value, is not correct; however, based on figures and information that has been provided as part of his testimony, reasonable estimates can be made of what those values might be, and I believe that as a result of that analysis, that the fair market value is somewhat less than the net proceeds to foundation of 81.7. I do not have a specific quantification. (Bold, italics added)

B. The Record Offers No Information About Or Support For Mr. Hoyer’s Assertions Regarding Fair Market Value

With the exception of the HLHZ appraisal dated July 13, 1999, the record is devoid of an independent valuation of BCBSME. Mr. Hoyer rejected BCBSME’s attempts to derive a valuation through Mr. McGinty’s pre-filed testimony. Mr. Hoyer himself did not do a valuation. HLHZ’s experts said they had not performed a valuation since July 13, 1999 and, consequently, could not form an expert opinion as to the current fair market value of BCBSME. This is not surprising since Mr. Collins stated that he would have to "confidential redacted- confidential redacted – confidential redacted." The record shows that this was not done here, not by Mr. Collins, nor Mr. Hoyer, nor anyone else. In estimating the current FMV of BCBSME, Mr. Hoyer selectively considered only three factors, see id. at p.17, and ignored all of the other factors material to an appraisal of FMV. Compare id. with Transcript of the Proceeding, April 5, 2000, Afternoon Session (Mr. Collins statement as to what would be essential for an updated valuation of BCBSME). This is especially important in a situation like the present one, where removal of a simple 4.4% size/risk premium from the Discounted cash Flow method of valuation would result in an 70% increase of the final FMV of the company. See Transcript of the Proceeding, April , 2000, Afternoon Session , pp 91-93 (testimony of Dr. Strong).

A new valuation is required to assess the current FMV of BCBSME. The superintendent should order one. Moreover, the superintendent should ensure that the new valuation properly values the full worth of BCBSME's interest in Machigonne. If 43% of Machigonne is worth 4.3 million dollars, then 57% is necessarily worth 5.7 million dollars. BCBSME's ownership of 57% of Machigonne should have a positive effect, not a negative effect on the FMV of BCBSME. A new valuation should not be corrupted by knowledge of the contract price agreed upon by the parties. Finally, in fixing the final FMV of the company, the superintendent should require a true valuation of the Medicare - related risk assumed by Anthem, as opposed to the $5 million price tag which Mr. Hoyer testified was unrealistic.

6. Anthem Should Be Required to Commit 200 – 250% of Its Company Action Level To Risk Based Capital

   Anthem’s decision to maintain all of its subsidiaries, including Maine should this transaction be approved, at risk-based capital levels varying from 100 – 125% of company action level is considered a bare-bones minimum. Anthem’s counsel offered a commitment to a level of 200 – 250% of its company action level as a way of satisfying the Superintendent’s expert concerns in this regard. The Superintendent should require such a well capitalized company to commit 200 – 250% of its company action level to meet the risk-based capital standards here.

7. Anthem Should Be Required to Maintain All Aspects of Blue Cross and Blue Shield of Maine’s Current Operations Including Products and Medical Policies For Not Less Than Five Years. Anthem Should Be Required to Maintain BCBSME’s Statewide Provider Networks In Perpetuity. Anthem’s Drug Exclusionary Policy Is Contrary To The Public Interest and Must Be Rejected.

If the Superintendent finds that Anthem’s takeover of BCBSME would tend to adversely affect BCBSME’s ability and tendency to render service to its policyholders and the public, the Superintendent may disapprove the application. 24-A M.R.S.A. §222(7)(A)(7)

A. Anthem Should Not Be Allowed To Terminate or Change Any Current BCBSME Product Offering For A Minimum Period of Five Years

Anthem East Integration Team documents provide ample evidence that Anthem uses confidential redacted – confidential redacted – confidential redacted. Anthem’s Chief Financial Officer’s statements confirm that confidential redacted are employed. Mr. Smith’s attempt to distinguish Anthem’s actual recorded plans to confidential redacted in Maine (and other states) by stating planned actions were limited to Connecticut fails to convince even the most gullible. In fact, the implication of third sentence of document B 10749 is that except for the Maine Partner members, all other Maine BCBSME subscribers are included in Anthem’s proposed confidential redacted – confidential redacted – confidential redacted.

The Superintendent should prohibit Anthem from taking any such actions for a minimum period of five years.

B. Anthem Should Not Be Allowed To Terminate or Change Any Medical Policies For A Minimum Period of Five Years.

Again, the record shows that Anthem East Integration Team plans to change BCBSME’s medical policies through a confidential redacted - confidential redacted." Anthem’s representation that medical policy would remain a local decision is clearly contradicted by Dr. Scalettar’s statement in reference to AN 02092:

"Confidential redacted - confidential redacted - confidential redacted."

(Bold, italics added)

The BCBSME medical policies have taken many years to develop and should not wiped out by Anthem as a result of this merger. The record shows that one woman in Ohio died because of Anthem’s internal medical policy that deemed - confidential redacted confidential redacted. Dr. Scalettar stated:

"Confidential redacted confidential redacted confidential redacted -" (Bold, italics added; Dr. Scalettar’s response was cut short by the Superintendent’s next question)

Many of Anthem’s medical policies are untested. The Superintendent must not allow Maine BCBS subscribers to be subjected to such policies for a minimum period of five years. Five years is a reasonable period within which this company and current BCBSME subscribers can learn more about such harmful policies as the ones described above and D. below. Such policies would not only adversely affect BCBSME policyholders, but also be contrary to the public interest in the operation of its HMO. 24-A M.R.S.A. §4204(2-A)(F)

C. Anthem Should Be Required to Maintain Statewide Provider Networks In Perpetuity.

Maine is a rural state with over two-thirds of its citizens residing in rural areas. Many of Maine’s residents are current BCBSME subscribers (440,000 out of a privately insured population of about 770,000). They rely on the fact that BCBSME pays for services provided by providers in their communities. This point became the center of controversy at the Legislature and resulted in the House passing a joint order (H.P. 1944). To date, Anthem has refused to commit to maintaining BCBSME’s current provider networks statewide.

The Superintendent should require Anthem to continue its networks under §222(7)(A)(7).

D. Anthem’s Drug Exclusionary Policy Is Contrary To The Public Interest And Should Be Prohibited in Maine

Dr. Scalettar’s statement regarding Anthem’s determination that the intra-arterial drug procedure did not withstand Anthem determination of "confidential redacted" underscores the need to prohibit Anthem’s drug exclusion policy.

Dr. Goldfield’s testimony states that under no circumstances could Anthem’s six-month exclusion on payment be viewed as a "safety measure." He also stated that the policy is "an effort to cut costs at the expense of improved patient quality." (CAHC Ex. 3, Pre-filed testimony of Dr. Norbert Goldfield)

Dr. Goldfield testified that drugs and technologies take years for the FDA to approve and, as part of that process, they are scrutinized for safety and effectiveness. There is no supportable basis stated in the record for Anthem to refuse to pay for new approved drugs and technologies. If Anthem seriously wanted to ensure that new approved drugs and technologies were safe and effective, it could do independent testing and research during the FDA approval process rather than imposing such draconian payment restrictions on its policyholders. Clearly, the only motivation for Anthem is to cut costs at the expense of improved quality of care for patients.

The Superintendent may deny the application for the certificate of authority to operate as an HMO if he finds something in Anthem’s proposed method of operation is contrary to the public interest. 24-A M.R.S.A. §4204(2-A)(F) The Superintendent should prohibit Anthem from adopting such a policy here as did the Connecticut Department of Insurance according to the Anthem panelists.

VIII. Confidential redacted

 

 

IX. The Superintendent Should Require That The Charitable Foundation Have Adequate and Sufficient Representation On The Board of the Liquidation Trust

As described in testimony provided by Mr. Foster, the Charitable Foundation is at risk for contingent tax liabilities incurred by the Liquidation Trust without representation on the Liquidation Trust’s Board. This is an untenable position. The Superintendent should require that the Charitable Foundation have adequate and sufficient representation on the Liquidation Trust’s Board in order to protect the interests of the Foundation. Moreover, once the final accountings of the Liquidation Trust are made and the affairs of the trust are wound down, the Liquidation Trust should be terminated.

 

CONCLUSIONS

The conversion plan submitted by the applicants fails to meet the statutory requirements. The Superintendent of Insurance must, therefore, disapprove the conversion plan, or at a minimum, suspend the processing of it. The applicants must submit a conversion plan that meets the statutory requirements. With regard to valuation, they must provide an appraisal as of the closing date of the transactions. If they choose not to undertake a new appraisal, they must turn over $102.5 million to the Charitable Foundation.

Consumers for Affordable Health Care urges the Superintendent to disapprove the conversion plan for failure to meet statutory requirements and to find that any future conversion plan submitted by the applicants must contain specific protections for the people of Maine and current BCBSME policyholders. In addition, CAHC requests that, to the extent that a future conversion plan contains certain harmful policies or provisions identified herein, it also be rejected.

DATED: April 14, 2000 Respectfully Submitted,

_______________________________

Joseph P. Ditre, Esq.

Dale Lavi, Esq.

Consumer Health Law Program

A Program of CAHC Foundation

One Weston Court, Level One

P.O. Box 2490

Augusta, ME 04338-2490

Phone: (207) 622-7083

Fax: (207) 622-7077

Email: jditre@mainecahc.org

Patrick F. Ende, Esq.

Maine Equal Justice Partners

65 State Street, 2^nd Foor

P.O. Box 5347

Augusta, ME 04332-5347

Ph: 207-626-7058

Fx: 207-621-8148

Email: pende@mejp.org

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