Group Uncovers $6.5 billion in Out-of-State Profit Transfers

Santa Monica, CA — At a public meeting today in Los Angeles, Blue Cross patients facing steep rate increases and others whose doctor-recommended care has been canceled or refused joined consumer advocates to call for penalties against the company and broad-based health care reform.

The public meeting was organized by state regulators in response to complaints that Blue Cross violated a patient protection agreement, advocated by the Foundation for Taxpayer and Consumer Rights’ (FTCR) and adopted as a condition of its 2004 merger with Anthem. The merger resulted in the formation of the nation’s largest health insurer.

FTCR released today a new analysis that shows that up to $6.5 billion in California insurance premiums were illegally transferred to Blue Cross‘ out-of-state parent company in violation of the 2004 merger agreement (including $950 million in the first three months of 2007). Click here to download FTCR’s comments.

FTCR said that Blue Cross had broken its agreement with regulators not to charge patients for $4.2 billion in merger financing costs and up to $600 million in bonuses and stock options to top executives.

“We feared that Californians would ultimately pay for the merger through either increased rates or reductions in coverage. Both have come to pass. Blue Cross should not be allowed to continue to double
cross patients and profit by breaking the law and refusing to honor the merger agreement,” said Jerry Flanagan of FTCR. “At a time when 6.5 million Californians cannot afford coverage and millions more are
underinsured, Blue Cross cannot be allowed to treat California like its ATM.”

Blue Cross patient complaints collected by FTCR since the merger have ranged from denials of medically necessary care that resulted in the death of at least one patient to double-digit rate increases and a $2 charge to enrollees for each mailed bill if they refuse to allow premium payments to be automatically deducted from their bank accounts.

FTCR called for regulators to pursue injunctions against Blue Cross to bar the illegal practices, because “overly aggressive underwriting practices and refusals to pay medical bills in conjunction with illegal cancellations of coverage produce profits that greatly exceed the anemic financial penalties issued by [regulators].” In addition, FTCR said financial oversight of Blue Cross should be continued indefinitely.

Blue Cross has contributed $1.75 million to the governor and legislature since 2001 — more than any other health insurer — to block legislative health care reforms. Blue Cross recently vowed to spend another $2 million to oppose reform attempts and led a successful effort to bury legislation that would have required health insurers to get approval for rate increases (AB 1554).

Key FTCR Findings of Merger Agreement Violations:

1. $6.5 billion out-of-state transfer. Between 2004 and 2006, Blue Cross has made monetary transfers to affiliated companies in the form of dividends and so-called “management and service agreements” that exceed the amounts allowed by the merger agreement by up to $6.5 billion. Such transfers may be laundering profits that exceed the legal limit established in the merger agreement, in the form of purported payment for services.

In written comments submitted to regulators, FTCR wrote that regulators: “[C]annot accept the transfers for ‘management agreements and service contracts’ at face value because without scrutiny, billions in illegal transfers could be included in payment for purported services. In fact, the financial incentive is precisely for the out-of-state affiliates to overcharge for services, and for BCC to willingly overpay, in order to transfer profit amounts that exceed the allowed limit.

What BCC is doing is no different from a public official steering public contracts to himself without competitive bidding. … The overwhelming suspicion in such a case is that it is pure self-dealing, and no bargain to the public.”

2. $950 million First Quarter ’07 Dividend: Independent auditors must review a $950 million dividend BCC transferred to its out-of-state parent company in the first three months of this year. Per the merger agreement, that payment should not have exceeded $141 million.

3. Bare-Bones Coverage: Since 2004, BCC has dramatically increased the number of limited benefit bare-bones policies in California — a violation of the merger agreement that Blue Cross would not change its methodologies for determining products and benefit designs. As result, Californians pay more for less coverage and are not adequately protected when they get sick.

4. ‘Pre-existing’ Condition limitations Denials of Care: Huge out-of-state profit transfers have been funded by anti-consumer practices that have escalated in the years since the merger — a violation of the merger agreement that Blue Cross would not changes its business practices. Internal Blue Cross underwriting documents revised one month prior to the merger approval show that Blue Cross now regularly
refuses to sell coverage at any price to people with minor health conditions like: Acne, Arthritis and Asthma. Click here for more on the internal Blue Cross documents.

5. Illegal policy terminations: Overwhelming evidence demonstrates a routine and flagrant violation of Health and Safety Code § 1389.3 barring insurance companies from terminating policies unless patients are shown to have made intentional misrepresentations of their health conditions on enrollment applications. Such practices violate provisions of the merger agreement that Blue Cross would not terminate policies except for instances of fraud.

Click here to download the 2004 Blue Cross/Anthem merger agreement.

Read about FTCR’s work to hold Blue Cross accountable to its merger promises.

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FTCR is California’s leading public interest watchdog. For more information, visit us on the web at www.ConsumerWatchdog.org.