Michigan Blues Plan for acquisition of physician health plan assets

Blue Care Network’s (BCN’s) proposed acquisition of the major assets of Physicians Health Plan of Mid-Michigan (PHP) is facing criticism from the state attorney general’s (AG’s) office and others. Among the criticisms leveled at the proposed purchase are whether BCN’s reserves could have been used to staunch the $46.8 million in losses reported during the first six months of 2009 by its parent company, Blue Cross and Blue Shield of Michigan (BCBSM).

At least one newspaper and AG Mike Cox (R) have questioned whether the funds proposed for the purchase could have offset losses and kept BCBSM from requesting rate hikes of more than 30% for roughly 400,000 members. Cox says, “Blue Cross and its subsidiaries must explain how they can afford to buy another company even as they fight to raise rates on seniors.” He adds until the plan can answer this, “I will remain skeptical” of the purchase. The AG’s office sent letters to state and federal regulators, requesting public hearings and asking the regulators to investigate the extent to which the purchase will reduce competition in the region.

In the proposed deal, announced Sept. 15, BCN agreed to take on the membership and purchase nearly every asset belonging to Sparrow Health System’s HMO, PHP. Under the proposal, BCN will acquire PHP’s nearly 80,000 commercial members and 18,000 Medicaid HMO members. PHP posted net income of $3.2 million on revenue of $175.3 million for 2008. Neither company will disclose the financial terms of the agreement until they get final approval on the deal from the Michigan Office of Financial and Insurance Regulation (OFIR) and the Michigan Community Health Department.

Cox Cites History of BCBSM Purchases

Cox, a persistent critic of BCBSM, notes that the company and its subsidiaries have spent more than $350 million acquiring other companies since 2005. But during the same time, the Blues plan has reported millions of dollars in losses and asked for premium increases on multiple lines of health insurance. Cox adds that the company has a history of making loans and transfers to subsidiaries to make acquisitions and wants to know if such transactions are part of BCN’s deal with PHP.

On Oct. 7, the AG’s office sent letters to the U.S. Department of Justice, the Federal Trade Commission and OFIR, according to spokesperson John Selleck. The letters, he explains, request that the agencies review whether the purchase will reduce competition in the Lansing, Mich.-area where PHP operates and whether the proposed purchase will affect “the overall surplus of BCN’s parent company.” According to Selleck, reports we’ve seen indicate that if the purchase is completed, “Blue Cross would hold over 90% of the market in Ingham County.” The letter to OFIR expressed both concerns, Selleck says, and asks for a public hearing on the acquisition, a request similar to the AG’s actions when BCN proposed its $240 million purchase of M-Care in 2007.

Selleck says the AG’s office also is concerned about how BCN is paying for the purchase. “Our staff attorneys are concerned that though BCN said they [are buying PHP] on their own, the money is still from the parent company.” He adds that BCN “said they paid $45 million cash and there are other conditions that haven’t been spelled out. We’d like to see how it affects the parent’s surplus.” The office is worried about the effect of the purchase on BCBSM’s surplus since the experienced a loss in the first six months of 2009, according to Selleck. However, BCN reported net income in 2008 of $85.6 million, according to the Lansing State Journal.

BCN CEO Contends Its Reserves Are Separate

BCN CEO Jeanne Carlson wrote an op-ed article, published in that newspaper on Sept. 27, defending the proposed acquisition after an editorial criticized it. According to Carlson, the HMO “is making the purchase by moving investment dollars from its segregated reserve fund. These dollars are currently in other investments. Blue Care Network fully expects a solid return on investment from the PHP transaction through premium revenue and spreading of administrative costs.” She adds that the editorial suggested that BCN “use its reserve dollars to fund losses incurred by Blue Cross’s individual and Medigap products. This is not permitted by law. The dollars are segregated for the benefit of Blue Care Network members.”

Dave Waymire, a spokesperson for the Michigan Association of Health Plans, fears the deal “will create an even more dominant monopoly in the Lansing region.” Pointing to a report from advocacy group Health Care for America Now, he notes that BCBSM already had 65% of the overall Michigan market in 2007. BCN has the state’s largest HMO network of physicians and hospitals, including 4,300 primary care physicians and 116 hospitals — compared with PHP’s mid-Michigan network of 11 hospitals and 1,300 physicians.

The Michigan Medical Society does not have a stance on the purchase yet, according to spokesperson Jessy Sielski. He says, “We want to keep a close eye on it when they’re considering approving the deal,” adding, “We’ll see what this means in terms of transitioning the network and find all the facts as they come available.” And he says that many providers in PHP’s network also are in BCN’s network.

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