Blue Cross Merger Decision Expected Soon in MT

Montana insurance officials expect to find out in April if a proposal from Health Care Service Corporation (HCSC) to buy Blue Cross and Blue Shield of Montana (BCBSMT) for $17.6 million can go forward. But that may be too late for a sweeter deal for Montana under an agreement that the state's Attorney General signed off on with HCSC officials.

A hearing on the proposal was held earlier in March with former state Supreme Court Justice Bill Leaphart acting as hearing officer. He is waiting on two reports; one from each of the chief counsels for AG, Tim Fox, and Insurance Commissioner, Monica Lindeen.

Lindeen is responsible for evaluating the impact on health insurance members and the health insurance market. BCBSMT is the state's largest insurer. Fox will determine if the price offered by HCSC is fair. The two offices are somewhat at odds over a deal that Fox brokered with HCSC prior to Leaphart's hearing.

The terms Fox agreed to with HCSC include a nearly $23 million increase in the original purchase price, and a new call center in Great Falls, Mont., within a year if insurance regulators signed off on the deal by March 30.

The chief counsels preparing recommendations have until April 19 to submit their findings to Leaphart, who will then issue his own recommendation.

Lucas Hamilton, communications and policy director for the Insurance Commissioner's office says expect Leaphart's opinion is expected "before the end of April." Lindeen told a local paper Fox's agreement with HCSC officials for a March deadline was "premature." At issue is that both Fox and Lindeen have to approve the agreement before it can go forward with or without modifications.

The long and complicated road to approving HCSC's purchase is due, in part, to Montana's conversion law, which is being tested out for the first time, says Hamilton. Passed in 2005, the law is meant to protect the state's consumers if a nonprofit health plan converts to one that is for-profit.

HCSC, also a nonprofit, has said the company's business status would not change. But under Montana's law, the deal has to be brokered as if the insurer was converting to be for-profit because Lucas says HSCS has stipulated to the conversion statute, and BCBSMT is legally losing its nonprofit license.

For Montanans, that means that a nonprofit foundation has to be set up from BCBSMT's current surplus, which is estimated to be $100 million, plus the purchase price, which is now $40.2 million. The AG's office would be responsible for determining how the $140 million trust would be used, though the law spells out that it must be for the public good.

Chicago-based HCSC is a non-investor owned (NIO) mutual insurance company doing business as a nonprofit health plan. It is an independent licensee of Blue Cross Blue Shield Association and operates BCBS plans in four states: Illinois, New Mexico, Oklahoma, and Texas. HCSC has more than 13 million members.

In its original application to state officials, BCBSMT stated it wanted to partner with another BCBS plan to capture economies of scale and compete with national health plans entering the market. The application also makes clear that HCSC's NIO status played a key role in BCBSMT's decision to partner with the insurer.

Paul Keckley, Ph.D., executive director for the Deloitte Center for Health Solutions, is not surprised at HCSC's move to acquire BCBSMT. He says mergers and acquisitions "in the Blues family" is common, and is expected to accelerate.

Deloitte took an in-depth look at the merger and acquisition transactions among health plans. The 10-page report shows no clear path to positive post-deal results.

The report's authors studied 44 M&A contracts 2006–2012. It took into account several balance sheet metrics, including price per share (PPS) of the acquiring company. The PPS was looked at three different times: when a deal was announced, a year after the announcement, and three years post-transaction.

Since the M&A cycle varied among the 44 companies, the number of plans included in the results varied. But among the key findings is 55% of the M&A deals had an immediate increase in (PPS); 36% of the acquiring plans had an immediate decrease in PPS, and 9% had no change. While there were more increases in PPS overall, the average value increase was measly at just one-tenth of 1%.

In Montana, the clock is ticking.