Profit Motive

IMAGINE A PILE OF GOLD. A GIGANTIC pile, ingot upon ingot, stacked to the sky. Imagine that this pile holds a vast amount of wealth, $20 billion, $25 billion, maybe more. And who owns these uncounted riches? Nobody, absolutely nobody. They're just sitting there, glistening,. waiting to be claimed.

A fantasy? Nope. This story's for real, and you may qualify for some of the gold. Its current owner is your local Blue Cross and Blue Shield, one of the 63 Blues plans that insure the health of one in four Americans. The Blues are not-for-profit companies. Now, many of them want to sell stock-in the interest of providing better health care and stronger insurance, they say. But while they may be nonprofit, the Blues aren't impoverished. Thanks to years of state and federal tax breaks, most of them are rich. Legislators, policyholders, consumer groups, would-be investors and the Blues' own executives are grabbing for that booty in what may be the biggest gold rush since Sutter's Mill. "That's the heart of the debate," says Texas lawyer Patrick Cantilo, an adviser to state regulators. "Are we letting the value go to the new investors, or are we letting it go to someone else?"

Nobody cared about that question back in the 1930s, when the Blues were set up by doctors and hospitals who wanted to be sure they'd get paid for rendering care. Health insurance was still rare, and the Blues won tax exemptions in return for promising to insure all comers. The public came to view the trademark cross and shield as emblems of some higher virtue. The image persists, but reality has changed. The federal tax break was curbed in 1986. Most states have revoked the Blues' special tax treatment and freed the companies to reject high-risk customers. By now the insurance policies and health-maintenance organizations that most Blues offer aren't much different from anybody else's. "When you hear the phrase not-for-profit, people think, 'charitable foundation'," says Patrick Hays, president of the Blue Cross and Blue Shield Association, which franchises the name. "They are definitely not charities."

But they're still nonprofits therein lies the rub. For-profit companies like United Healthcare and US Healthcare--soon to be acquired by insurance giant Aetna--have muscled onto the Blues' turf. "The public isn't looking for whether we're profit or nonprofit," says Roy Heimburger, CEO of Blue Cross and Blue Shield of Missouri. "They're looking for value." Blues have fought back by setting up for-profit HMOs. And once there's a for-profit subsidiary, well, why not take the entire company on the stock market. Unless they can raise more capital selling stock, Blues execs claim, they can't fend off the competition and finance the ever-rising cost of medical care.

Of course, there's more to it than keeping up with the Aetnas. The Blues that want to become for-profits are hardly lacking for resources, says Colorado Insurance Commissioner Jack Ehnes. "These are not cash-short companies. These are heavy, heavy balance sheets." But even if a Blue is well heeled, going public has attractions. Like stock options for execs, which a nonprofit can't offer but which for-profit Blues will hand out generously the moment they issue equity. Like the chance to snap up other companies, which is hard for a nonprofit to justify but which for-profit companies do all the time. Like extracting more revenue--"unlocking the value," as Wall Streeters say--from assets like customer lists and the Blue Cross Blue Shield name. Add up all the advantages of issuing stock, says Princeton economist Uwe Reinhardt, and "the temptation is irresistible."

Like that gold rush back in '48, this one started in California. In 1993 Cal Blue Cross sold the public 20 percent of WellPoint Health Networks, its for-profit HMO. WellPoint took off like a rocket and now covers 2.8 million people. Step two: Cal Blue Cross proposed to fold itself into WellPoint. Whoa! said regulators: the nonprofit's assets--including its 80 percent of WellPoint--are for the public's benefit. After years of dickering, Cal Blue Cross gave in. On June 1, it will hand $1 billion, plus $2.2 billion in WellPoint stock, to two new foundations. "The state has gotten what it's entitled to," says Harry Snyder of Consumers Union in San Francisco. Much of that stock will eventually be sold, leaving the foundations to spend about $200 million a year on medical research and care for the poor.