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Subject: Blue Cross Plans Agree to Merger; Troubled D.C. Unit Gets Lift From Va.<By
Date: Thu, 29 Oct 92 04:29:59 EST
Message-ID: <18.1992Oct29.042959@AmeriCast.com>

Blue Cross Plans Agree to Merger; Troubled D.C. Unit Gets Lift
From Va.<By Thomas Heath and Albert B. Crenshaw<Washington Post
Staff Writers=

Racked by losses that have seriously depleted its financial
reserves, Blue Cross-Blue Shield of the National Capital Area
tentatively agreed yesterday to be absorbed by its richer Vir-
ginia counterpart in an effort to restore its fiscal health.

Blue Cross officials said the merger, which requires approval by
state and District regulators, would not have any immediate ef-
fect on coverage or rates for the 1.1 million Washington area
residents served by the National Capital Area plan.

However, the consolidation could result in the elimination of a
portion of the 4,200 jobs at the Washington-based operation.
"When you put organizations like this together, you look for
economies of scale, ways to reduce expenses," said Norwood M.
Davis Jr., chairman and chief executive officer of the Virginia
plan. "That will be done and that will be done aggressively."

The merger would create the third-largest Blue Cross plan in the
nation, serving about 2.9 million people and generating annual
revenue of about $4 billion. Only Empire Blue Cross-Blue Shield
of New York state and Blue Cross and Blue Shield of Michigan
would be larger.

The deal culminates days of negotiations between the Washington-
based and Richmond-based plans, which began  because the finan-
cial reserves of the National Capital Area operation have fallen
by half in the last year. Talks came to a head Monday night, when
directors of the Washington-based plan decided during a six-hour
emergency meeting to seek the merger with Virginia Blue Cross.

Sources said that as part of the deal, the Virginia plan has
agreed to loan $30 million to the Washington plan. Such a loan
could simultaneously bolster the Washington plan's lagging
reserves and reassure policyholders of its solvency, sources
said.

Davis said yesterday that no loan amount will be finalized until
his company completes its examination of the Washington plan's
books.

Once that is done, "it may be at that time we would lend them
(money) if that's appropriate," Davis said. "But that would be
more to provide comfort to the policyholders and regulators and
not to keep them alive."

Robert M. Willis, the top insurance regulator in the District of
Columbia, said yesterday that the agreement between the two Blue
Cross plans includes "a surplus note that would be sufficient to
eliminate any risk to policyholders." Willis said he did not know
the size of the surplus note, which is effectively a loan.

Willis expressed misgivings about the proposed takeover, which
would give the Virginia plan control of the Washington-based Blue
Cross board of trustees and make Davis chairman of the partner-
ship.

"I want to make sure as part of this transaction, we are funda-
mentally solving those management problems that existed in the
past," Willis said, adding that the transaction should not be
simply a financial takeover.

Willis said he was particularly troubled by the $77 million in
reported losses at various subsidiaries of the Washington plan,
many of them in exotic foreign companies.  Willis also said he
wants assurances that the merged company would remain the insurer
of last resort for Washington area residents unable to find
health insurance elsewhere.

"I think the policyholder should be concerned about this transac-
tion" because the Virginia plan is a for-profit insurer that may
not want to accept patients with severe health risks, Willis
said.

"For those who are uninsurable, I want to make sure that person
still has health insurance available," Willis said.

Davis said the Virginia plan has continued to be an insurer of
last resort in that state and "we have a strong commitment to
community service."

Virginia, like 14 other Blue Cross plans across the country, has
converted to a mutual insurance company, a common form of insurer
that is owned by its policyholders. Any profit is returned to the
policyholders in the form of a premium refund.

The District plan, like most other Blue Cross-Blue Shield plans,
is a nonprofit corporation operating under special laws that al-
low it tax exemptions and other benefits in return for insuring
the sickest consumers.

Customers of the Washington-based plan are evenly distributed
between  the District, Northern Virginia and Montgomery and
Prince George's counties. The Richmond-based plan covers practi-
cally all of the state except for the suburbs bordering the Dis-
trict. Blue Cross-Blue Shield of Maryland is not affected by the
merger.

Ray Freson, a spokesman for the National Capital Area operation,
said he expects that the merged company would maintain a presence
in the District, although he declined to say how much.

Peter F. O'Malley, the Prince George's County lawyer who headed
negotiations for the Washington plan, said he anticipated no job
losses from the merger.

"There will be a strong District presence" if the plan is carried
out, O'Malley said. "When consolidation occurs, there will be op-
portunities" created that will make jobs available.

The details of the takeover will continue to be worked out
between the two businesses until they are finalized on Nov. 30,
according to spokesmen for both plans. The two sides agreed yes-
terday on a letter of intent calling for an inspection of each
other's finances and the development of a "road map" detailing
how and when the companies would be combined.

Analysts said the Washington plan has several attractive features
for the Richmond-based insurer. It has contracts with the U.S.
government to provide health-care coverage to about 500,000
federal workers and their families, and it maintains a nationwide
communications network for claims processing. The National Capi-
tal Area plan also has developed a sophisticated program of
managed care, in which Blue Cross negotiates the cost of medical
care on behalf of its customers.

Freson said the merger would have differing effects on customers,
ranging from a reduction in the number of health insurance poli-
cies available to changes in prices.

"Do we offer two similar products or do we pick one?" Freson
said.  "What are the issues involved in converting people who
have a present product into a new one? There have to be decisions
on whether there will be a single (rate structure area) for the
District and Richmond."

The Washington-based plan has been in the public eye since mid-
summer, when a Senate subcommittee began investigating the finan-
cial health of several Blue Cross-Blue Shield operations across
the country.

About the same time, the Virginia Bureau of Insurance was con-
ducting a scheduled review of the Washington plan's finances.  In
August, Virginia insurance regulators barred that plan from
creating or financing any more subsidiaries.

Regulators also ordered the Washington-based plan to submit by
early September a detailed proposal for selling real estate hold-
ings should it need an infusion of cash to pay claims.  As those
investigations were in progress, the Washington-based plan con-
tinued to suffer heavy losses on its subsidiaries. Also, its core
business, which had been earning enough profit to help offset
subsidiary losses, began to lose money during the first half of
this year.

That combination contributed to a drain on the company's
reserves. At the same time, the value of the assets in those
reserves, including real estate, declined. The result was that
the insurer's reserves - what it would have if it sold everything
and paid all its bills - dwindled from $102 million last December
to $52 million today.  Although the company said this week that
the $52 million exceeds minimum standards set by the state of
Virginia, the continuing operating losses, coupled with the real
estate decreases, alarmed both company officials and regula-
tors.02:13 10-29C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

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