Paul Markovich, CEO at Blue Shield of California, told the San Francisco Business Times that the insurer has no intention of giving up its “mission-driven, not-for-profit status,” pays hundreds of millions in taxes every year, and plans on paying $1.2 billion to acquire Care1st Health Plan.
Blue Shield, under fire after regulators revoked its California tax-exempt status, said in early December it planned to buy Care1st Health Plan, a multi-state Medicaid and Medicare health insurer with more than 520,000 enrollees.
The deal, originally announced in early December, is expected to close in June at the earliest, or later this year, officials told me Sunday morning.
“We’re paying a fair purchase price to start serving the neediest Californians and, in the process, transforming a for-profit into a not-for-profit and capping their income, subject to (Blue Shield’s) two percent pledge,” Markovich said, which caps its profits at two percent.
Care1st, based in Monterey Park, boasts more than 524,000 enrollees, most of them in Los Angeles and San Diego. A specialist in the government health plan niche, as of Nov. 30 it had 473,000 Medicaid enrollees, 46,000 Medicare members and 5,300 enrollees who are “dually eligible” for both government programs.
Blue Shield’s mission is to “ensure that all Californians have access to high-quality affordable care,” Markovich said. An estimated one-third of all Californians are covered by Medi-Cal, the joint state-federal program for low-income Californians, so “we’ve been looking for ways to enter this business, including doing it from scratch and this was by far the best opportunity to do so.”
Some have criticized the deal arguing that Blue Shield may have over pay for the smaller health plan. Markovich’s defended the price.
The Care1st deal resulted from an auction process in which Blue Shield was one of “multiple bidders,” he said, and “the Care1st board had a fiduciary responsibility to take the best bid.”
Besides helping it move into the Medi-Cal/Medicaid managed care market, the deal also could mitigate some of its recent perception problems. The all-cash transaction will dramatically shrink its $4.2 billion reserve fund, a source of controversy over whether Blue Shield behaves too much like a for-profit enterprise.
The weekend disclosure came just days after the news broke that Blue Shield’s tax-exempt status has been revoked in California by the Franchise Tax Board.
Once the Care1st deal closes, Markovich said, “we will be right in the middle of the range of where you need to be to be an A-rated company,” referring to financial rating agency ratings.
Although various news stories have noted that the Blue Shield’s $4.2 billion in reserves are four times what the Blue Cross Blue Shield Association requites, Markovich suggested that conversation has been a bit out of touch.
Having reserves of $1 billion or so “would most certainly get me fired,” he told me Sunday afternoon, and would be “dramatically lower” than needed for Blue Shield to remain as an A-rated insurance company.
Instead, according to the company, it needs between $2.5 billion and $3 million in reserves to retain a strong credit rating.
The Blue Cross Blue Shield Association “is talking about disaster lines” with its minimum standards for reserves, he said. “Below that, they start talking about taking the brand away.”
Moreover, Markovich stressed, “the state of California is not going to bail out Blue Shield, like the feds bailed out AIG (during the financial crisis). “We have to be financially self reliant.”
Blue Shield expects that some details from its filings with the California Department of Managed Health Care, which is reviewing the Care1st deal, will become public next week, so it preemptively decided to make them public on its own.
Date: March 23, 2015