An Economic Analysis of Health Plan Conversions: Are They in the Public Interest?

Over the last decade, managed-care companies have been consolidating on both a regional and national scale. More recently, nonprofit health pians have been converting to for-profit status, and this conversion has frequently occurred as a step to facilitate merger or acquisition with a for-profit company. Some industry observers attribute these managed-care marketplace trends to an industry shakeout resulting from increased competition in the sector. At the same time, these perceived competitive pressures have led to questions about the long-run viability of nonprofit health plans. Furthermore, some industry and government leaders believe that some nonprofits are already conducting themselves like for-profit health plans and question the state premium tax exemption ordinarily accorded to such plans. This paper examines related health policy issues through the lens of a case study of the proposed conversion of the CareFirst Blue Cross Blue Shield company to a for-profit public-stock company and its merger with the Welipoint Corporation. Company executives and board members argued that CareFirst lacked access to sufficient capital and faced serious threats to its viability as a financially healthy nonprofit health care company. They also argued that CareFirst and its beneficiaries would benefit from merger through enhanced economies of scale and product-line extensions. Critics of the proposed conversion and merger raised concerns about the adverse impacts on access to care, coverage availability, quality of care, safety-net providers, and the cost of health insurance. Analyses demonstrate that CareFirst wields substantial market power in its local market, that it is unlikely to realize cost savings through expanded economies of scale, and that access to capital concerns are largely driven by the perceived need for further expansion through merger and acquisition. Although it is impossible to predict future changes in quality of care for CareFirst, analyses suggest that quality appears to be somewhat lower in for-profit national managed-care companies. Additional research is needed to assess the viability of true nonprofits, the potential effects of nonprofits and for-profit national managed-care plans on the evolution of local insurance and provider markets, and methods for effective oversight of nonprofit health plans.