Blue Cross History Compilation.pdf

Blue Cross and Blue Shield

A Historical Compilation

Table of Contents:

1. Blue Cross and Blue Shield: A History of

Charitable and Benevolent Health Insurance Plans……………2-15

2. Blue Cross/Blue Shield State Histories………………………16-49

3. Blue Cross/Blue Shield Insurer Histories…………………….50-52

4. Blue Cross/Blue Shield Stories:

Community Participation Makes a Difference……………….53-58

5. Chart: Blue Cross/Blue Shield Affiliation and Status………..59-62

6. Chart: Blue Cross/Blue Shield Assets Set Aside………………...63

Blue Cross and Blue Shield

A History of Charitable and Benevolent Health Insurance Plans

Blue Cross and Blue Shield plans across the country were created with the intention of providing

affordable health care coverage in the nonprofit context with a community focus. The plans

were established to fill significant holes in the health care system. They were created and

promoted by the community, acting in the public benefit. Their history and involvement in

creating an alternative health care coverage source—the voluntary, nonprofit prepaid health

plan—and their subsequent participation in the development of the Medicare and Medicaid

programs have helped ensure that more Americans obtain access to health care coverage.

Since the Blue Cross and Blue Shield Association voted to allow its nonprofit members to

become for-profit corporations in 1994, some Blues plans have attempted to deny that they are

charitable organizations, claiming they are thus not obligated, under charitable trust law, to set

aside their assets to continue their missions when they convert to for-profit entities. But

nonprofit Blue Cross and Blue Shield plans were clearly established as charitable and benevolent

entities, and should therefore be subject to charitable trust requirements. This paper discusses

the history of Blue Cross and Blue Shield plans, with a particular emphasis on the Texas plan,

and outlines the many pieces of evidence showing that Blue Cross and Blue Shield plans are

charitable and benevolent organizations.

I. The Texas Experiment

What we know of today as Blue Cross and Blue Shield plans were started by an

experiment in Texas to provide increased hospital coverage to members of the community

at an affordable rate. The first effort to confront the problems of access to health care

through a nonprofit prepaid mechanism began in Dallas in 1929. That year, Baylor

University hired Justin Ford Kimball, formerly a superintendent of schools in Dallas, to

provide oversight of the University's medical education and to "shore up the shaky

finances of University Hospital."

With occupancy rates falling and patients unable to

pay their own bills, Mr. Kimball set out to establish a plan that would help hospital

patients pay their bills and keep the hospital alive.

Having previously established a sick benefit for the Dallas teachers ten years earlier, Mr.

Kimball used this same teacher organization to initially explore prepaid hospital

coverage. Kimball's proposal virtually coincided with the October 1929 stock market

crash, which "added urgency to the teachers’ worries about economic security and

increased their interest in the hospitalization find."

With the teachers' enthusiasm,

Robert Cunningham III and Robert M. Cunningham Jr., The Blues:. History of the Blue Cross and Blue Shield

System, (1997) page 3. This book, written by a father and son team, is a comprehensive study of the history of

BCBS plans. It was sponsored by the Blue Cross Blue Shield Association. The authors had access to internal

documents from the national Association and conducted interviews with numerous former and current Blues

officials. Robert Cunningham, Jr. served as a consultant to the BCBS Association in the 70's and 80's during which

he was instrumental in organizing their archives and creating the BOBS Plan History Project. This book was a major

outcome of the Project.

Id. at 4.

Id. at 5.

Kimball proceeded forward with the experiment.

The Baylor prepaid hospital plan was created to be distinct from traditional commercial

insurance.

As a nonprofit plan, one of its earliest brochures boasted that, "Baylor uses

no sales agency or middlemen, but prefers to deal directly with each group so that all

group hospitalization fees paid may be used only for hospital care of members and not for

any personal profit."

The original Baylor plan gave Dallas teachers twenty-one days of

hospital care for $6 per year.

The Texas Department of Insurance determined that the

Baylor plan was not in the business of providing insurance. Instead, the Department

viewed the plan as a "group contract for the sale of services."

Deemed by Kimball's

assistant Brice Twitty as a "godsend to thousands," more than 1,300 teachers initially

signed up for the Baylor plan, and within five years more than 408 employee groups with

more than twenty-three thousand members were covered by this new type of plan.

II. Blue Cross Plans Flourish Across the Country

It did not take long for the concept of prepaid, nonprofit health care coverage as envisioned in

Texas to take root in other parts of the country. As the 1930s began, gaps in health care

coverage were widening. Families and individuals were faced with hard choices and

hospitals were increasingly facing financial difficulties. As a hospital executive and

fixture Blue Cross executive stated,

“I could remember the difficulties we had then, trying to keep our doors

open… People brought chickens in and meat to pay their bills. They would

paint or do work around the hospital of some kind.... Nurses would come in

and beg us to give them a job without pay, for room and board, because

they were starving.”

It became clear that, for communities to survive, something drastic had to happen in the health

care system. Kimball's Baylor Plan provided a new and creative opportunity for improving

access to care. The embrace of Kimball's experiment was a,

“recognition and pulling together of some of the most promising tools then

available for dealing with the problems of cost and access to care, thereby

setting the table for a generation of social engineers who were determined

to make care available to anyone who needed it.”

As plans developed in other states, improvements were made to the Baylor model, the most

important being an expansion of coverage to hospital networks rather than one individual

Id. at 4.

Id. at 6 (quoting Blue Cross and Blue Shield, Advance, June 1989 at page 6)

Paul Starr, The Social Transformation of American Medicine, (1984), page 295.

C. Rufus Rorem, Enabling Legislation for Non-Profit Hospital Plans, 6 Law and Contemporary Problems 528, 529

(1939).

Cunninghams, at 6-7.

Cunninghams, at 9 -10 (quoting Fritz Lattner, interview with Odin Anderson, page 4).

Id. at 7.

hospital.

The first multi-hospital plan began in New Jersey in 1931. Frank Van Dyk was

hired as the executive director of the Essex County Hospital Council to collect overdue

bills from patients at the seventeen hospitals affiliated with the council. In the early 1930s,

Mr. Van Dyk's job was difficult because,

“families needed every penny to keep warm, dry and fed. They did not have the

money to pay hospital bills. ‘It occurred to me what a wonderful thing it would be

if you could remove the cashier's window from the hospital...There ought to be a

better method of doing things...Everywhere in the state people had to put off

going to the hospital because of inability to pay.’”

Like his counterpart in Texas, Van Dyk sought to create a nonprofit plan which put health

care before profits. The New Jersey plan offered up to twenty-one days of semiprivate

hospitalization for $10 a year, not including maternity or dependent care. Soon after, the

plan added dependent care, and within a year six thousand people were covered and thirty

hospitals were participating.

Support from leaders in the community and community engagement were two of the

primary reasons for success of the Blue Cross plans. The Cleveland Plan was started

with a special city welfare federation grant of $7,500. By the mid 1930's the Cleveland

plan had engaged people and organizations from throughout the area to assist in

promotion. Because of this high level of community involvement, the plan was able to

pay back the federation and boasted,

“wherever the Plan secured and kept such public identification, the membership

growth was rapid and beyond the dreams of the most optimistic manager. In

these areas, governors and mayors proclaimed Blue Cross enrollment periods,

service clubs took part in promotion, Boy Scouts delivered enrollment

material to prospects, and clergymen from the pulpit urged people to enroll in

this community enterprise.

Such promotion could not be bought at any price.”

There was active community participation from all sectors in promoting and supporting Blue

Cross plans as a means to protect people from the high costs of health care. The foundations of

Blues plans across the country were unquestionably built with the help of this strong

community support.

By 1933, the American Hospital Association's (AHA) Council on Community Relations and

Administrative Practice adopted its own approach for developing hospital insurance, rejecting

the single hospital plan modeled in Baylor, which limited consumer choice to only one

hospital. As one of the early leaders in the Blue Cross organization stated, it "soon

became obvious . . . that a general community need could not be met through single-

Id. at 10.

Id. at 11 (quoting Frank Van Dyk, interview with Odin Anderson, page 2).

Id. at 12.

Cunninghams, at 15 (quoting James E. Stuart, "Blue Cross Story: An Informal Biography of the Voluntary Nonprofit

Prepayment Plan for Hospital Care").

hospital service Plan."

The AHA sought to create insurance plans that "were to be nonprofit,

to emphasize the public welfare, and to limit themselves to dignified promotion.”

C. Rufus

Rorem, the leader of the AHA movement, stated that the,

“pioneers in the voluntary hospitalization movement were not

philosophers. They were not social reformers. They were social

organizers. The voluntary Plans were an attempt to organize the public

buying power on a voluntary basis, without the disadvantage of political

control, a means by which an employed group of people could finance

medical care for itself. They were dealing with a practical problem in a

practical way.”

From the very beginning, the Board of Trustees of the AHA resolved to approve the

principle of "hospital insurance" and developed a brochure, issued later that year, entitled

"Essential of an Acceptable Plan for Group Hospitalization." The essentials included an

"emphasis on public welfare" by being organized as a public service and "nonprofit

organization" in which "no individual or group should be allowed to enjoy any financial

gain from a plan, other than a reasonable and proper return for necessary services."

Under the leadership of C. Rufus Rorem, head of the AHA's Commission on Hospital Service,

the AHA drafted Model legislation that served as the basis for most state enabling statutes. The

Model law proposed a special class of nonprofit voluntary hospital insurance plans, exempt from

state general insurance laws and conferred with "charitable and benevolent status.

Like their

nonprofit hospital counterparts, prepaid hospital insurance plans',

“voluntary spirit was reflected not only in terms of nonprofit incorporation

and the ideal of community service frequently invoked by early leaders, but also

in the fundamental differences between the Plans' approach to paying for care and

conventional underwriting practice. The keys to this approach were the concepts

of the service benefit and of a single, community wide premium rate.”

Virtually all the Blue Cross plans were established with "community rating

instead of rates

based on an individual's health status to price their products."

Throughout the country, these

charitable corporations offered "the same rates to all subscriber groups regardless of age, sex,

occupation, or other characteristics that might affect the frequency with which members of the

Id. at 20 (quoting James E. Stuart, "The Blue Cross Story: An Informal Biography of the Voluntary Nonprofit

Prepayment Plan for Hospital Care").

Starr; at 296.

Cunninghams, at 19 (quoting C. Rufus Rorem as cited in Odin Anderson, Blue Cross Since 1929: Accountability and the

Public Trust).

Report by Louis Reed of the Federal Security Agency, U.S. Public Health Service (1947). The Cunninghams describe this

report as the “definitive 1947 study” of BCBS. Cunninghams, at xiii (Acknowledgments).

Rorem, at 531 and 543.

Cunninghams, at 31.

The concept of creating rates for a large pool of subscribers is known as “community rating,” which is distinct

from experience rating. “Experience rating” is the practice of setting insurance premiums on the basis of the actual

loss experience of a given employee group. Cunninghams, at 258 (glossary).

Cathy Tokarski, Mergers, Conversions: Blues' Survival Strategies, American Medical News, May 20, 1996, at page

17.

group would require hospitalization."

It was not until the for-profit commercial insurers began

to move into the health insurance market that the Blues' Plans began to question whether their

efforts to provide community rating should continue.

As more local communities initiated plans, the AHA's Special Commission on Hospital Service,

created in 1937, determined that it would offer "associate institutional membership" to any

nonprofit organization that met specific standards.

The Commission's initial role involved

issuing approval certificates for nonprofit plans which met the standards.

Among the standards first instituted in 1937 were the requirements that: membership plans

be nonprofit; the board of each plan include representatives from local hospitals, the medical

profession, and the general public; all hospitals in a community be given the opportunity to

participate in the plan; plan employees receive salaries rather than commissions; and

hospitals be reimbursed based on costs in order to get the best possible coverage to the

largest possible number of people at the lowest possible costs.

In their history of the Blue

Cross and Blue Shield system, the Cunninghams write that the standard requiring

reimbursement based on costs would have been a difficult one to resolve between all the plans

and their network of hospitals. Until the standards were created, there had never been a

uniform position regarding payment rates in prepaid coverage plans. The AHA was

confronted with the tensions between meeting the needs of hospitals and the needs of the

plans.

“It was plain that too low a price would beggar the hospitals and too high a

price would beggar the Plan...The payment rate had to be decided by

negotiation, in good faith on both sides, with the kind of trust made possible

by common purpose and no thought that either could profit from the result.

It is remarkable that there were apparently no deadlocks, no broken

negotiations, and no recriminations during the first decade after the creation

of these standards. In the nonprofit environment, payment rate negotiation

was not seen solely as a game of winners and losers.”

A formal approval process by the Blue Cross Commission of the AHA began in 1938, and only

those approved could use the Blue Cross symbol and name. The process set the stage for a

long history of publicly promoting these nonprofit hospital-sponsored plans as different

than those sold by other insurance companies.

By the end of the 1930s, approximately half of the states had passed enabling legislation for

hospital care service plans like Blue Cross.

Many incorporated several of the important

features proposed by the AHA including a declaration that the plans be organized as charitable

Cunninghams, at 31.

Id.

Cunninghams, at 28.

Rorem, at 541.

Cunninghams, at 29-30.

Cunninghams, at 30.

Starr, at 298.

organizations.

The statute that enabled the original Baylor plan to provide the public prepaid hospital coverage

for more than one hospital was created in 1939.

The Texas statute gave charitable and

benevolent status to its Blue Cross plan. Additionally, the state of Texas enacted strong

measures for state involvement and oversight of BCBST. The Texas statute restricted the

amount that could be used for administrative services to 15% of dues. Moreover, the plan had to

obtain state approval even before the 15% could be used for administration.

The statute also

prohibited the Texas plan from compensating its employees more than $6,000 per year, again

requiring that the state approve all salaries before they could be implemented.

The enabling statute in Texas specifically distinguished a health service corporation from

traditional insurance: "hospital service corporations shall be governed by this act, and shall not

be construed as being engaged in the business of insurance under the laws of this state."

As a

leader in the AHA movement in support of charitable and benevolent hospital service

plans, C. Rufus Rorem asserted that the Blues Plans were clearly distinct from traditional

insurance:

“From the economic point of view, hospital service plans are a form of

insurance. From the provisions of the various state regulations and the enabling

acts, it appears that they constitute a special type of insurance differing from the

stock and mutual companies.”

Blues plans were created with "fundamental system(s) of values, in the tradition of the private

voluntary, not-for-profit hospital that dominated the American scene."

By 1940 the ranks of

the Blue Cross plans supported by the AHA grew to include over 6 million enrollees.

Of the

39 plans surveyed, virtually all were begun with the seed of nonprofit, publicly-supported

sources among which: 22 were started with capital contributed by hospitals (virtually all of

which were nonprofit); six received funds from a local "Community Chest" or foundation; and

three received all initial funding from civic leaders. But for the nonprofit resources from Baylor,

a charitable hospital, the entire Blues movement might never have been created.

III. Blue Shield Plans Not Far Behind

With the growing public reliance on prepaid hospital plans, there also rose a demand for

coverage for medical services. Physicians, however, were more resistant than hospitals to the

concept of prepaid plans, fearing among other things, a violation of the physician and patient

relationship.

Yet the public continued to feel the financial burdens of paying for medical

care that they otherwise could not afford. In response to growing public pressure throughout

Id.

Rorem, at 531.

Rorem, at 538.

Id. at 541.

Rorem, at 534 [emphasis added].

Id. [emphasis added].

Cunninghams, at 30.

Starr, at 298.

Cunninghams, at 38.

the country, select physicians and medical groups began to develop special contracts with

employers and employees to cover medical services.

The first successful prepaid medical plan began in California in an effort to cover five

thousand workers building an aqueduct. Soon thereafter, under the guidance of Henry J.

Kaiser, whose construction company was involved in the aqueduct project, a similar

program began that was open to other employee groups—today known as Kaiser

Permanente Health Plan.

Not far behind Kaiser, the California Medical Association

("CMA") launched its own voluntary prepayment plan and the American Medical

Association ("AMA") began to seriously consider, rather than outright resist, the concept

of prepaid medical care.

Simultaneously, President Roosevelt, in conjunction with his effort at social welfare

reform, established a committee to investigate the establishment of a national health

insurance plan. While these early efforts at national health insurance by the Roosevelt

administration were abandoned, the medical establishment's steadfast resistance to

prepaid health care coverage began to wane.

In California, the California Medical

Association (CMA) offered a nonprofit service-oriented prepayment plan for voluntary

private coverage in an effort to hold back the governor's attempt to institute compulsory

insurance.

. The governor objected to the categorization of the CMA plan as a

"nonprofit" instead of an insurance company and argued that the plan violated California

law.

The court held that the plan was appropriately categorized as "nonprofit" and

should be exempt from state insurance laws.

As the California Blue Shield plan developed, it

was committed to its identity as a nonprofit organization, like its sister hospital plans. Soon

thereafter, physician plans quickly flourished in other states and became substantially similar to the

Blue Cross plans.

IV. Blue Cross and Blue Shield Plans Evolve

As Blues plans developed and became an integral part of the health care system, local autonomy

remained one of their "cardinal rules."

The plans became more financially independent and

they remained committed to strong public representation on their boards of trustees.

The Blues

plans saw themselves as the "intermediary" between the needs of the community and the needs of

the hospital networks.

A 1947 report by Louis Reed of the Federal Security Agency, U.S.

Public Health Service discusses the evolution of public involvement in the Blue Cross plans:

“A new Plan which the hospitals have started and which they underwrite is in a

Id. at 35-36.

Id. at 39.

Id. at 41.

Id. at 42-44.

Id. at 45.

California Physicians' Services v. Garrison, 28 Cal. 2nd 790 (1946).

Cunninghams, at 46.

Id. at 309.

Cunninghams, at 62.

Id. at 63.

Id. at 64.

very real sense a creature of the hospitals. However, as the Plan grows it stands

more and more on its own feet.... After a certain stage it would seem that dominant

control should shift to the public.... When the children have grown, when they

support themselves, then parental control is no longer desirable or possible.”

The report further asks the question "Who controls the plans?" and describes a realistic picture of

the varying types of control from state to state. However, ultimately the report concludes that to

be successful, plans must be true to their promotion of themselves as "civic organizations," and

thus "must give the general public the feeling that the plan belongs to the public, that it is in truth

a civic organization, of, by and for the public."

During the 1940s, there was a growing movement to ensure that all Blue Cross plans offer direct

enrollment to individuals as well as groups, recognizing "that their social purpose and public

relations require that the opportunity of enrollment should be available to all."

Plans began to

use a once-a-year community enrollment campaign, providing an enrollment window opened to

the general public. This proved to be a successful tactic for increasing enrollment both in the

cities and in rural areas. Media and civic organizations promoted the enrollment campaign,

categorizing the plans as "public service" options.

In these campaigns, all possible use was

made of publicity, community civic groups, and civic spirit. The techniques varied by state but

essentially included a limited period of time during which individuals could sign up for coverage

and promotion of the full support of the medical community. In small communities, local civic

organizations such as women's clubs and the Red Cross would sponsor and carry out the

campaign on behalf of the plan.

The key to successful community enrollment was presentation

of the plan as a community service and the use and assistance of every possible civic sponsor.

Until the mid 1940's, plans rarely used advertising to promote their product because of concerns

that it would be inconsistent with their nonprofit, civic-service character, and might jeopardize

other forms of free promotion that the plans often received. In fact, the first standards

established in 1937 to unify the BCBS plans across the country and allow them to use the

blue cross symbol included the following: "Promotion and administration policies should

be dignified in nature and consistent with the professional standards of the hospitals

involved."

Texas advertisements from that era carefully portrayed the state Blues plan

as a "public" entity. Advertisements in Dallas Magazine by the Texas Blue Cross plan in

1945 identified the plan, not as a private business, but as "Texas' Own Non-Profit

Community Plan." A 1943 promotional brochure, "A Message to the People of Texas

from over Two Hundred Texas Hospitals on Our Blue Cross Plan," explains, "[t]hrough

this plan we bring you a health program by the people and for the people of our state

without profit to anyone."

Report by Louis Reed of the Federal Security Agency, U.S. Public Health Service (1947).

Id.

Cunninghams, at 68.

Id. at 69.

One could speculate on the public’s perception of the connection between the Red Cross – a high-profile charity serving the

public – and Blue Cross – a nonprofit organization helping the community –as being indistinguishable. The “blue cross” first

used in Minnesota, was adopted from the Geneva cross, internationally known as a symbol for help for the sick and injured.

Cunninghams, at 29.

Throughout the 1940s and 1950s, discussion about comprehensive health insurance

continued to occur at the national level. There was increased competition between the

nonprofit Blue Cross and Blue Shield plans and their for-profit counterparts. At the local

and national level, communities were calling for more comprehensive health care

coverage.

By the mid 1950s, many of the Blue Cross plans had moved forward with efforts to provide

group health care coverage to federal employees. The federal government, unlike many

other employers, refused to cooperate in a manner that would ease the burden of

administration on the Blues plans. They would not allow payroll deductions nor would

they permit premium contributions.

Despite federal resistance, the Group

Hospitalization Plan in Washington D.C. managed to insure half the federal employees.

Soon thereafter, the federal government began to ease its resistance for federal employee

group life insurance.

Congress approved payroll deductions and a "very substantial"

federal contribution for group life. It was not long before federal employee health

insurance was enacted.

As the Blue Cross organization moved to strengthen its national presence, the federal

government began to recognize the increasing importance of health care coverage for its

employees.

By the end of 1959, the Federal Employee Health Benefits Program ("FEBHP")

was enacted.

Under FEBHP, federal employees were offered the choice between Blue Cross

and Blue Shield plan coverage, competing for-profit commercial insurance coverage, and other

local prepaid group plans available in the service area.

FEBHP offered three tiers of coverage,

with a lower cost option, a mid-range option, and a high option. The federal government agreed

to cover half the premium of the low cost option.

The Blue Cross Association and the National Association of Blue Shield Plans bid directly

with the federal government to offer the Blue Cross and Blue Shield options,

subcontracting out to local plans.

Together, the two associations were able to create the

Federal Employee Program ("FEP") as the primary Blue Cross and Blue Shield choice

offered to federal employees across the country.

With involvement from all plans but

the Cleveland hospital plan, the national partnership between the Blue Cross and Blue

Shield organizations was "a very big moment in the history of [the] Blue Cross and Blue

Shield [system]."

Id. at 94.

Id. at 111.

Id.

Id. at 113.

Id.

Id. at 114.

Id.

Id. at 115 (quoting Edwin Werner interview with author).

V. Serving the Public Need: Responding to the Problems of the Uninsured

Throughout the 1960s, specific populations began to be left out of the health insurance market.

Elders, unemployed people, and indigent communities often were unable to obtain health

insurance, as the primary source of insurance continued to be through employer group plans.

The discussion about whether, and how, to provide comprehensive health care to some of

the most vulnerable populations became more heated on the national level. The Blues

plans themselves recognized the problem of elderly uninsured but were extremely wary of

the government's ability to respond to the problem effectively.

The Blues' leaders

recognized that, thus far, they had been unable to meet the growing needs of the elderly

population, but believed strongly that the answer to the problem was in local communities, so

that "control [could] remain close to the people."

The first federal attempts to deal with the growing elderly uninsured population were not

successful, yet the government did not give up. In 1954, Congress turned to the AHA in order

to get actuarial data on the costs of providing a prepaid plan to retirees. The AHA and the

Blue Cross Commission then established a special Joint Committee to Draft Legislation for the

Aged, Indigent, and Unemployed.

The Joint Committee found that the cost of hospital

care for the elderly was three to four times higher than the younger population.

After

collecting actuarial information, the Blue Cross Commission and the AHA drafted a

legislative proposal creating a federal program that would provide prepaid coverage to

elders and the poor through a federal matching program. While the proposal did not go

forward, it is apparent that the Blues Plans' relationship with Congress and the

administration became increasingly more intimate and sophisticated.

Communities continued to face the challenge of providing adequate health care coverage

to elders and indigent persons. By the mid 1950s, many of the Blues Plans had

established relationships with county and municipal government to work together in an

effort to make care more available to these vulnerable groups within communities.

Colorado, for example, the state created an "old age pension plan" whereby 85 percent of

the state's excise taxes were used to fund a minimum monthly income for Coloradans

over sixty five. By 1957 the surplus in the fund had swollen and voters approved a new

constitutional amendment to use the surplus to fund a health care program for the aged.

In partnership with the state, the Blue Cross and Blue Shield Plans were responsible for

administering the new state program, offering benefits that virtually mirrored the Plans'

benefit packages.

On their own and in conjunction with state governments, many of the

Blues Plans attempted to make coverage more available for elders, but maintaining such

coverage became increasingly difficult without oversight and financial intervention from

the federal government.

Cunninghams, at 120.

Id. at 121 (quoting Louis Pink letter to Oscar Ewing, October 26, 1951).

Id. at 122.

Id. at 123.

Id. at 124.

Id. at 128.

Id. at 128-129.

In 1959, Congress attempted to fill many gaps in health care coverage by amending the Old Age

Assistance (OAA) program. The amendment sought to increase medical assistance for welfare

recipients through federal and state matching funds. In addition, Congress added a proposal

to create the Medical Assistance for the Aged ("MAA") program which would make health care

available to people age 65 and over with low or moderate incomes. The MAA program also

required state matching funds. By 1960, both proposals became law.

Because many of the states did not have the resources to provide matching funds, not all

states implemented these programs. The need for more comprehensive federal legislation

continued to exist throughout the beginning of the 1960s.

The Blue Cross Association

achieved consensus among the individual state plans that the private sector should

provide the solution to the growing health care problem, but if Congress was to create a

"Social Security-type system," then the Association would cooperate.

VI. Texas Blue Cross and OAA: The Precursor to Medicare

Blue Cross and Blue Shield of Texas was one of a handful of Blue Cross plans that began to

work with states to administer the MAA portion of the Old Age Assistance program. Ten

percent of elders on OAA lived in Texas.

In Texas, the Blue Cross plan worked in unison with

physicians, hospitals, and the state welfare department. "Certain that public opinion would not

permit them to earn anything for their own reserves, [the Texas Blue Cross and Blue Shield plan]

underbid its commercial competitors with a promise to administer the program with overhead

costs of no more than three percent."

Despite this tight administrative constraint, within the

first two years the plan was so financially sound that it was able to expand benefits and return a

surplus of $100,000 to the state.

The program, funded with 75% federal funds and 25% of

Texas state funds, offered comprehensive benefits that met the needs of elder consumers.

As the head of the Texas Blue Cross plan said, "if every state could do what Texas has

done, we wouldn't have any problem about the aged."

With the success of the Texas

Blues

partnership with the state, other state Blues plans increased their efforts across the

country to participate in OAA/MAA partnerships.

With federal concern that the OAA/MAA program was not sufficiently responding to the

problems of the uninsured, President Johnson put his efforts into a bill which would offer

hospital and nursing home coverage for everyone aged sixty-five and older, financed through a

Social Security tax.

As more legislative proposals were put on the table before Congress, "the

expertise of the Blues was in heavy demand."

The final result was a Medicare and Medicaid

Id. at 131.

Id. at 135.

Cunninghams, at 139.

Id.

Id. at 140 (quoting Walter McBee at the BCA annual meeting, 1963).

Id.

Id. at 141.

Id.

bill that provided "an amalgamation of hospital, medical, and indigent care."

The legislation

passed by Congress in 1965 created the Medicaid and Medicare programs, the latter structured

with separate hospital and medical benefits. Coincidentally, the Medicare program used the very

same structure by which the Blues Plans functioned.

As Medicare evolved, the Blues Plans became more and more integrally involved in the

administration and development of this publicly funded program. When the Social Security

Administration gave hospitals the opportunity to choose their "intermediaries"-- health plans

responsible for administering and reviewing claims under the Medicare Part A program-- the

hospitals chose Blue Cross Plans as intermediaries in 31 states, representing 90% of the beds in

all participating hospitals.

Out of 49 "carriers" (the administrators for the Medicare Part B

plan), the Social Security Administration itself chose Blue Shield to administer 33 plans,

covering 60% of eligible beneficiaries.

In the beginning, the Social Security

Administration, which was delegated with the responsibility for overseeing the Medicare

program, "needed Blue Cross and Blue Shield Plans and other carriers to help teach them

the business."

The role of the Blues as intermediaries in the development and

administration of the Medicare program became "substantial."

Blues Plans'

involvement in the Medicare program "constituted a humanitarian triumph of major

proportions.

To most Americans the Blue Cross Blue Shield system was the national

health care system of the country, and Medicare and Medicaid intensified this national

image.

In Texas, the state Blue Cross Blue Shield plan took on the intermediary role for Medicare

from the very beginning in 1966. More than 30 years later, the partnership between Blue Cross

Blue Shield of Texas and the federal government continues. The majority of Texas

hospitals still choose the Blues plan as their intermediary. All Medicare Part B payments

to physicians and other health care providers are handled by Blue Cross Blue Shield

Texas, except for home health care and durable medical equipment payments. These two

types of payments are handled by one of four regional intermediaries in the U.S.

Coincidentally, the southeast region, which includes Texas, is handled by another Blue

Cross Blue Shield plan from South Carolina, doing business as Palmetto.

Despite the tension created by the public vs. private debate in the development of Medicare

and Medicaid, the culture within BCBS was focused on the public good working with

government to solve problems with access to health care. No profit motive existed to create a

conflict of interest, and Blues plans were attractive partners for the federal government. The

Blue Cross name connected with these government plans implied access to low cost/no profit,

publicly responsible coverage and made them more appealing to the public. In turn—even

though implementation created a great burden on the plans—access to public money eventually

helped BCBS plans to develop expertise and expand their market share.

Id. at 142.

Id. at 147.

Id.

Id. at 148.

Id. at 149.

Id. at 153.

Bernard Tresnowski, a future BCBS Association president who joined the Association during this period said the agreement

VII. Special Tax Status: Blues Plans Not Exactly Like Commercial Insurers

For more than forty years, virtually all BCBS plans were organized under federal law as

501(c)(4) "social welfare" organizations. A 501(c)(4) organization is further defined in Treasury

Regulations as a corporation primarily,

“engaged in promoting the common good and general welfare of the people

of the community. Such an organization is operated primarily for the purpose of

bringing about "civil betterments and social improvements.”

In the early 1980s, many of the commercial insurers began to challenge the fully tax-exempt

status of the BCBS plans. They brought their challenge to the IRS and to Congress. The

national BCBS Association, a nonprofit organization that holds the BCBS trademark, went to

great lengths to distinguish BCBS plans from commercial insurers by stressing their dedication

to charitable, community-based health care services. Membership in the national BCBS

Association is a prerequisite for any state BCBS plan to use the blue "Cross" and "Shield"

service marks. The national BCBS Association representatives argued to Congress that while

they might have evolved into business corporations, they still retained the special character of a

nonprofit plan, providing "a unique community service."

The campaign waged by the BCBS plans to defend their nonprofit tax-exempt status

resulted in a “split decision.” As of January 1, 1987, the federal government removed the

full tax-exempt status of BCBS plans and instead created a special tax class for BCBS

organizations, Internal Revenue Code (I.R.C.) §833. The new I.R.C. category subjected

BCBS plans to federal taxation but recognized the unique role BCBS plans play. Under

I.R.C. §833, the BCBS plans, unlike commercial for-profit insurers, are entitled to special

tax benefits. Congress created a special deduction for BCBS plans with reserves worth less

than three months of premium income, taxing "net income sheltered by the deduction at 20

percent, rather than at the 34 percent corporate rate."

As the Chairman of the Finance

Committee stated when I.R.C. §833 was under consideration, the special deduction was

created in "recognition of the community service activities" of these plans.

Due to this continued special consideration, Blue Cross Blue Shield of Texas, for example, paid

$23.9 million less in federal income taxes from 1987-96 than it would have paid without the

deduction. Despite the elimination of federal tax-exempt status, most of the BCBS plans at that

time continued to remain nonprofit and many often maintained tax exemptions under state

and local laws. As Bernard Tresnowski, President of the BCBS Association, stated:

with the federal government allowed the Association to "spread our overhead and attract a lot of new people into

the business who might not otherwise have been attracted. Many people . . . came because of the opportunity

presented by the government programs. I am one example of that.” Cunninghams, at 159.

Treasury Regulation Section 1.501(c) (4) - 1 (a) (2) (i).

Cunninghams, at 215 (quoting from an interview with the former President of the national BCBS Association, Bernard

Tresnowski, December 1992).

Id. at 215.

Senator Packwood, Chairman of the Finance Committee, 132 Cong. Rec. 513957 (daily edition September 27, 1986).

“We remain special and thus essentially different from our competitors - as we

always have been. The task now becomes one of converting this new

circumstance to our competitive advantage by emphasizing the

characteristics that distinguish Blue Cross and Blue Shield Plans from all

others - community origins, community ties, small group recognition, unique

hospital and physician relationships - along with strong name recognition.”

Throughout most of its history, the national BCBS Association's rules prohibited conversion of

BCBS plans to for-profit status. The Association actively portrayed itself and its state plan

members as public benefit organizations. The 25

Anniversary Report of the Blue Cross

Association (1955) states, "Blue Cross belongs to the people...it is an organization operating in

the public interest." In 1994, however, one of its largest organizations, Blue Cross of California,

ran into controversy over its move to establish a for-profit subsidiary.

In June of that same

year, the national BCBS Association changed its policies so that its licensees could convert to

for-profit status and distribute earnings to those who exercise control over the company.

The decision by the Association to permit its members to become for-profit entities opened the

floodgates to conversions of BCBS plans across the country. As a result, the number of

independent Blue plans fell sharply, from 67 in 1995 to 41 in 2003.

Cunninghams, at 216 (quoting Tresnowski, "Report to the Plans, 1986," page 7).

Milt Freudenheim, For-Profit Shift at Blue Cross, The New York Times, June 30, 1994, at Cl.

Id.

Carl J. Schramm, “The Diseconomies of Blue Cross Conversion” Alliance for Advancing Nonprofit Healthcare, (2004), at

http://www.nonprofithealthcare.org/documentView.asp?docID=104&sid=.

Blue Cross/Blue Shield State Histories

(As of November 30, 2007)

ALABAMA

Blue Cross and Blue Shield of Alabama is a nonprofit health insurer with 3.6 million

members.

ALASKA

In May 2002, Premera Blue Cross of Washington and Alaska, which covers over 1.6

million people in both states, announced its plan to convert to a for-profit insurance

company.

In February 2003, the Washington Insurance Commissioner allowed over two dozen

individuals and organizations asserting a “significant interest” to intervene in the conversion

proceeding. Several of the intervenors opposed the conversion of Premera and raised

questions about whether the full value of the company would be preserved for the public in

the event of a conversion.

In granting the motions to intervene, the Insurance Commissioner grouped the intervenors

into five categories and required each to appoint a lead attorney. Each group was treated as

a single party for purposes of discovery, presentation of evidence, oral and written

argument, and cross-examination. The groups included: Washington consumers,

Washington hospitals, Washington providers, and a coalition in Alaska. Among the

members of the Alaska coalition are the Anchorage Neighborhood Health Center, United

Way of Anchorage, and the University of Alaska.

In July 2004, the Washington Insurance Commissioner formally rejected the conversion

proposal. Ten days later, the Alaska Director of Insurance echoed the Washington decision

by rejecting the company’s effort to convert Premera’s holdings in Alaska. Each regulator

thoroughly and critically examined the company’s conversion proposal and concluded that

it was not in the best interests of consumers. Premera appealed the decisions in both Alaska

and Washington. The Washington decision was upheld on appeal (see 133 Wash.App. 23,

131 P.3d 930 (2006)) which prompted Premera to withdraw the appeal in Alaska.

ARKANSAS

Blue Cross and Blue Shield of Arkansas is a mutual health insurer, owned by its

policyholders, covering over 425,000 people.

ARIZONA

Blue Cross Blue Shield of Arizona is a nonprofit health insurer with over a million

policyholders.

CALIFORNIA

Blue Cross of California (BCC) transferred a majority of its assets to a for-profit subsidiary

in 1993. State regulators originally approved the transaction without any formal charitable

asset distribution. Subsequently, the Department of Corporations determined that the

transaction failed to protect the charitable assets of the former nonprofit corporation. The

Commissioner of the Department of Corporations entered into discussions with BCC. The

plan initially proposed distributing $100 million of its assets to a charitable foundation. The

Commissioner did not accept this figure. A series of negotiations ensued between the

Department and BCC. Ultimately, BCC agreed to distribute all of its assets, over $3.2

billion, to two grant making health foundations, creating The California Endowment, a

501(c)(3) private foundation, and the California HealthCare Foundation, a 501(c)(4) entity.

The Commissioner hired independent consultants for assistance with determining the fair

market value of the company and the mission, governance, and structure of the foundations.

The charitable assets were distributed in a combination of cash and an equity interest in the

new for-profit. The board selection for The California Endowment was extremely thorough

and involved an executive search consortium.

The for-profit successor to Blue Cross of California is WellPoint Health Networks, Inc.

WellPoint merged with Anthem, Inc. in 2004. The new company, called WellPoint Inc. is

the Blue Cross licensee in California, and also a Blue Cross Blue Shield licensee in 13 other

states: Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New

Hampshire, New York, Ohio, Virginia, and Wisconsin. Wellpoint Inc. provides health

insurance to 34 million customers, making it the nation’s largest health insurer.

COLORADO

In 1996, BCBS of Colorado (BCBSCO) merged with Nevada BCBS, forgiving $9.8 million

in debt that the Nevada plan owed to the Colorado plan.

In March 1999, Anthem, Inc., a mutual insurer then owned by its policyholders, offered

$155 million for the Colorado and Nevada plans, and promised to preserve at least $140

million of the purchase price in the Caring for Colorado Foundation.

In November 1999, after a 2-day hearing, the Insurance Commissioner approved

BCBSCO’s proposed conversion and sale to Anthem. Anthem placed $155 million in the

Caring for Colorado Foundation. The Foundation’s by-laws call for a seven-member

Community Advisory Committee appointed by the Board of Directors. The CAC is

responsible for nominating three people for any Board vacancy. The Governor appoints

Board members from the list the CAC provides. The Governor may remove a director he or

she appointed for cause only. A vote of the directors can be used to remove any director

with or without cause. The Board of Directors must have at least one public meeting

annually, during which the public can address the board.

In February 2001, Anthem announced its intention to convert from a mutual insurance

company to a stock corporation (“demutualization”), and filed its demutualization proposal

with the Indiana Department of Insurance in June 2001. Although policyholders in

Connecticut, Indiana, Kentucky, and Ohio were eligible for Anthem shares, the proposal

deprived policyholders in Colorado, Maine, Nevada and New Hampshire of any right to

receive shares in the new company. Consumer groups in all Anthem states, concerned about

the potential impact of this conversion on health care coverage, encouraged regulators to

review the transaction carefully and to impose conditions that would protect current and

future policyholders. Despite this request of the multi-state coalition, only the Indiana

Department of Insurance conducted a public hearing – as required by state law. The hearing

was held in Indianapolis (Anthem’s home base) in October 2001 and was quickly followed

by the approval of the Indiana Insurance Commissioner. Subsequently, Anthem launched its

IPO to become a publicly traded for-profit company.

Anthem merged with Wellpoint Health Networks in 2004. The new company, called

Wellpoint Inc. is the Blue Cross licensee in California, and also a Blue Cross Blue Shield

licensee in 13 other states: Colorado,Connecticut, Georgia, Indiana, Kentucky, Maine,

Missouri, Nevada, New Hampshire, New York, Ohio, Virginia, and Wisconsin. Wellpoint

Inc. provides health insurance to 34 million customers, making it the nation’s largest health

insurer.

CONNECTICUT

In July 1997, the Connecticut Department of Insurance approved the merger of BCBSCT

with Anthem, Inc., a mutual insurer then owned by its policyholders. The Attorney General

recused his office from dealing with the charitable trust issues raised in the merger, citing

past assistance BCBSCT provided his office in its tobacco litigation. A Hartford law firm

was named Special Attorney General.

During 1997, the state Comptroller and a coalition of advocacy and labor organizations filed

separate suits against Anthem to protect policyholder rights and preserve charitable assets

now possessed by Anthem. In December 1997, the Special Attorney General filed a suit to

prevent Anthem from acquiring and transferring out of Connecticut assets that are rightfully

subject to a charitable trust. The Special Attorney General also alleged that Anthem and

BCBSCT breached their fiduciary duties by refusing to maintain the assets of the BCBSCT

plan for charitable purposes. After the lawsuit was filed, Anthem initiated a public relations

campaign against the Attorney General. Consumer groups, legislators and the Attorney

General denounced Anthem’s advertising tactics.

In June 1999, the Attorney General, Comptroller and advocacy groups announced that they

had reached a settlement with Anthem. As a condition of the settlement, Anthem agreed to

transfer approximately $41 million to a foundation to serve the underserved and uninsured.

In order to ensure solid community and consumer representation, the state established the

Connecticut Health Advancement and Research Trust (CHART). This organization

proceeded to appoint the board of the Anthem Foundation of Connecticut. The Foundation

was incorporated as a supporting organization to CHART.