The News Journal

By CHAD LIVENGOOD • The News Journal • June 29, 2011

DOVER - State Insurance Commissioner Karen Weldin Stewart would have the power to approve how Blue Cross Blue Shield of Delaware expends a $175 million reserve if it merges with a Pittsburgh-based insurer under legislation that cleared the state Senate on Tuesday.

But a legislative agreement reached Tuesday would not allow Attorney General Beau Biden to force Blue Cross to dedicate a portion of its surplus to a foundation for health care for needy Delawareans if Blue Cross' proposed merger with Highmark Inc. is ultimately approved.

Senate Bill 146 essentially performs a legislative end run around Biden's ruling earlier this month that the Blue Cross-Highmark deal constitutes a "conversion" under a 2004 law designed to protect public investments in nonprofit companies.

The legislation clarifies that lawmakers never intended the conversion law to apply to the merger of two not-for-profit insurers. "It was not intended in a case like this where the nonprofit is being taken over by a nonprofit," said Senate Majority Leader Patricia Blevins, D-Elsmere.

The Senate passed the bill 21-0 with little debate.

Blue Cross and Highmark announced their proposed merger last August. The deal would allow Blue Cross, for a fee, to tie into Highmark's more modern claims processing and risk management systems. In return, Highmark executives would be rewarded with three of Blue Cross' board seats and would essentially take control of the local company.

Blue Cross has said that updating its own systems is necessary to compete with larger insurers, but that the cost is burdensome. Without the deal, Blue Cross would pay $80 million more, its reserves would erode and the company would be operating at a loss by 2014, the company said in documents submitted as part of the merger-approval process.

Blue Cross has said that linking up with Highmark would also save customers about 3 percent on premiums -- though rates are still expected to increase almost 30 percent in the next four years even if the deal is approved.

Biden has said that, as a condition of the Highmark merger, Blue Cross must set aside money from its $175 million in reserves to fund a health care foundation for needy Delawareans. He said the law was designed to protect reserves built up, in part, with money that would have gone to taxes if Blue Cross were a for-profit firm.

Because of its nonprofit status, Blue Cross saw a $6 million tax break last year.

As an alternative method of safeguarding the reserves, an amendment to Senate BIll 146 would require review and approval by the Department of Insurance of any payment Blue Cross makes in excess of $500,000 from the reserve fund to Highmark.

Without approval of Blevins' bill, Blue Cross had warned, Highmark could walk away from the deal, potentially triggering a sale to a for-profit insurer.

In a committee meeting last week, and through compromise discussions this week, Biden was steadfast in his opposition to Blevins' bill. He warned that, through the deal, Highmark would gain control of Blue Cross' entire pot of reserves.

Stewart has the power to ultimately approve or deny the deal, should it proceed. A public hearing is scheduled for early September.