BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Herschel Rosenthal, Chairman
Senate Bill 445 (Rosenthal) Hearing Date: April 19, 1995
As amended: April 17, 1995
Fiscal: Yes
SUMMARY
SB 445 would direct the Department of Corporations to regulate the
manner in which nonprofit health care service plans oconverto or
orestructureo to become for-profit plans.
DIGEST
Existing law
1. Requires the Department of Corporations (DOC) to license and
regulate both nonprofit and for-profit health care service plans
(ohealth planso).
2. Permits the conversion of nonprofit corporations to for-profit
status.
3. Requires a nonprofit corporation, upon dissolution, to dispose of
its assets in conformity with its nonprofit articles of incorporation.
4. Authorizes DOC to require nonprofit public benefit health plans to
donate the fair market value of the plan to charity as a condition for
approving a conversion to for-profit status.
This bill
1. Directs nonprofit health plans to provide DOC with an annual
summary describing their public benefit and charitable activities.
2. Confirms the authority of DOC to review and approve the
oconversiono of a nonprofit health plan to for-profit status.
3. Confirms the authority of DOC to review and approve the
orestructuringo of a nonprofit health plan; orestructuringo is defined
as the transfer of a substantial amount of nonprofit health plan
assets to a for-profit entity.
4. Directs DOC to apply certain requirements to a conversion or
restructuring including (a) a charitable set-aside equal to the fair
market value of the nonprofit health plan, taking into consideration
market-based information, (b) the use of an IRS 501(c)(3) organization
to hold the charitable set-aside, with a 501(c)(4) allowable in
limited circumstances, (c) ensuring the charitable organization is
independent of the new for-profit health plan, (d) requiring
charitable funds to be used to serve the stateos health care needs,
(e) avoiding conflicts of interest in charitable grant-making, and (f)
requiring the charitable organization to provide an annual report to
DOC.
5. Requires the converting or restructuring health plan to provide a
fee to DOC to pay for the cost of expert consultants hired by DOC to
review the proposal, and to pay for providing public notice and
reasonable access to public records.
6. Requires DOC to issue oguidelineso outlining procedures for
implementing this bill, and to adopt public information and public
participation requirements.
7. Exempts conversions and restructurings filed with DOC prior to
April 1, 1995.
(This grandfathers the ongoing Blue Cross proceeding).
COMMENTS
1. Purpose of the bill. The author introduced SB 445 to confirm and
clarify the authority of DOC to regulate the conversion and
restructuring of nonprofit health plans to for-profit status, and to
put in place safeguards to avoid undervaluations which deprive
charitable health care organizations of the fair market value of
converting health plan assets.
2. Auditor Generalos Report. In 1986, the Auditor General issued a
report on DOCos regulation of conversions of nonprofit health plans to
for-profit status. The report concluded that DOC relied on
traditional ovaluationo methods to estimate the fair market value of
plan assets in order to obtain reasonable donations to charity. The
report concluded that othe law provides little guidance for the
administration of conversions...o
and found that othe department does not have formal, written
procedures governing the conversion process.o In response to the
report, the Business, Transportation and Housing Agency (BT&H), within
which DOC resides, committed that othe Department is currently in the
process of preparing a conversion manual .... we do recognize the need
for a formal written manual outlining the process and explaining the
various issues involved.o The Department of Corporations never
prepared a conversion manual as promised by BT&H.
SB 445 ensures that DOC issues oguidelineso to fulfill this
commitment.
3. Interim Committee Hearing. In October of 1994, this Committee
held an interim hearing on oDOCos Administration of Conversions and
Restructurings of Nonprofit Health Care Service Plans -- The Blue
Cross Case and its Predecessors.o The Committee found that in many
conversion cases DOC accepted asset valuations which soon proved to be
grossly understated by hundreds of millions of dollars. These
undervaluations by DOC resulted in windfalls to the for-profit plans
and a loss of significant funds that should have been dedicated to
charitable health care needs.
At the hearing, Consumers Union called for legislation to ensure
that in future conversions and restructurings, DOC ensured that
charitable dedications reflected the fair market value of plan assets,
that charitable organizations be completely independent of the new
for-profit health plans, be subject to strict conflict of interest
requirements, and that public access to records and public
participation be assured in health plan conversion and restructuring
proceedings. SB 445 seeks to implement the recommendations proposed
by Consumers Union.
4. Support. Many of the supporters of SB 445 are charitable
organizations that provide health services, and they are concerned
that nonprofit health plan conversions to for-profit status are
stripping away funds that should be dedicated to charitable health
care.
Because of the substantial benefits nonprofit health plans have
received from the state over decades, it is important that they not
escape their charitable obligations when they restructure or convert
to for-profit. In the past, HMO low-ball undervaluations have
resulted in token amounts going to charity, with the remaining
windfall improperly going to the for-profit HMOos. The supporters
believe SB 445 is necessary to ensure that the billions of dollars
entrusted to nonprofit HMOos will in the future be turned over to
nonprofit health care charities as the HMOos convert to for-profit
corporations. These charitable dedications will go a long way to
addressing the unmet health care needs in the state, particularly with
regard to medically uninsured and underserved populations.
5. Amendments in Response to HMO Concerns. The author has already
adopted a number of amendments in response to HMO concerns including
(1) eliminating the condition that DOC oapproveo nonprofit plan public
benefit activities, (2) directing DOC to consider obut not be bound
byo market-based information when evaluating plans, (3) allowing the
use of o501(c)(4)o organizations in limited circumstances, (4)
broadening the charitable trust oheath careo goals, (5) eliminating
oAttorney Generalo reviews, (5) requiring DOC to issue guidelines
instead of oregulationso and (6) grandfathering the
oBlue Crosso restructuring proceeding that has been before DOC for a
number of years.
6. Oppose unless amended. The California Association of HMOos
(CAHMO) opposes
SB 445 unless it is further amended. While CAHMO appreciates the
amendments taken to date in response to HMO concerns, CAHMO recommends
that further amendments be considered regarding: (1) ovaluationo
methods so that they do not require auctions or other market-based
actions inconsistent with a traditional conversion, (2) the need for
opublic hearingso which CAHMO suggests may not be appropriate, (3) the
need for charitable organizations to oreport to DOCo after the
conversions, and (4) the distinction between omutual benefito and
opublic benefito corporations [see comment #6]. The author has
indicated a willingness to consider some of the amendments suggested
by CAHMO in consultation with DOC [see comment #7].
7. Mutual Benefit v. Public Benefit Corporations. Both Blue Shield
of California and Lifeguard Health Care are organized as nonprofit
omutual benefito corporations. They point out that virtually every
health plan conversion to date has applied to nonprofit
opublic benefito corporations which under law hold their assets
subject to a charitable trust. They maintain that omutual benefito
corporations have no such charitable obligation and, therefore, they
oppose SB 445 unless it is amended to exclude nonprofit omutual
benefito corporations.
The author has referred the omutual benefito corporation issue to
the Attorney General and the Commissioner of Corporations, and has
indicated a willingness to
amend SB 445 after considering other opinions on the issue. Some of
the options under consideration include (a) an exemption from the
bill, (b) applying SB 445 only to the extent mutual benefit
corporations hold some assets in charitable trust, (c) limiting the
set-aside obligation to an amount equal to the benefits received from
the state resulting from nonprofit status (e.g., tax savings) and (d)
requiring DOC to ensure a set-aside for the benefit of the mutual
benefit corporationos omemberso to avoid a windfall to the
for-profit HMO.
8. Awaiting DOC Position and Proposed Amendments. At the time this
analysis was completed, DOC had yet to take a position on SB 445. The
author was reluctant to amend the bill with regard to certain
provisions, such as dealing with the distinction between the
conversion of opublic benefito and omutual benefito nonprofit health
plans, without first receiving recommendations from DOC.
POSITIONS
Support
American Association of Retired Persons (AARP)
Butte County Health Care Coalition
California Advocates for Nursing Home Reform
California Medical Association
Chinese for Affirmative Action
Congress of California Seniors
Consumers Union
Delancy Street Foundation
Economic Empowerment Foundation
Hearing Society for the Bay Area
Health Access
Latino Issues Forum
Northcountry Clinic
Rural Community Assistance Corporation
Oppose unless amended
Blue Shield of California
California Association of HMOos (CAHMO)
Lifeguard Health Care
Consultant: Michael Shapiro