BILL ANALYSIS                                                                                                                                                                                                    

                 Senator Herschel Rosenthal, Chairman

Senate Bill 445 (Rosenthal)             Hearing Date:  April 19, 1995

As amended:  April 17, 1995
Fiscal:   Yes


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. 

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  
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  

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).


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  

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  
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.




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