A07018 Summary:

BILL NO    A07018 

SAME AS    No same as

SPONSOR    Gottfried (MS)

COSPNSR    Paulin, Cook

MLTSPNSR   Dinowitz, Galef, Lavine, Maisel

Add S7318, Ins L

Establishes requirements for conversion of medical or dental expense indemnity
corporations or health or hospital service corporations from not-for-profit to
corporations organized for pecuniary profit; provides for procedures for review
of the conversion application before presenting a petition for conversion to
the court and standards for approval of such applications; makes related
provisions.

A07018 Actions:

BILL NO    A07018 

03/18/2009 referred to insurance
01/06/2010 referred to insurance

A07018 Votes:

A07018 Memo:

BILL NUMBER:A7018

TITLE  OF  BILL:    An  act  to  amend the insurance law, in relation to
conversion of medical or dental expense indemnity corporations or health
or hospital service corporations into a corporation organized for  pecu-
niary profit

PURPOSE OR GENERAL IDEA OF BILL: To authorize non-profit insurers organ-
ized  under  Article 43 of the Insurance Law and HMOs to convert to for-
profit entities; to establish standards for  the  review  of  conversion
applications  by  the  Attorney  General  and  the Superintendent and to
provide for public input into the process.

SUMMARY OF SPECIFIC PROVISIONS: Section 1 amends paragraph 2 of  section
4301(j)  of  the  Insurance  Law to authorize non-profit health insurers
which were not the subject of an initial decision and opinion to convert
to a for-profit organization pursuant to Section 7318 of  the  Insurance
Law as of December thirty-first nineteen hundred ninety-nine.

Section 2 adds a new section 7318 of the Insurance Law to: 1) define the
terms  "applicant," "convert" or "conversion" and "charitable asset"; 2)
specify the information a company that wishes to convert must submit  to
the  attorney general and the superintendent; 3) set time frames for the
review of  an  application,  authorize  the  attorney  general  to  hire
consultants at the cost of the applicant and provide for public hearings
on  a  conversion  application and notification to policyholders and the
public; 4) set standards which must be met in  order  for  the  attorney
general to approve an application, including the irrevocable transfer of
the  fair market value of the applicant to a charitable organization and
the mission and governance of that organization; 5) provide  for  review
of an application by the superintendent; 6) set out requirements for the
submission  of  a  conversion  petition to the Supreme Court; 7) provide
that a company's  enrollees,  subscribers  or  policyholders,  or  their
designees,  will  have standing in a hearing of the court on a petition;
8) provide standards for court review of a petition; and 9) provide that
the provisions of subsection 4301(j) will prevail over the  Not-For-Pro-
fit Corporation Law in the event of a conflict.

Section 3 provides for an immediate effective date.

JUSTIFICATION: Like other segments of the marketplace, the health insur-
ance  industry is witnessing an era of consolidation. Mergers and acqui-
sitions have become increasingly common in both the for-profit and  non-
profit  sectors. Aetna's merger with U.S.  Healthcare and its subsequent
acquisition of both NYLCare and Prudential Health Care is just one exam-
ple.

In response to these competitive  pressures,  many  non-profit  insurers
have argued for permission to convert to for-profit entities in order to
have  access  to  the capital markets. Four years ago there were 69 Blue
Cross Blue Shield (BC/BS) plans in the country;  today,  there  are  52.
Following  the  National  BC/BS Association decision to allow for-profit

conversions, BC/BS plans in  California,  Indiana,  Georgia,  Wisconsin,
Connecticut  and  other  states have converted to for-profit entities in
recent years and several other  conversions  are  pending.  Other  BC/BS
plans have been acquired by these new for-profit entities.

While  many observers lament the loss of non-profit health insurers, New
York State is somewhat unique. Health care reforms adopted over the past
several years have eliminated most, if  not  all,  distinctions  between
for-profit  and  non-profit  insurers  in  terms of their conduct in the
marketplace. Community rating, open enrollment, portability reforms, the
1995 Point-of-Service Law and changes in health  care  financing  system
adopted  in  the  1996 Health Care Reform Act have led to a system where
health plans are treated the same and are expected to live by  the  same
standards, regardless of their status. Non-profit health insurers are no
longer  "the  insurer  of last resort" for the old or the sick. And some
non-profit health insurers do not even participate in the individual  or
the  Medicare  supplement  market  or  in  public programs such as Child
Health Plus, Family Health Plus  or  Medicaid.  Many  non-profit  health
plans, such as Excellus in Upstate New York, own for-profit subsidiaries
and  make  distributions  to  these for-profit companies through complex
holding  company  structures.  Another  non-profit  health  plan,   HIP,
acquired a for-profit health plan from Connecticut in 2004. Indeed, it's
difficult  to  determine  what  New  Yorkers receive in exchange for the
millions of dollars in premiums,  income  and  property  tax  exemptions
non-profit insurers receive annually.

Under  current  law  in  New  York,  however, for-profit conversions are
impossible for certain entities.  Insurance  Law  section  7301  broadly
prohibits  the  conversion of insurance companies, with the exception of
certain specifically authorized types of conversion unrelated to  health
care  conversions.  Insurance Law section 4301(j) specifically prohibits
the conversion of any "medical  expense  indemnity  corporation,  dental
expense  indemnity  corporation, health service corporation, or hospital
service corporation" into a for-profit corporation except  for  the  one
conversion  authorized  in  Chapter One of the Laws of 2002- Empire Blue
Cross Blue Shield. As a result of these dual  prohibitions,  conversions
currently contemplated by certain health care entities cannot be carried
out  absent  legislation,  either specifically as in the case of Chapter
One, or, as in the  case  of  this  bill,  generically  authorizing  the
conversion.

This  bill  couples  such  authorization with appropriate procedural and
substantive criteria for health care conversions designed to ensure that
such conversions will be in the public interest. Sections 510 and 5  511
of  the Not-for-Profit Corporation Law and precedent provide a framework
for conversions and dissolutions generally, but  the  statute  has  many
short  comings when applied to health plan conversions. This legislation
is modeled on laws adopted in other states, the National Association  of
Attorneys  General  Model  Act  and the Consumers Union Model Act. While
preserving key elements  of  current  law  such  as  requiring  ultimate
approval  by  the  state  Supreme  Court  after hearing, the legislation
shores up the statute to provide for rigorous scrutiny of  a  conversion

application  by  the attorney general and superintendent and substantive
public health benefits.

Most  importantly,  this bill would require that 100% of the fair market
value of any non-profit health plan which converts would be  devoted  to
an  independent  foundation  charged with a broad mission to address the
unmet healthcare needs of New Yorkers.

PRIOR LEGISLATIVE HISTORY: 1999: A.8846A - Referred to Insurance;  2000:
A.8846A - Reported referred to ways & means; 2001:  A.7352 - Referred to
Insurance;  2002:  A.7352  -  Referred  to Insurance; Similar provisions
contained in A.9610 (Chapter One of the Laws of  2002);  2003:  A6849  -
referred  to  ways  and  means; 2004: A6849 - passed the Assembly; 2005:
A4024 - passed the Assembly; 2006: A.4024 -  advanced  to  3rd  reading;
2007-08: A.8545 - referred to Insurance.

FISCAL IMPLICATIONS: None.

EFFECTIVE DATE: Immediate.