Blue Shield – Care1st Merger Approved With Conditions

Yesterday, the Department of Managed Health Care announced that it approved Blue Shield of California’s acquisition of Care1st, a Medi-Cal (Medicaid) managed care plan with 500,000 Southern California patients–the largest health plan transaction in nearly a decade. In the months leading up to yesterday’s approval, Health Access and other health care consumer groups, including Consumers Union, and others, questioned key elements about the structure of the deal, its potential impact on Care1st’s patients and California’s health care system, and the disposition and use of Blue Shield’s charitable assets for this transaction. Given the track record of these insurers, our stance was that if Blue Shield or any other insurer wants to get bigger, they will need to get better.

According to DMHC, regulatory approval of the acquisition and the “undertakings” that go along with that approval require Blue Shield to “improve the state’s health care delivery system, benefit consumers and improve access in the Medi-Cal program.” The terms of the approval take some modest steps toward achieving these goals, but don’t go as far as we had hoped. DMHC must be vigilant on following up on Blue Shield’s commitments to improve quality and access for its enrollees, particularly the Medi-Cal patients it will soon serve.

The undertakings require Blue Shield to invest $200 million toward programs that increase transparency and accessibility in health care and support consumer assistance programs. These funds will support an Encounter Data Project that will help get information on patient health and manage health care costs, and develop a one-stop database for consumers to get provider directory information. Blue Shield is also required to fund consumer assistance programs.  While these financial commitments are a good starting point for supporting initiatives that will benefit health care consumers, much of Blue Shield’s charitable contributions in these undertakings are under its discretion and control, such as the $140 million ($14 million/year for 10 years) augmentation to the Blue Shield Foundation.

DMHC’s approval also requires Blue Shield to improve its health quality ratings, as measured by the Right Care Initiative, the Office of Patient Advocate Quality Report Card, and the Medi-Cal Managed Care Health Care Options Consumer Guide. The undertakings essentially require Blue Shield to bring any below-average ratings up to average. While it’s critical for Blue Shield to improve its quality measures for services provided to both commercial and Medi-Cal patients, regulators and health consumers should not settle for merely average quality ratings from one of the state’s largest health insurers that has $4 billion in reserves. Finally, the undertakings require Blue Shield to clean up its inaccurate provider directories and improve access to specialists in Care1st’s network for Medi-Cal consumers. Existing state law already requires Blue Shield to do these things and we should require them to do more than meet the minimum required by law.

DMHC’s approval of this acquisition did not include critical consumer protections sought by Health Access and other consumer groups:

  • We, along with our partners at Consumers Union, argued that Blue Shield’s assets are subject to charitable trust obligations. DMHC instead found that none of Blue Shield’s assets, including over $4B in reserves, are subject to charitable trust obligations. This allows Blue Shield to use its assets however it wants, without state oversight, despite the fact that the company was organized to provide a community benefit and has enjoyed state tax breaks for just about all of its history.
  • Blue Shield has in recent years proceeded with rate hikes deemed unreasonable by state regulators (both DMHC and CDI). The acquisition of Care 1st should have been conditioned on Blue Shield’s agreement to not proceed with unreasonable rate increases. DMHC instead merely requires Blue Shield to meet with DMHC before doing so.
  • Blue Shield is not required to reinvest profits earned from Medi-Cal product line in Medi-Cal, and can instead directing these profits to other parts of the company.
  • Blue Shield can continue stockpiling reserves — reported at $4B earlier this year — instead of investing that money in improving quality and access for its patients.
  • Blue Shield is being asked to commit an additional $14M a year to its foundation. This is an insufficient commitment considering Blue Shield had $2.4B in gross profits last year and over $4B in reserves.

This merger impacts not just the consumers in these plans but the health insurance market as a whole, setting an important precedent for future mergers and acquisitions.  As the Department of Managed Health Care reviews other mergers currently pending, California should insist that these deals benefit not just the insurers, but health care consumers and the system as a whole. Health Access and other consumer and community groups will continue to actively seek stronger conditions for the even-bigger mergers coming up for approval in the next few months.

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