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BACKGROUND

In April 1943, NYC Mayor Fiorello LaGuardia announced the formation of the "Mayor’s Committee on Medical Care for the People of the City of New York." This blue-ribbon panel, made up of city officials, social workers, business and union leaders and health care professionals, was charged with "defining the responsibilities of local government and of private enterprise in making modern medical facilities available for persons of moderate income who cannot afford to pay for them." A year later, Mayor LaGuardia announced plans for a "new type of community health program," borrowing elements from several existing health care models, including garment workers’ and public housing clinics and forerunners of today’s Blue Cross Plans and GHI. The Mayor’s plan called for a private, non-profit corporation organized under the laws of New York State as a prepayment plan, which stressed disease prevention as well as acute care. In September 1944, the Mayor and prominent citizens filed the Certificate of Incorporation for the Health Insurance Plan of Greater New York with the State Board of Social Welfare in Albany. Among the purposes of the new non-profit corporation were:

"to establish a plan or plans under which subscribers and their families, in groups or as individuals, under agreements with the corporation may be provided with medical care and attention in any or all the branches through duly licensed physicians, as well as nursing and other auxiliary services, together with necessary appliances, drugs, medicines and supplies."

State legislation adopted in 1945 permitting payroll deductions for health insurance paved the way for the City of New York to provide health care as a benefit for its employees. In 1946, Mayor William O’Dwyer announced the formation of a committee to study the relative benefits of existing health insurance plans, HIP, the United Medical Service (Blue Shield), Associated Hospital Service (Blue Cross) and Group Health Cooperative, Inc (GHI). HIP received its license from the state Insurance Department on March 1, 1947 and its first subscribers were the 2,643 members of the Chefs, Cooks, Pastry Cooks and Assistants Local 89. Later in the year, the city’s Board of Estimate, following the recommendation of O’Dwyer’s committee, approved a contract with HIP for medical services and Associated Hospital Service for hospital coverage.

The seed money for the HIP experiment came almost exclusively from foundations, including the New York Foundation, the Albert and Mary Lasker Foundation and the Rockefeller Foundation. Over $400,000 in loans and grants from these charitable foundations sustained HIP until its premium base supported its operations.

In 2001, HIP purchased Vytra Health Plans, a non-profit health plan which insures 200,000 people on Long Island, by buying out Vytra’s original investors, Univera Health Plan and Winthrop Hospital, for $62 million. In 2000, as Vytra was considering its own conversion plan, the Attorney General’s office rejected a plan that relied on the transfer of the stock in a new for-profit company to Winthrop and Univera. Instead, the Charities Bureau determined that the company’s assets were charitable assets that must remain dedicated to substantially similar purposes and protected for the benefit of the people of Long Island. This year, HIP purchased ConnectiCare, a for-profit HMO domiciled in Connecticut, for a reported $350 million.

Chapter One of the Laws of 2002 authorized the conversion of a single, non-profit health plan, Empire Blue Cross/Blue Shield, to a for-profit company. Under the terms of Chapter One, 95% of the value of the Empire charitable asset was to be transferred to a newly-created Public Asset Fund for distribution to the myriad health-related programs funded through the state’s Health Care Reform Act (HCRA), with the remaining 5% dedicated to a new healthcare foundation. Litigation brought by a coalition of consumer groups and Empire subscribers challenging the constitutionality of the legislation, however, has led to a court injunction on the distribution of the Empire proceeds, now estimated to exceed $3 billion in cash and stock in WellChoice, Empire’s successor entity. The NYS Court of Appeals is scheduled to hear oral arguments in the case on April 26, 2005.

Governor Pataki proposed legislation as part of this year’s budget submission (A.1922, sections 46 through 49) to allow any non-profit health plan in the state to convert to a for-profit entity under the same terms and conditions contained in Chapter One, including the 95/5% distribution of the proceeds. The financial plan submitted by the governor with the FY05/06 budget assumes $400 million in HIP conversion proceeds for the HCRA pools, based on an estimate of approximately $1.5 billion as the value of the HIP charitable asset. The Governor’s proposal was not enacted as part of the budget, but language was included to suspend HCRA payments unless the value of the Empire charitable asset is transferred to Public Asset Fund through resolution of the litigation or some other means prior to July 1.

Legislation approved last year by the state Assembly (A.4024/Grannis) has been reported favorably by the Assembly Insurance and Ways and Means committees and is currently on Third Reading on the Assembly Calendar. In addition to establishing standards and a framework for a review of the merits of conversion applications by the Attorney General, state Insurance Department and the courts, the bill would require that 100% of the charitable asset of a converting entity be irrevocably devoted to addressing the unmet healthcare needs of New Yorkers. A similar bill has been introduced in the state Senate (S.153/Seward).

MATTERS WHICH WITNESSES ARE ENCOURAGED TO ADDRESS IN THEIR TESTIMONY

1. Please comment on Governor Pataki’s proposed Article VII legislation (A.1922) and/or A.4024/Grannis.

2. What impact would the conversion of HIP to a shareholder-owned, profit-driven company have on its enrollees, healthcare providers and staff and on the cost and availability of health insurance in its service area generally? Has the HIP Board of Directors discussed what impact the conversion would have on its subscribers and the public? Market forces, insurance reforms and changes to the hospital financing system have transformed the insurance market and the role played by non-profit insurers like HIP. In what ways does HIP behave differently than for-profit plans? What value does the consumer or health care provider receive as result of HIP’s non-profit status?

3. The service area for HIP and its affiliates includes NYC, Long Island, Westchester, Orange, Rockland and Putnam Counties. What steps have HIP management and its Board of Directors taken to date regarding a possible conversion? Have financial or legal advisors been hired? Has there been outreach, discussions, meetings, hearings, forums or other opportunities for participating providers or enrollees in HIP or its affiliates, businesses, labor organizations, or elected officials to express their opinions on HIP’s proposed conversion?

4. The City of New York and certain NYC municipal unions have claimed that they are entitled to or otherwise "owed" a portion of the charitable asset of HIP in the event of a conversion. HIP’s charter, however, does not appear to include specific mention of NYC union workers in its statement of purpose. Empire Blue Cross/Blue Shield, which converted in 2002, and GHI, which remains nonprofit, together insure about 70% of city employees. And the City of New York, as a purchaser of coverage, as well as NYC municipal union members and retirees, which typically do not contribute to the cost of their basic coverage, have enjoyed lower health care costs as a result of HIP’s tax-favored status. Income and property taxes paid by city and state businesses and residents have been subsidizing HIP premiums for nearly 60 years. Given these facts, what is the basis for claims to the HIP charitable asset by the City of New York and NYC municipal unions?

5. The legislation proposed by Governor Pataki is essentially a "two-for-one deal," since Long Island-based Vytra Health Plans would be deemed to be converted to a for-profit with the conversion of HIP, its parent company, with the proceeds of the HIP conversion going to fund HCRA programs. Should consideration be given to the obligation of Vytra to continue to meet the health care needs of Long Islanders through distribution of its charitable asset, and to the impact of a Vytra conversion on Long Island consumers and businesses? Should consideration be given to the value of the charitable asset attributable to Vytra alone, and the local needs that could be addressed with these resources?

6. While publicly maintaining a posture of mild interest in conversion, HIP management has been considering for-profit conversion for several years and has sought to shape state legislation on this topic since the late-1990s. Recently, HIP officials warned that the company would not go through with a conversion plan unless certain municipal unions received a substantial portion of its charitable asset. Has this position been discussed by HIP’s Board, or adopted or referenced in any resolution of the Board?

7. Common law and the New York Not-for-Profit Corporation law place a series of obligations on non-profit board members, among them the duties of care and obedience. At a hearing of the Assembly Insurance and Health committees in April 1997, corporate governance expert Ira Milstein described the fiduciary duties of non-profit board members this way:

   "As fiduciaries, not for profit board members have obligations to uphold the organization’s purpose as defined in the charter - the governing instrument that express the purpose for which the organization was formed and thus determines what the organization can or cannot do. The board’s legal responsibility in this regard is sometimes referred to as its ‘duty of obedience.’ It has been explained as follows:

   ‘In short, [boards] exist for the sustenance of a mission, for the perpetuation of an institution in which [the mission] is embodied over time in such a way that the future is not mortgaged to the present and, by fiduciary obligation, for the direct care and preservation of corporate assets entrusted specifically for the pursuit of a particular mission and its related goals.’

   Thus while not for profit directors are not guarantors of the success of the organization’s investments, activities, programs or grants, they are responsible for operating the entity and managing its assets to achieve its stated purposes."

   What steps has HIP’s Board of Directors taken to meet its fiduciary obligation both in terms of evaluating the impact of a conversion on HIP’s historic mission, the reasons justifying any decision to seek approval to convert, and the disposition of HIP’s charitable asset in the event of a conversion? Has the HIP Board dicussed how they would meet their fiduciary responsibilities under a conversion plan that allows the asset to be transferred to other parties?

INSTRUCTIONS FOR WITNESSES AND INTERESTED PARTIES

Persons wishing to present pertinent testimony to the Committee should complete and return the reply form on the following page as soon as possible. It is important that the reply form be fully completed and returned so that persons may be notified in the event of a change in venue, emergency postponement or cancellation.

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PUBLIC HEARING REPLY FORM

Persons wishing to present testimony at the public hearing on May 5 are requested to complete this reply form as soon as possible and mail or fax it to:

Renee Skorupski, Legislative Associate
Assembly Committee on Insurance
Room 520 – Capitol
Albany, New York 12248
Email: skorupr@assembly.state.ny.us
Phone: (518) 455-4928
Fax: (518) 455-5182

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