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New York approves Empire's conversion plan

The New York State Department of Insurance (DOI) has blessed Empire Blue Cross and Blue Shield's amended plan to convert to from a nonprofit to a for-profit insurer.

Current Empire policyholders will not be compensated in the planned conversion.

The approval allows Empire, New York's largest health insurer, to convert to a stock company and hold an initial public offering (IPO). If the conversion progresses, 5 percent of the proceeds from the sale of the stock will be given to a charitable organization to improve public health, expand access to health care, and identify and address public health needs in New York. The remaining 95 percent of the proceeds will go toward initiatives such as "workforce recruitment and retention" — meaning employee hiring and raises — in New York hospitals.

The DOI's approval comes despite a lawsuit filed by consumer and health care advocates against New York officials to prevent the state from taking 95 percent of the proposed sale of Empire to WellChoice, Inc. Empire plans to transfer all its assets to WellChoice, its for-profit holding company, and then launch the IPO. The conversion is expected to generate $1.1 billion in charitable assets over the next three years.

Unlike the recent demutualization that transformed Anthem Insurance Cos. Inc., a mutual company, into Anthem Inc., a stock company, current Empire policyholders will not be compensated in the planned conversion. Also, unlike previous conversions of nonprofits, the lion's share of the proceeds from conversion will benefit hospitals rather than underserved and/or uninsured individuals.

"The state cannot simply take $1 billion of charitable assets that were dedicated to increasing New Yorkers' access to health care and divert those funds for other purposes," says Mark Scherzer, an attorney for the lawsuit's plaintiffs that include Consumers Union, Disabled in Action, Housing Works, the New York Chapter of the National Multiple Sclerosis Society, and five individual Empire policyholders.

Among other allegations, the lawsuit charges that Empire's Board of trustees violated its fiduciary duty to safeguard the assets of the nonprofit insurer for charitable purposes by abandoning its previous determination that the majority of funds should go to a foundation dedicated to improving access to health care.

Both Empire and New York state officials have filed motions to dismiss the lawsuit. Those motions are scheduled to be heard on Nov. 7, 2002, in the Supreme Court of the State of New York. The lawsuit does not prevent Empire from holding its IPO. Empire officials say they are in "quiet mode" and will not publicly comment on IPO matters.

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