Premera Begins Formal Conversion Hearings on May 3
Premera via BizWire
MOUNTLAKE TERRACE, Wash.--(BUSINESS WIRE)--April 30, 2004--After
nearly 20 months of review and study, formal hearings on the Premera
Blue Cross proposal to convert to an investor-owned company begin May
3 before the Washington State Insurance Commissioner. Hearings will
take place in Tumwater, Washington. A decision is set for July.
Premera seeks to access capital for three important purposes:
-- to strengthen the company's reserves (health plans use
reserves to meet their obligations to members, and to protect
against economic uncertainties);
-- to support membership growth; and
-- to invest in technology, products and services desired by
members, employer groups and other customers, and physicians
and hospitals.
"Providing health-care coverage requires a great deal of capital
funding," said Premera CEO Brereton (Gubby) Barlow. "However, as a
non-profit health plan, our ability to raise new capital is limited."
Premera's primary source of new capital today is the operating
profit that remains after the company pays members' medical claims and
its operating expenses. Premera's operating profit was 1.7% of
revenues in 2003. Premera also must pay state and federal taxes just
as for-profit insurers do.
After studying the alternatives, it became clear to Premera's
Board of Directors that the equity (stock) markets would provide the
best source of new capital funding. In 2002, the board of directors
unanimously concluded that Premera should seek additional capital as a
public company.
Experts have studied whether the conversion could affect premium
rates.
"Those studies reinforce the belief of Premera's Board that
Premera's conversion will not affect premium rates," Barlow said.
On average, Premera spends about 84 cents of every premium dollar
on members' medical claims. As those medical-claim costs continue to
rise in double digits yearly, premium rates must increase to cover
those costs.
"If Premera's rates rise out of line with competitors, we will
lose customers," Barlow said. "This remains true whether Premera is a
non-profit or a for-profit company."
Company officials also recognize that having a broad network of
physicians and other providers is important.
"Conversion to a public company will not affect our payments to
providers, and we are committed to offering customers a broad network
of physicians, hospitals and other providers," Barlow said.
The Premera proposal also presents a unique opportunity for
Washington and Alaska to receive hundreds of millions of dollars to
help solve unmet health care needs. Premera proposes to provide its
initial stock to two charitable foundations, one in Washington and one
in Alaska. Funding to the foundations as a result of the conversion
may exceed $500 million from sale of that stock. The distribution of
the funds would be governed by independent foundation boards selected
by the Attorneys General of Washington and Alaska.
"Our board, our employees and I are working hard to meet our
customer's needs," Barlow said. "We have served the Northwest and
Alaska for many decades and are committed to this region. Enhancing
our access to capital by converting to a public company is the best
way to serve our members well into the future."
Prefiled testimony of 19 Premera witnesses addresses all aspects
of the company's conversion proposal. Included are statements by
outside experts as well as Premera officials who attest to financial
data, insurance rates, and other company policies and practices. A
special conversion website - www.healthierwashington.com - provides
additional information. Copies of Premera's testimony and other
background are available at www.premera.com/newsroom.
About Premera Blue Cross
Our mission is to provide peace of mind to our members about their
health-care coverage. We provide health insurance and related services
to 1.3 million people in Washington and Alaska. Premera Blue Cross has
operated in Washington since 1933, and Alaska since 1957. Premera Blue
Cross is an independent licensee of the Blue Cross Blue Shield
Association.
Premera Blue Cross is a member of a family of companies based in
Mountlake Terrace, Washington, that provide health, life, vision,
dental, and long-term care insurance, and other related services, in
multiple western states.
FACT SHEET: Highlights of Premera Witness Testimony
(NOTE: All testimony is available at www.premera.com in the
Newsroom/Conversion Resources section.)
Sally Jewell, Lead Director, Chair of the Governance Committee,
Premera Board of Directors (and Chief Operating Officer of REI, Inc.).
-- The Premera Board undertook extensive due diligence before it
decided unanimously to authorize management to seek regulatory
approval for conversion.
-- She explains the reasons for the Board's conclusion that
Premera should increase its capital and that the best way to
do so was to become a public company.
-- As a public company, Premera will be able to raise capital
without losing its independence, selling operating assets, or
taking on unnecessary debt.
Gubby Barlow, President and Chief Executive Officer, Premera.
-- Conversion will help the company to better serve its members.
-- Premera seeks to access capital for three important purposes:
to strengthen the company's reserves (health plans use
reserves to meet their obligations to members, and to protect
against economic uncertainties); to support membership growth;
and to invest in technology, products and services desired by
members, employer groups and other customers, and physicians
and hospitals.
-- The conversion would also create two new health care
foundations with hundreds of millions of dollars in funds to
serve the unmet health care needs of Washington and Alaska
residents.
-- Premera has responded to issues raised by states' consultants
by making amendments to its application to become a public
company.
E. Lewis Reid, Former President and CEO, The California Endowment.
-- The Premera conversion serves the public interest.
-- Conversion will enable Premera, which is today fully taxed, to
raise investment capital while creating two health foundations
that, on a per capita basis, are equal to or larger than the
largest foundation ever created through a Blue Cross
conversion.
-- Mr. Reid describes in detail specific activities that other
foundations have undertaken, and that the Washington
foundation could undertake, to address unmet health care
needs.
-- The terms of Premera's amended application regarding the
relationship of New PREMERA to the foundations are fair and
reasonable.
Barbara J. Dingfield, The Giving Practice.
-- Ms. Dingfield provides consulting advice to philanthropic
organizations. She testifies about Premera's efforts to gather
information from the health care community about Washington's
unmet health care needs.
-- She summarizes the feedback received through this process,
including recommendations about the purposes that should be
served by the Washington foundation.
John Gollhofer, M.D., Chair of the Quality Committee, Premera
Board of Directors.
-- Dr. Gollhofer, an obstetrician/gynecologist practicing in
Spokane, Washington, testifies that Premera's Board and
management are committed to the health and satisfaction of
Premera's members.
-- Conversion will not have an adverse impact on physician
reimbursement or rural healthcare.
Thomas R. McCarthy, National Economic Research Associates, Inc.
-- The Premera conversion will not lessen competition or tend to
create a monopoly in the health coverage business in
Washington.
-- The conversion will not increase premiums, decrease provider
reimbursement rates, or reduce consumer access to health
insurance products or health care providers.
Brian Ancell, Executive Vice President of Health Care Services and
Strategic Development, Premera.
-- Broad and stable provider networks are important to Premera's
success.
-- Premera's provides market-based provider reimbursement and has
achieved high levels of provider satisfaction
Roki Chauhan, M.D., Vice President of Medical Services and Medical
Director for Quality, Premera.
-- Premera's care facilitation programs emphasize preventive
care, member education, and provider best practices. They
enable Premera to facilitate patient access to better
treatment, improve member health, and reduce medical costs.
-- Additional funding will enable Premera to expand the scope and
resulting benefits of such programs to policyholders.
Heyward Donigan, Executive Vice President and Chief Marketing
Officer, Premera.
-- The health insurance market in Washington is competitive.
Competition drives pricing and service in the state, and that
will continue to be true whether or not Premera becomes a
for-profit company.
-- For-profit and not-for-profit companies currently serve the
state. To the extent that such companies might not now compete
with Premera in a particular product line or service area,
they could easily do so. Entry by new competitors is also
feasible.
Jerry Lusk, Milliman USA.
-- Becoming a public company will have no material impact on
Premera's premium rates.
-- Due to market constraints, Premera cannot increase premium
rates sufficiently to generate adequate capital reserves.
-- It would not be practical or prudent to extend Premera's
rate-related assurances for more than two years.
Patrick M. Fahey, Chair of the Compensation Committee, Premera
Board of Directors (and Chairman of Regional Banking, Wells Fargo
Bank).
-- Premera's executive compensation and incentives are set by the
Premera's Board of Directors Compensation Committee, composed
entirely of independent board members.
-- This committee works with independent consultants and
establishes executive compensation consistent with industry
best practices.
-- Mr. Fahey also describes the development of Premera's stock
plan, the Board's incorporation of state consultant
suggestions into that plan, and the compensation-related
assurances in Premera's amended conversion application.
Richard A. Furniss, Towers Perrin.
-- Mr. Furniss is a management consultant who specializes in
executive compensation. He evaluates Premera's executive
compensation programs and finds that Premera's current
compensation levels are reasonable and appropriate.
-- Premera has procedures and assurances in place to ensure that
this will continue to be the case following conversion.
-- Premera's proposed stock program is very conservative.
Richard P. Fox, Chair of the Audit and Compliance Committee,
Premera Board of Directors (and Partner, RavenFire LLC).
-- Mr. Fox testifies to the Board's strong commitment to
Premera's financial and operational integrity.
-- The procedures that have been put into place by the Audit and
Compliance Committee ensure that the company operates in
accordance with best practices.
-- After considering numerous alternatives, the Board concluded
that conversion is the best way for the company to increase
its capital reserves.
Kent Marquardt, Executive Vice President and Chief Financial
Officer, Premera.
-- The principal reason for undertaking this conversion is to
provide levels of capital that can most effectively be
obtained from the stock market.
-- Premera seeks to access capital for three important purposes:
to strengthen the company's reserves; to support membership
growth; and to invest in technology, products and services
desired by members, employer groups and other customers, and
physicians and hospitals.
-- Mr. Marquardt also addresses issues raised by the state
consultants concerning Premera's amended application to become
a public company.
Donna C. Novak, NovaRest, Inc.
-- Ms. Novak is an actuary and consultant with both regulatory
and NAIC experience.
-- Premera, its policyholders, and the public will all be best
served if Premera substantially increases its level of capital
reserves.
-- Raising equity is significantly better than other options
available to Premera to increase its capital.
Alan Smit, Senior Vice President and Chief Information Officer,
Premera.
-- Mr. Smit testifies regarding the importance of sophisticated
information technology to provide excellent customer service.
-- There are increasing demands on Premera to improve technology
to serve providers and customers, to provide better customer
service, and to meet regulatory changes.
-- As a result of these demands, Premera's need to make IT
investments will continue.
Brian Kinkead, Banc of America Securities.
-- Mr. Kinkead testifies that, in his expert opinion, Premera's
strategy to gain access to the public equity market is
reasonable.
-- He also testifies that the company will be an attractive
investment and that the structure and terms of the proposed
transaction will be acceptable to investors.
Audrey Halvorson, Senior Vice President and Chief Actuary,
Premera.
-- Ms. Halvorson describes how Premera develops premium rates in
general, and for its small group and individual customer
segments in particular.
-- Premera cannot vary its premium rates for individual or small
group products in different parts of the State in order to
increase its operating margin in one region relative to its
operating margins elsewhere.
John M. Steel, Partner, Seattle office of Gray Cary Ware &
Freidenrich, LLP.
-- Mr. Steel testifies that, in his expert opinion, Premera is a
commercial enterprise, not a public benefit corporation.
-- Premera's status as a not-for-profit corporation does not make
it a charitable corporation.
-- Premera's assets are not impressed with a charitable trust
and, even if some were, the foundations that will be created
as a result of the conversion will receive assets of far
greater value than any allegedly charitable assets Premera may
now hold.
-- The Premera Board fulfilled its fiduciary duties in
investigating and assessing alternatives for capital formation
via possible merger or combination.
-- The arrangements between New PREMERA and the charitable
foundations are reasonable and customary.
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