Top Court Backs Empire Blue Cross's Shift to Profit-Making

By AL BAKER

New York Times

June 21, 2005

ALBANY, June 20 - New York's highest court ruled on Monday in support of the state's plan to convert Empire Blue Cross and Blue Shield into a profit-making company, which would supply the state with billions of dollars to help balance its budgets.

While several lawmakers and Gov. George E. Pataki have been counting on a windfall from the deal to meet the state's growing health care needs, several fiscal watchdogs have repeatedly warned that using such nonrecurring revenues to pay operating expenses breaks a cardinal rule of public finance. The problem is, the money from the conversion will eventually run out, but the costs will continue, critics have noted.

Still, many in Albany hailed the 4-to-2 decision by the Court of Appeals as a bright bit of financial news, saying it would allow the proceeds of the conversion to be turned over to the state, a jackpot those on both sides of the debate estimated could be worth up to $4 billion in new revenues. The decision also answered, in the final hours of the legislative session, a big uncertainty looming over lawmakers' heads: how to pay for some core programs in the state's multibillion-dollar Health Care Reform Act, which finances programs like drug insurance for the elderly and coverage for low-income families.

"This was the big shark lurking in the tank that could have upset all of the plans for this year's budget and for H.C.R.A. refinancing," said Senator Eric T. Schneiderman, a Democrat from Manhattan.

In upholding the conversion, the court found that the way the state fashioned the deal in 2002 was constitutional. The conversion proceeds were pledged to pay for a variety of health programs and for three years of raises for hospital and nursing home workers.

The court ruled that giving Empire the permission to go public did not prevent other companies from seeking to convert in the same way, contrary to arguments that the deal was tailored to benefit one company, Empire, and was therefore unconstitutional.

The suit was brought in 2002, by Consumers Union, the publisher of Consumer Reports, as well as three individual Empire policyholders. The plaintiffs argued that the "state government's taking of private, nonprofit charitable property," was unconstitutional, said Charles Bell, the programs director for Consumers Union. The lawsuit also claimed that the board of directors of Empire breached their fiduciary duty "to ensure its assets are going to charity purposes," Mr. Bell said.

But Judge Susan Phillips Read, writing for the majority, said the court concluded that the plaintiffs' arguments were "legally insufficient."

"Empire has traditionally functioned as both a financing device for hospitals and a means to make economical health care available to as many New Yorkers as possible," Judge Read wrote. "The dedication of conversion assets to support public health programs and to recruit and retain health care workers is wholly consistent with these activities."

Mr. Bell said on Monday that "we are reviewing our legal options," including considering whether to file an appeal with the United States Supreme Court. "We're very disappointed in the ruling because it fails to protect the billions of dollars, over $3.5 billion dollars, now, of Empire's value, that we believe are nonprofit and charitable dollars that we believe do not belong to the State of New York."

The two dissenting judges said that further court proceedings would be necessary to determine the facts.

Kenneth E. Raske, president of the Greater New York Hospital Association, called the decision a "sweeping and stunning victory" that put to rest any anxiety about the flow of conversion money from this deal or others. The state is hoping to tap another pot of money, as much as $2 billion, by converting the HIP Health Plan into a profit-making company. "It was a time bomb waiting to go off," Mr. Raske said.

In its budget passed this year, the Legislature extended the Health Care Reform Act until June 30, 2007, though some appropriations to pay for it were subject to the court decision, said a spokesman for Senator Joseph L. Bruno, the Senate's Republican majority leader. In this fiscal year, which began on April 1, the state is counting on $1.8 billion from the conversion of Empire.

"This basically buys the state possibly several years on the labor contract that the Empire conversion was done to pay for," said Assemblyman Alexander B. Grannis, a Manhattan Democrat. But, he added in the next breath: "It's still a one-shot."