Blue Cross Hijacked

How the Governor and the State's Most Powerful Union Shortchanged Health Consumers

If a labor official's duty, first and foremost, is simply to bring home the bacon, then the deal cut by health workers leader Dennis Rivera in Albany last month with Governor Pataki and legislative leaders more than passes the test. In a recession year in which major state cuts in Medicaid—the funding that so many of his hospital employers depend upon—were expected, Rivera snagged a 13 percent raise for his members, paid for by state funds.

"And we did it without a strike, without the loss of time or pay," said Rivera in a victory message to members, adding: "What did we give up? Not one single thing."

But Rivera and his union, the old Local 1199 now known as 1199/SEIU, have always been measured by a different yardstick than other unions. The leadership acknowledged that labor lives in a joint-stock world in which civil rights are often more crucial than pension rights, and that the union was best served by fighting for those progressive changes that affected society as a whole. That approach caused Martin Luther King Jr. to call 1199 his "favorite union."

To win his latest contracts, however, Rivera had to keep those old-fashioned sentiments firmly under wraps. And if 1199's members gave up nothing in their new contracts, the rest of the state's low-income residents gave up a great deal.

In crafting their massive package of state aid to health care institutions, Rivera and Pataki grabbed more than $1 billion that was intended for a foundation capable of finally addressing many of the state's fundamental health care inequities. The foundation was to have been funded by the proceeds from the conversion of the state's largest insurer, Empire Blue Cross Blue Shield, into a for-profit corporation. Founded in 1934 as the original insurer of last resort for the chronically ill, Empire had long benefited from tax breaks, favorable hospital rates, and occasional massive cash bailouts from the state. Hemmed in by new competitors and prevented from raising money in the capital markets, Empire announced in 1996 that it wanted the state to release it from its nonprofit status. In exchange for state and legislative approvals, Empire offered to place the entire earnings from its initial stock offering—valued at $1.1 billion by financial analysts—into a new nonprofit foundation.

The same route has already been taken by insurers in a dozen states, including North Carolina, Kentucky, and Maine, where the legal principle was upheld that decades of taxpayer assistance for the insurers had created what state attorneys general referred to as a "charitable asset." In California, a new $3 billion foundation created after the conversion of a Blue Cross entity is now plowing millions of dollars into new clinics and health programs.

While many health advocates worried about the loss of a nonprofit insurer, there was widespread agreement that new regulations and for-profit HMOs made the move all but inevitable. "The work of a for-profit insurer and a not-for-profit have become indistinguishable," said Alexander Grannis, the liberal Manhattan Democrat who chairs the assembly insurance committee. "The mission was gone for Empire."

Health advocates from across the state assembled to examine how the money generated by Empire's conversion could be used. In 1997, more than 130 organizations, ranging from United Cerebral Palsy to ACT UP, signed a statement of principles to guide the transfer of assets to a charitable foundation. They called for an independent board of directors representative of communities and consumers, accountable to the public, and dedicated to expanding health care coverage to the uninsured and the creation of new programs for the state's neediest residents.

"I was really excited," said Susan Dooha, director of health policy for Gay Men's Health Crisis, who helped coordinate the effort. "We would have some serious money that would generate a lot of attention on how to solve New York's seemingly unsolvable problem of the uninsured. I thought we had a once-in-a-lifetime opportunity to make a difference."

Not everyone agreed. 1199 and the Greater New York Hospital Association, which represents the major downstate voluntary hospitals in labor contracts with the union, opposed the conversion, on what they described as basic philosophical grounds.

A for-profit insurer "would be more concerned with the price of their stock than their ability to deliver services," GNYHA president Kenneth Raske told the press. Rivera dismissed the proposed foundation, which had by now won legal approvals from Attorney General Eliot Spitzer, as merely "a smoke screen and a sweetener" on Empire's part. Rivera and Raske floated their own proposal to take over Empire and run it, an idea that was rejected by Empire's board. At that point, the estimate of how much Empire's conversion would generate was about $300 million. But in 2000, a new study found that a fiscally improved Empire would now generate at least $1 billion if converted. Rivera and Raske's attitudes underwent a marked change.

With their backing, the Republican chairman of the state senate's insurance committee introduced a new bill that would split the Empire proceeds between two separate foundations, one for statewide health needs and another to help hospitals purchase new computer systems. "It is with a heavy heart that we came to this decision," said Raske.

"That's when things started to go south," said Charles Bell, program director for Consumers Union, which has monitored more than 100 nonprofit conversions worth $16 billion around the country. The advocates, working with Grannis and Assemblyman Richard Gottfried from the West Side, continued to press for a single foundation. As recently as last fall they thought negotiations were moving along. Then, in late December, the Albany rumor mill began to buzz with talk about a deal between Pataki and Rivera that called for sinking all of the Empire conversion proceeds into the state's pool of health care funds. A major chunk of that money would go to "workforce retention,"i.e., raises for state health care workers, including 1199's members.

The political rationale wasn't hard to determine. With 210,000 members, 1199 has become the state's most powerful union, and there was already strong talk that Rivera might stay neutral or even support Pataki's re-election in this year's gubernatorial race. Pataki appeared at 1199's Christmas party, where he was cheered by members. At the same time, advocates later learned, he was deep in secret talks with the labor leader, and another 1199 ally, State Senate Majority Leader Joe Bruno. Someone floated a trial balloon to the press in early January.

"At the time the announcements were in the paper of the governor and Rivera striking a deal, there was no bill," said Grannis. "It wasn't until the first week of January that we saw any language on the bill."

Hung up for six years, the Empire conversion now raced toward approval in a new bill. Now 95 percent of the proceeds were dedicated to state health funding, including worker raises. Only a last-minute push by Grannis and Gottfried won a small foundation, which will receive 5 percent of the assets, a potential $50 million.

The raw politics shocked the advocates. "One would've expected the political leadership to have resisted this blatant grab for the assets and push them back," said Bell.

"You can't sneeze at $50 million, but it's just not going to make a meaningful difference," said Mark Scherzer, counsel for New Yorkers for Accessible Health Coverage, the coalition brought together to watchdog the conversion.

Jennifer Cunningham, Rivera's political director, acknowledged that 1199 had changed its position on the conversion, but said her union has nothing to apologize for. "People can differ about the best use of the dollar, but we have been incredibly vigorous supporters of expanding access to affordable health care in the state," she said. "I'm willing to go toe-to-toe with any advocate who wants to tell me that a home care worker making $7.49 doesn't deserve a raise," she said.

In fact, none of the advocates opposed the raises, only the funding source. "We believe health care workers need and deserve decent salaries," said Dooha. "But this isn't how the conversion money should be used."

There are other concerns. On a national level, advocates fear Pataki's move could be duplicated by other governors facing budget shortfalls and eager for a quick fix. Locally, other nonprofit insurers, such as Health Insurance Plan of New York, have also indicated an interest in converting. To that end, Bell and Scherzer said they are considering a legal challenge against the legislation.

"This is just a horrible precedent," said Grannis, a 28-year veteran of the legislature. "Even if you give up and say this is an extraordinarily difficult time, it would have been a unique opportunity—unparalleled and unprecedented in my career—to put together something that would have a real impact."

"We are really grieving an incredible loss," said Dooha. "Especially coming at this moment, when New York is in recession and so many people are losing their health insurance. There was hope on the horizon."

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