Presentation by Kurt GallingerVice President and Counsel

Amerisure Companies

For: Senate Health Policy CommitteeApril 16, 2008

Support Fair Competition

1,557 companies are willing to compete for Michigan insurance business on a fair and level playing field

Only one is asking the legislature for permission to abuse a tax exemption and monopoly leverage to compete

HB 5284 & 5285 Propose Expanding BCBS and the AF to Compete Unfairly

Allows tax exempt BCBS to purchase any legal business Hospitals, clinics, insurance companies, agencies,

auto repair shops, etc. Leveraging tax free dollars, contracts, networks

and agency relationships to compete with private business

Bundling products Untaxed earnings available to downstream

affiliates

History of the Blues Not a commercial insurance company (Act 350 of

1980) Mission of a non-profit

Improve general health, safety and welfare Access to reasonably priced, quality health care

Only non-profit under Act 350 Charitable and benevolent institution

State tax exempt (business & property) Lost federal tax exemption

Limited to health care and health care benefits

Creating a Monopoly Unique status created competitive advantages that

resulted in its current monopoly position Uses market dominance to leverage favorable

contracts, networks and agency relationships BCBS funds and property can only be used for original

purposes and for benefit of subscribers BCBS charter amended in 1993 to allow for purchase

of Accident Fund Allowed State to receive highest bid

Buying the Accident Fund – the birth of a Bluesopoly

BCBSM given limited exception in 1993 No branching out into other lines Could not unfairly compete for worker’s comp

Spent $261million dollars to purchase AF rather than reducing subscriber rates.

We opposed special exceptions in 1993. We oppose

them today.

So-Called “Firewall” ProvisionsTHE NONPROFIT HEALTH CARE CORPORATION REFORM ACT (EXCERPT)

Act 350 of 1980

550.1207 Powers of health care corporation; interests of senior citizens; validity of corporate acts.

Sec. 207. (1) A health care corporation, subject to any limitation provided in this act, in

any other statute of this state, or in its articles of incorporation, may do any or all of the following:

* * * (x) Notwithstanding subdivision (o) or any other provision of this act,

establish, own, and operate a domestic stock insurance company only for the purpose of acquiring, owning, and operating the state accident fund pursuant to chapter 51 of the insurance code of 1956, 1956 PA 218, MCL 500.5100 to 500.5114, so long as all of the following are met:

So-Called “Firewall” cont’d (ii) The activity is determined by the attorney

general to be lawful under section 202. (iii) The health care corporation does not directly

or indirectly subsidize the use of any provider or subscriber information, loss data, contract, agreement, reimbursement mechanism or arrangement, computer system, or health care provider discount to the insurer.

So-Called “Firewall” cont’d (iv) Members of the board of directors,

employees, and officers of the health care corporation are not, directly or indirectly, employed by the insurer unless the health care corporation is fairly and reasonably compensated for the services rendered to the insurer if those services were paid for by the health care corporation.

(v) Health care corporation and subscriber funds are used only for the acquisition from the state of Michigan of the assets and liabilities of the state accident fund.

So-Called “Firewall” cont’d (vi) Health care corporation and subscriber funds

are not used to operate or subsidize in any way the insurer including the use of such funds to subsidize contracts for goods and services. This subparagraph does not prohibit joint undertakings between the health care corporation and the insurer to take advantage of economies of scale or arm's-length loans or other financial transactions between the health care corporation and the insurer.

-200

-150

-100

-50

0

50

AccidentFund

All Affiliates

CapitalContributions(Paid byBCBSM)

Dividends(Paid toBCBSM)

Net Cash Drainon BCBSM

$ Millions

CASH DRAIN ON BCBSMBy BCBSM Affiliates

*Based on 2004-2007 BCBSM Schedule Y

-125

27

-98

-172.8

35.8

-137

Affiliate “Contributions”

Dan Leopp, April 9, 2008Detroit Free Press

Our Michigan-based, for-profit subsidiaries contributed nearly $100 million in 2007 to lessen the cost pressure on health care premiums.

Affiliate “Contributions” cont’d

Dan Leopp/Elizabeth Haar, April 13, 2008Lansing State Journal

Affiliate “Contributions” cont’d

Elizabeth Haar, April 15, 2008Lansing State Journal

Affiliate “Contributions” cont’d But Elizabeth Haar, president of the Accident Fund, said the

coalition's numbers fail to account for net income transfers from the Accident Fund to Blue Cross over the last 14 years. “We returned $100 million in net income to Blue Cross in 2007,” Haar said. Since 1994, when the Blues purchased the Accident Fund from the state of Michigan, the Accident Fund has provided the Blues with a 297 percent return on investment, she said. Helen Stojic, a Blues' spokesperson, said the Accident Fund's transfers to the Blues are reported to OFIR as a line item in the Blues' annual statement of revenue and expenses. Over the last 14 years the Accident Fund has returned more than $1 billion in profits back to the Blues, Haar said.

Elizabeth Haar/Helen Stojic, April 14, 2008Crain’s

“Contributions” Identified

Accident Fund’s 1993 Share of Michigan’s Workers Compensation Insurance Market

Accident Fund

All Others

13.9%

86.10%

Accident Fund’s 2006 Share of Michigan’s Workers Compensation Insurance Market

Accident FundAIG

Liberty Mutual

Hartford

Auto Owners

Frankenmuth Mutual

Michigan Construction

Travelers

Hanover

Zurich/Maryland

Hastings Mutual

Michigan Insurance

Amerisure

Michigan Farm Bureau

CNA

Cincinnati

Chubb

Ace American

Everest National

Michigan Millers

26.14%

7.47%5.62%4.45%4.32%3.99%3.50%3.47%3.09%3.02%2.90%2.49%2.47%2.22%2.18%1.97%1.92%1.40%1.00%0.97%

Stay Off The Fast Track

House passed bills in 2 weeks from start to finish

One committee hearing, no sub-committees, no study groups, no work groups, no input from any other insurance company, consumer or health care provider

The Senate has been the deliberative chamber – don’t rush to finish – there’s no emergency and this has nothing to do with “Individual Market Reform”

Oppose the Bluesopoly! HB 5284 & HB 5285 Should Be Killed in the Senate

If not, there are some market- and consumer friendly options that will require more time:

Require the Blues to convert into a private company. Privatizing the Blues would create a large cash

infusion for the state and create a new source of tax revenue.

Require the Blues to sell the Accident Fund and then allow AF to compete in the marketplace as a

private company.

Require the Blues to pay several billion dollars in unpaid state back taxes and create an enforceable

separation or “firewall” between the Blues and the Accident Fund.