Aug. 22--WILKES-BARRE -- The former Blue Cross of Northeastern Pennsylvania has engaged in "blatantly unlawful conduct" by giving away $90 million in surplus money that should have been used to benefit policyholders, a class-action lawsuit filed this week alleges.
The breach of contract lawsuit, brought by Plains Township on behalf of all current Blue Cross of Northeastern Pennsylvania policyholders who were subscribers between 2012 and 2014, targets both Blue Cross and the Wilkes-Barre-based AllOne Foundation and AllOne Charities, which received $90 million in charitable contributions shortly before Highmark Inc. closed its merger with Blue Cross of Northeastern Pennsylvania on June 1.
A statement Highmark released at the time said the money was going to "support health and wellness efforts across Northeastern Pennsylvania."
But West Pittston-based attorney Michael J. Cefalo, who is representing the plaintiffs along with the Philadelphia law firm Caroselli, Beachler, McTiernan & Coleman, says that as a nonprofit, Blue Cross should have used that money to help its ratepayers.
"It's not their money. It belongs to the people who paid the premiums," Cefalo said. "They have to give that back to the subscribers."
Highmark spokesman Anthony Matrisciano said the company had not been served with the suit Friday and does not comment on pending litigation.
A legal obligation
Plains Township joined the lawsuit because many of its employees had been insured by Blue Cross, township solicitor Stephen Menn said. The board voted on it out of concern for how the money was being used, he said.
"We felt it was something that we needed to address on behalf of the municipality, in the event there was money that should be applied toward our premium as opposed to being used in some other fashion," Menn said. "If you're not part of it, you're not going to get a reduction in costs, and if you are part of it, it doesn't cost you anything."
The lawsuit asks the court to declare that the $90 million -- just a portion of the more than $300 million surplus Blue Cross had at the end of 2013 -- can only be used to benefit policyholders and cannot be given away. It also seeks unspecified damages for what the plaintiffs term "BCNEPA's breaches of contract in retaining over
($40 million) of unlawful underwriting profits."
"The funds which BCNEPA sought to and then gave away are not assets of BCNEPA freely disposable at the whim of BCNEPA but rather are held by BCNEPA in trust for the benefit of its policyholders for the purpose of providing direct benefits to policyholders," says the lawsuit, which was signed by attorney David S. Senoff.
The attorneys argue Blue Cross had a legal obligation to act as a nonprofit because of its own articles of incorporation, which say the corporation "does not contemplate pecuniary gain or profit, incidental or otherwise, to its members."
A 2005 determination by the state Insurance Department established appropriate operating surplus ranges for Blue Cross plans because in some cases it is appropriate to "provide recompense" to customers for their premiums, according to the suit. The lawyers contend that the document "plainly and clearly stated" that "there was not to be any profit component for such policies."
Despite that, Blue Cross violated the law by generating and retaining $41.7 million in profit between 2012 and 2014, the suit alleges.
Since the merger with Highmark was announced in February 2014, Blue Cross of NEPA has "again and again made it clear that it intended to give away its surplus to charitable organizations rather than, as required by law, to use such funds to benefit policyholders," the lawsuit says.
Cefalo said the money should go back to policyholders, either as a dividend or an alternative benefit such as eliminated co-pays for doctors' visits or cut costs for prescription drugs.
The suit contends that Blue Cross claims to have an "expert opinion" justifying the $90 million donation but it "deliberately has concealed that information from its policyholders (and the public at large), claiming that it is 'confidential.'"
"Incredibly, BCNEPA engages in such blatant unlawful conduct despite the fact that BCNEPA has never agreed to any suggestion that it is a 'charity,'" the complaint says. "Indeed, objecting to previous attempts to curtail its activities, BCNEPA maintained that it 'clearly (is) not a charitable organization.'"
Citing what they term the "improper transfer" of the
$90 million, the plaintiffs have filed a motion for a preliminary injunction seeking a judge to rule the money can't be used in a way at odds with state law and Blue Cross' articles of incorporation, and also that the money must be used "for the direct benefit" of Blue Cross policyholders.
Luzerne County Judge Fred A. Pierantoni III gave the defendants 30 days to respond to the motion and set arguments in the matter for Oct. 7.
A source of controversy
Blue Cross of NEPA's use of surplus money has been a controversial topic for years. The company has in the past claimed that the hundreds of millions in surplus money was a "safety net" for the approximately 600,000 people it insures.
But the money hasn't always served that purpose alone. In 2002, the company found itself the target of a class-action lawsuit in Lackawanna County that would have forced it to divest itself of up to $338 million of its reserves to preserve its tax-exempt status under state law. The plaintiffs also sought to block the insurance company's plan to spend $175 million to integrate local health-care systems and support the creation of a local medical school.
After nearly a decade in the court system, the Pennsylvania Supreme Court in June 2011 ruled against plaintiff Robert Petty, who was covered under Blue Cross policy for employees of R.G. Petty Masonry of Clarks Summit. The court found he and the business lacked standing in the case.
"Appellants' attempt to assert a breach of fiduciary duty is simply another attempt, be it under a different name, to attack Blue Cross's business-making actions and decisions," the justices wrote. "While Blue Cross may have a fiduciary duty to appellants under its contract, that duty does not extend to Blue Cross's business practices, and thus appellants' breach of fiduciary duty claim cannot stand."
Over the years, retired state Rep. Phyllis Mundy, D-Kingston, has been an outspoken critic of the Blue Cross using its surplus for any purpose other than to reduce rates, saying people who have contacted her are outraged that they have no input on how their money is being spent.
"They're an insurance company, not an charitable organization," Mundy said Friday.
In 2004, Mundy critiqued the corporation for using its operating budget to pay for four senior executives' membership at the Huntsville Golf Club in Lehman Township, which at the time cost $15,000 per corporate member.
Mundy again took aim at the organization in 2007 when news broke that it had donated $70,000 of its surplus money to a Democratic political advocacy group.
During her time in office, Mundy repeatedly sought to require Blue Cross and other non-profit health insurance companies to use their surpluses to reduce rates for customers, arguing Blue Cross should not be raising rates when it has millions of dollars in its coffers.
Her attempts at legislation were unsuccessful, be she said Friday that she thinks the pressure she put on the administration at the time helped bring about the 2005 Insurance Department determination referenced in the lawsuit.
"It almost sounds like we're right back where we started from in 2005 because Blue Cross surpluses did decrease there for a long time," Mundy said. "It looks like they're right back up where they started."
570-821-2058, @cvjimhalpin
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