Horizon wins votes to allow for major restructuring

NJ’s largest health insurance company wants to reshape its corporate structure. Critics charge the company’s goal is conversion to for-profit

Following a brief but spirited debate, lawmakers gave final approval Thursday to a controversial measure allowing the state’s largest health insurance company to reform its business and tax structure in ways supporters said are critical to allow it to remain competitive.

The divided votes in the Assembly and Senate – which split largely along party lines, with most Democrats in favor and most Republicans opposed – sends the legislation to Gov. Phil Murphy, who is expected to sign it into law. The company, Horizon Blue Cross Blue Shield of New Jersey, which provides health care coverage to 3.6 million people, would still need approval from state regulators to implement the changes. During the Senate debate, lawmakers from both parties echoed concerns raised by some advocates about a lack of transparency around the process and stressed that any additional revenues should be returned to policy holders or dedicated to public health measures. The proposal has seen strong support from business interests.

Under the legislation, Horizon would provide the state $600 million by June 2022 and up to $1.25 billion over the following 18 to 25 years, with the money deposited in the general fund. The company, valued at approximately $7 billion, would reduce its state tax burden by $50 million annually under the reform.

“This process has been rushed through the legislature,” said Sen. Nia Gill (D-Essex) one of just three Democrats to oppose the measure in that house. “This money belongs to the families of the loved ones on ventilators, suffering from COVID-19. This money belongs to the families struggling to provide. Not the state,” she said.

Gill also noted that in 2017 Democrats in the legislature passed a law to blocked an effort by former Gov. Chris Christie, a Republican, to secure some $300 million from Horizon reserves for addiction treatment, requiring that certain excess revenues to be returned to policy holders. “We cannot allow a Democratic governor to do what we would not permit previous governors to do,” she said.

Supporters insist the reform is necessary to allow Horizon to modernize its business operations to better compete. But Sen. Gerald Cardinale (R-Bergen) noted that the funds intended for the state payments come from “excess reserves” generated by the non-profit with a charitable mission. “Maybe they were working under a lot of constraints, but those constraints didn’t stop them from making excess profits. And to the tune of $600 million,” he said.

The complex legislation has moved quickly through three committees in recent weeks, following lengthy testimony for and against the measure and tough questions from some lawmakers.

Multiple business organizations testified in favor of the proposal and diverse community groups joined forces as “Move Health Care Forward New Jersey” to support the measure. A study commissioned by Horizon indicated the changes would unleash new business potential for the company, resulting in some 2,000 new jobs annually and billions of dollars in additional economic activity statewide, over a decade.

But many health care advocates have raised concerns about the measure, which echoes past efforts by Horizon to reform its corporate operations. Some critics fear the deal does not effectively protect Horizon’s assets — valued at roughly $7 billion — for public benefit, as required under state law, and would put the priorities of investors ahead of Horizon policyholders.

Here is a breakdown of the proposal and what it means for Horizon members and state residents:

What does the legislation do?

Sponsored by several powerful lawmakers including Senate President Steve Sweeney (D-Gloucester), budget committee chairman Paul Sarlo (D-Bergen) and Assemblyman John McKeon (D-Union), the bill (S-3218/A-5119) creates a new path for Horizon to change its corporate structure; it does so by allowing Horizon to transform from a “health services corporation” to a “mutual holding company” that would oversee multiple business entities, some devoted to insurance and some not. Any financial gains enjoyed by these entities would remain within the mutual holding company.

Horizon is New Jersey’s only “health services corporation,” a charitable entity legally obligated to its policyholders. But this structure involves an archaic corporate structure and high tax burden that supporters of reform say leaves the company unable to effectively compete against national for-profit insurance companies like Aetna and UnitedHealth. Under the bill, the holding company and its subsidiaries would retain the same Horizon charitable mission and be required to keep current staff levels for several years, albeit with multiple exceptions.

Why does this matter to Horizon?

Under the current structure, there are caps on what the company can invest in new technologies or spend on partnerships or programs that provide benefits not covered through a traditional insurance claim. As it is, Horizon can invest up to 2% of its reserves (about $140 million) in any one outside entity or partnership and no more than 10% (or $700 million) in these efforts overall and the funds can only be drawn from certain business lines.

While legislative testimony often touched on the need to invest in new technology, like wearable health trackers, Horizon leaders also highlighted the importance of initiatives like Neighbors in Health, a program the insurance company launched with health care giant RWJ Barnabas and dozens of community-based organizations. Horizon invested $25 million through this partnership to fund social workers in targeted, high-need communities in 11 counties, an expense that is outside its traditional claims-based payments and is counted against the caps on investments.

What’s in it for the state of New Jersey?

The bill calls for Horizon to pay the state $600 million upfront by June 2022, if the reform is approved; up to $100 million in the second year; and between $25 million and $50 million annually, based on a statutory schedule of 18 to 25 years, depending on the company’s ability to protect its reserves. Eventually the state would collect $1.25 billion over this period. The money would go into the state’s general fund — meaning it could be put to almost any use — despite efforts by Sen. Steve Oroho (R-Sussex) and some colleagues to ensure it is dedicated to public health.

Horizon said these figures were developed through negotiations with lawmakers and Gov. Phil Murphy’s staff, in part to offset the impact the corporate reform would have on state tax collections. Horizon currently pays a premium tax rate eight times higher than its competitors — adding an extra $50 million to the company’s yearly state tax bill — and the legislation would instead put it on par with what others pay.

Why are health care advocates concerned?

Health care advocates are concerned for many reasons, starting with the fact that Horizon’s assets are supposed to benefit the public good, not private entities. Several opponents insist this reform is a “shell game” that hides the company’s real intention — converting to a for-profit entity — which under existing law would require Horizon to set aside the full value of its assets in a fund dedicated to public health. They also complain that Horizon has not been transparent about its value and that the entire process has been shrouded in secrecy.

Horizon insists this is not about for-profit conversion, and language was added to the bill to specifically prohibit the mutual holding company from transforming in this way or merging with another for-profit entity. The legislation also prohibits the holding company to be purchased by a for-profit entity, the company said, and — if pursued — that process would trigger other consequences and requirements, including the “charitable settlement” noted by advocates that would set aside funds for public health benefits.

How would Horizon policyholders benefit?

While Horizon is obligated to act on behalf of the 3.6 million members, these members would not likely see any immediate or drastic change from the deal. According to the company, a more modern and flexible corporate structure would enable it to grow financially and invest in new technology and programs, like the Neighbors in Health initiative, all of which benefit members overall.

But representatives of New Jersey Citizen Action warn that the reform would put an end to periodic payments Horizon is now legally obligated to make to policyholders when its reserves exceed a certain level. Under the revised legislation, any potential payments would be considered “satisfied” by the company’s upfront payment to the state.

On the other hand, the bill includes a measure designed to keep Horizon engaged in New Jersey’s individual and small business health insurance exchanges, which cover hundreds of thousands of residents who do not receive coverage through their job and earn too much to qualify for Medicaid. If the company backs out of those critical markets it would no longer be exempt from payroll and state sales taxes.

What happens next?

If the bill is passed and signed by the governor, as expected, Horizon could then submit an application to the state Department of Banking and Insurance to proceed with the reform. The state attorney general, who oversees charities, would also review the application, under a recent amendment to the legislation. The Department of Banking and Insurance would be responsible for vetting the request — parts of which would be available for public review — and could hire outside experts to review the proposal at Horizon’s expense. The department would also need to schedule three public hearings within three months, but essentially would be required to approve the deal unless the state finds faults with the application that the company can’t resolve.