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January 29, 2008


""Good morning Superintendent Dinallo, and thank you for the opportunity to appear before you this morning. My name is Edward Skyler, and I am the Deputy Mayor for Operations for the City of New York. On behalf of Mayor Bloomberg, I am here to testify today on the impact the proposed conversion of EmblemHealth, better known as HIP and GHI, to a for-profit corporation will have on the City of New York, its employees and other New Yorkers.

"The New York State Insurance Department must reject GHI and HIP's current proposal to convert to a for-profit company because the negative impact of a conversion on the City would be dramatic, severe and permanent. The City and other covered organizations already spend more than $4 billion annually in employee healthcare costs, most of which is paid to GHI and HIP. If GHI and HIP are granted for-profit status, they will quickly and substantially raise the rates they charge, and the City will have no choice but to pay for it.

"These rate increases will be inevitable because of the conversion and the anti-competitive merger of HIP and GHI that preceded it, a merger that the City is vigorously contesting in Court. The unlawful merger of HIP and GHI eliminated competition between these providers, who were created as non-profit entities for the express purpose of providing affordable healthcare to residents and employees of New York City. If the State permits the proposed conversion to happen without imposing stringent conditions on HIP and GHI, it will cause a fundamental and irrevocable shift in the allegiance and duties of the managements of HIP and GHI from the long-term health of the City's employees, to shareholders, whose only concern is profit.

"While the City would be forced to pay the increased healthcare costs that the merger and conversion would make possible and inevitable, none of the value of a conversion-which would presumably be realized through a public offering of HIP and GHI stock-would accrue to the City. Rather, the State, and a charitable foundation controlled by the State, would reap 100% of the benefit of the proposed conversion, leaving the City to pay for the substantial premium increases that would follow it. Given these patent inequities, the Superintendent must not allow this conversion to happen unless it is conditioned on the City both receiving its fair share of any public offering and being assured, through appropriate regulation, that there will be a meaningful cap on rate increases.

"GHI and HIP both have deep roots in New York City. GHI was formed in the City in the 1930s, and pioneered the provision of healthcare to working New Yorkers. HIP started operations in 1947 and was created by Mayor LaGuardia for the express purpose of providing affordable health insurance to New York City residents and City workers. For more than 60 years, GHI and HIP have fulfilled their not-for-profit missions, and the value of these companies derives almost entirely from contributions made by the City and its employees over more than six decades.

"Today, due to this long-term investment, New York City is by far the largest contract-holder with GHI and HIP, contributing approximately 60% of the total value of the merged company. Fully 93 percent of the City's workforce, more than 518,000 employees and retirees -cops, firefighters, nurses, doctors, teachers and librarians - choose either GHI or HIP for health coverage. And the City is bound by law to pay the HIP rate for 100% of City employees covered under a City-funded health plan.

"I'm sure the members of this committee are aware that healthcare costs have risen dramatically for the past several years. Between 2002 and 2008, the City's healthcare costs increased by approximately 67%, from $2.4 billion to $4 billion, an average of nearly 9% per year. Despite these cost increases, HIP and GHI remain far and away the most affordable healthcare plans available for City employees.

"But make no mistake, as a combined for-profit company, HIP and GHI will be compelled to impose much larger rate increases on all contract-holders, and the City will be forced to pay the majority of those increases. After the conversion, HIP and GHI will be obligated to pay substantial corporate income taxes and State and MTA taxes on insurance premiums; these taxes alone would immediately increase operating costs by more than 2% of current premiums, or $67 million per year. These costs could be covered only by increasing rates on current contract-holders.

"Moreover, to maximize profits, HIP and GHI's would-be shareholders will demand that it charge at least as much as other private insurers. To get an idea of the magnitude of such increases, consider that the for-profit healthcare provider closest in price to HIP currently charges 24% more in premiums than HIP charges for health plans offered to City employees. We estimate that the City must pay an additional $32.9 million for every 1 percent increase in health insurance costs, so if rates increased by even half of this amount, it translates to approximately $400 million in additional healthcare costs every year.

"The fact that such increases would have to come out of the City's pockets would be irrelevant to shareholders, who would rightly expect the highest possible return on their investment. Given these realities, any claim that HIP and GHI's rates and historic pattern of rate increases would remain the same after a conversion simply defies common sense. Nor could purported 'efficiencies' or 'synergies' from a merger and conversion counterbalance the enormous pressures to raise rates that a conversion will unleash.

"And keep in mind that none of this is happening in a vacuum. Last week, Mayor Bloomberg presented the City's financial plan for the next four fiscal years. It contains budget deficits of about $5 billion a year in Fiscal Years 2010, 2011 & 2012, driven largely by increases in uncontrollable costs, including Medicaid, pensions and fringe benefits. The City can ill afford to see its health care costs spiral out of control, and undermine our ability to balance the budget without slashing funding for crucial core services such as public safety and education.

"Furthermore, due to the anti-competitive merger that the City is currently suing HIP and GHI to undo, any competitive restraint on rates that would have mitigated the upward pressure on premiums caused by a conversion of HIP or GHI has been eliminated. Prior to the merger, GHI and HIP competed against each other to provide affordable healthcare to the City's employees.

"Due to that competition, GHI and HIP's rates historically have been significantly lower than its for-profit counterparts. However, if the conversion is permitted, the State will be granting a combined HIP and GHI the unrestrained ability and incentive to increase rates, which the City will have to pay.

"In response to the concerns I have described, you may hear that the negative impacts of a conversion would be mitigated by the presumed public offering of HIP and GHI stock. That is not the case. In fact, a public offering would not result in any direct benefit to the City or its employees, because the proceeds of such an offering would go directly and entirely into the State's control. In fact, the Governor's proposed budget, released last week, projects revenues from the proposed conversion of $284 million dollars in fiscal 2009, and more than $1.5 billion dollars in State revenues is projected in fiscal years 2010, 2011 and 2012.

"This windfall to the State would be the direct result of the decades-long investment that the City has made to provide quality healthcare for its employees and residents. The fact that the City would be completely unable to use the proceeds of a public offering to offset the cost increases that a conversion will make inevitable is grossly unjust. Rather than reaping the value of its investment and using it to ensure that City employees continue to get affordable healthcare, the conversion will take what is essentially a City asset and use it to pay the State's bills.

"If, in spite of all these factors, the Superintendent chooses to approve the conversion, he must do everything in his power to assure that it does not adversely affect the City and its employees, or negatively impact 'the delivery of health care benefits and services' to the people of New York City. To do that, the Superintendent must condition any approval of the conversion on a binding requirement that GHI and HIP cap any rate increases, and those caps must be strict and longer-lasting than those imposed on Empire Blue Cross/Blue Shield when the State permitted it to convert in 2002.

"The City proposes that the Superintendent limit any rate increases by HIP and GHI for a significant time period following the effective date of the conversion to no more than what the Superintendent first finds is consistent with increases in medical costs and utilization (for example, future rate increases could be tied to some standardized consumer-price index). In addition, the Superintendent should establish an Oversight Committee with authority to ensure that HIP and GHI comply with any order permitting conversion. Finally, the Department must support developing a means to ensure that a substantial portion of the proceeds of any public offering of HIP and GHI go to the City. Last spring, I traveled to Albany with UFT president and head of the Municipal Labor Committee, Randi Weingarten to make a joint case to the Governor and the Legislature that if HIP and GHI are permitted to convert, the City must get a fair share of the proceeds to ensure that we can continue to provide affordable healthcare.

"Before closing, I should point out that the proposed conversion now before you differs in three significant and important ways from the Empire Blue Cross/Blue Shield conversion approved by the Department in 2002. First, Empire was subsidized by New York State, and its contract-holders were located throughout the state, so that it was appropriate that the value realized from the IPO flow to the State rather than to any particular municipality. But the value of HIP and GHI was created almost exclusively by the City of New York and its employees and residents, and the cost increases that would inevitably follow the proposed conversion would be felt almost exclusively by the very people who should be the primary beneficiaries of a conversion, but who will see the entire value of their investment go to the State.

"Second, Empire had explored alternatives to conversion - including merger with or acquisition by another insurer - and none were available. HIP and GHI, on the other hand, have successfully merged, so their arguments for conversion are weak compared with those in favor of Empire's conversion. (After all, if their arguments in favor of the merger are to be believed, the merger itself will reduce their costs and make them more competitive with other New York insurers.) Third, Empire had lost at least half of its subscribers from 1986 to 2002, had experienced a period of major operating losses, and its continued existence was in question. GHI and HIP were doing well even before their merger and the merged entity is viable and indeed valuable to the City and the region.

"All the facts demonstrate that GHI and HIP cannot convert to a for-profit corporation without inflicting irrevocable harm on the City. As such, the Superintendent should approve the plan of conversion only subject to stringent conditions that will ensure that the City can continue to provide affordable healthcare to its employees and residents, and only if the City is guaranteed a fair share of the proceeds from any public offering of HIP and GHI stock.

"Thank you very much for the opportunity to testify this morning."


Stu Loeser/Jason Post   (212) 788-2958

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