Monitoring Blue Cross Blue Shield Conversion Funds


The Commissioner’s Order

In June 1999, Blue Cross Blue Shield United of Wisconsin filed an application with the Commissioner of Insurance proposing to convert from a non-profit insurer to a for-profit corporation. Documents related to that application are available on the Office of the Commissioner of Insurance website:

The next year, Commissioner Connie O’Connell issued an Order allowing the conversion to proceed. As part of the conversion, the Commissioner required that Blue Cross Blue Shield pay back to the public the more than $600 million that the company had benefited as a result of its tax-exempt status. According to the Commissioner’s Order, the purpose of these funds was to "promote public health initiatives that will generally benefit the Wisconsin population."

Click here to read the Commissioner’s Order (pdf).

The Medical Schools

Complying with the request of Blue Cross Blue Shield, the Commissioner assigned the task of administering this $600 million of public money to Wisconsin’s two medical schools, the Medical College of Wisconsin and the University of Wisconsin School of Medicine and Public Health. The Commissioner did not give the funds to the schools as a gift; instead, she explained in the Order, "The conversion funds are best viewed as public capital charged with a particular purpose." The Commissioner’s Order charged the medical schools with overseeing the conversion funds and allocating the money to projects that promote Wisconsin’s public health.

Each school established a program for distributing the funds:

Advancing a Healthier Wisconsin (Medical College of Wisconsin)
Wisconsin Partnership Program (University of Wisconsin-Madison)

The WUHF Board

The Commissioner also established the Wisconsin United for Health Foundation (WUHF) to oversee the distribution of the conversion funds. The WUHF Board reviews the medical schools’ plans for the funds every five years to ensure compliance with the Commissioner’s Order. The Board does not, however, have any formal authority over the medical schools.

The Legislative Audit Bureau’s Report

In 2010, the State of Wisconsin Legislative Audit Bureau reviewed the medical schools’ programs established to distribute the conversion funds. The report raised several concerns about the management and oversight of these funds, concerns that ABC for Health had previously raised. (See the sidebar.)

The Audit Bureau's Report spans two volumes:

Legislative Audit Bureau Report 10.6: An Evaluation (pdf)
Legislative Audit Bureau Report 10.7: Review of Selected Projects (pdf)

The Key Issues

The Legislative Audit Bureau’s report raised several key issues, which ABC has discussed in correspondence with the Commissioner of Insurance, the WUHF Board, and the medical schools; in a series of issue papers; and in several newsletters. (See the sidebar.)

The key issues, and ABC’s recommendations, are summarized below:

The 35/65 Split

The original Order allocated 35% of funds to public health initiatives and 65% to medical education and research. Over the past decade, the 35/65 split has not changed, despite an increase in the fund amount and other funding that is newly available. The allocation has also not changed in light of evolving threats to the public health of Wisconsin. We recommend that the Insurance Commissioner amend the Order to grant the WUHF Board authority to revisit and revise the split.

Click here to read ABC’s issue paper on the 35/65 split.

Misdirection of Funds

While the Insurance Commissioner’s Order states that the purpose of the conversion funds is to "promote public health initiatives that will generally benefit the Wisconsin population," the Audit Bureau’s report reveals that many funded projects fail to directly benefit Wisconsin’s residents. First, many medical education and research grants direct funds to core medical school activities, including faculty recruitment, equipment purchases, and student education. As the audit report points out, these core expenses do not directly relate to Wisconsin’s public health. In addition, many medical education and research grants fund projects that lack a focus on Wisconsin-specific health issues. The stated purpose of the conversion funds requires funded research projects to focus on Wisconsin-specific health issues and grant seekers to demonstrate the Wisconsin-specific focus of their research as a part of the grant application process. Finally, a substantial portion of public health grants is being spent directly by the schools or paid to the schools’ faculty and staff. This is money that should be spent directly on public health initiatives. We recommend the medical schools lift their requirement that a faculty member be involved in all funded public health projects.

Click here to read ABC’s issue paper on the misdirection of funds.

Conflicts of Interest

The Audit Bureau’s report reveals that conflicts of interest contaminate the granting process, describing a handful of cases in which members of oversight and advisory committees had a personal interest in grants under review. The report also reveals a broader conflict. At both schools, the Dean has the authority to allocate medical education and research funds without making those funds available to competitive proposals. The needs of the Deans are not identical to the needs of the public, and the Deans should not have this level of discretionary authority over funds intended to benefit the health of the Wisconsin people.

Click here to read ABC’s issue paper on conflicts of interest.

Supplanting of Funds

The Commissioner’s Order states that "the funds may not be used to supplant funds or resources that are available from other sources." According to the audit report, many of the grants may be violating this rule. First, expenditures on faculty recruitment, equipment purchases, and student education appear to supplant the schools’ operational budgets. Public health funds should not cover the schools’ normal operating costs. In addition, many funded research projects investigate national health problems, such as cancer and Alzheimer’s disease, while federal funding is available for much of this research. As mentioned above, the conversion funds should support investigations of Wisconsin-specific health issues and should not support research projects that duplicate the efforts of NIH-funded investigations at other institutions. We recommend the Insurance Commissioner amend the Order to require that grant seekers indicate on their applications that they have investigated other funding sources and found no other funding available for the project.

Click here to read ABC’s issue paper on supplanting.

Inadequate Oversight and Enforcement

The problems of misdirection of funds, violations of the prohibition against supplanting, and conflicts of interest all relate to a broader problem: lack of adequate oversight. A better oversight and enforcement mechanism could ensure that the conversion funds are spent appropriately and ethically. Effective enforcement also must include penalties for noncompliance. We recommend the Insurance Commissioner amend the Order to grant the WUHF board oversight and enforcement authority.