City Sees a Profit Grab in Insurers' Conversion Plan

In a move that could harm the chances of two health insurers seeking to convert into a fused, for-profit corporation, the city is saying the entity would act in the interest of shareholders at the expense of policyholders.

The city, in a memorandum sent yesterday to the state's Insurance Department, opposed the proposal by the Health Insurance Plan of New York and Group Health Incorporated, arguing it would result in lucrative stock options for top company executives even as premiums were increased and benefits were diminished.

"The conversion will fundamentally shift GHI and HIP's legal obligations from doing what is best for their members and the public generally, to pursuing the largest profit possible," the city's top lawyer, Michael Cardozo, wrote in the 28-page document. "The only benefits that are likely to ensue from the conversion will go to HIP/GHI's current officers and directors, not the policyholders or subscribers, and not New York's residents."

Even as insurance officials weigh the proposal, HIP's chief executive officer, Anthony Watson, is poised to receive stock options that sources said could be worth up to $20 million, The New York Sun reported last month. In 2007, the company doubled the compensation of its top 10 executives, including Mr. Watson, who earned $4.7 million last year, up from $2.1 million in 2006.

The company said Mr. Watson, whose base salary is just more than $1 million, received compensation in 2007 that resulted from a performance incentive plan.

In releasing the memorandum yesterday, Mayor Bloomberg said the conversion would cost the city millions of dollars. More than 90% of city employees and retirees currently subscribe to GHI or HIP, costing the city $4 billion each year. The city has been a vocal opponent of the proposal, and in 2006 filed a lawsuit to block the conversion.

"We don't need City dollars intended to protect hard-working City employees and retirees used instead to pad the compensation of health care executives," Mr. Bloomberg said in a statement.

By law, the conversion requires the approval of the state's Insurance Department. In January, the department convened public hearings on the proposed corporation, which would be known as EmblemHealth. "We are well aware of the City's strong objections, which were forcefully stated at the public hearings," the insurance superintendent, Eric Dinallo, said in a statement yesterday.

Mr. Dinallo emphasized that before signing off on the conversion, he is required by law to ensure that the result would not have an adverse impact on EmblemHealth's members, or negatively affect health care delivery and benefits. He also must ensure that the conversion results in the fair, equitable, and convenient winding down of the business of GHI and HIP. "The Insurance Department will fulfill its obligations under the law and protect the people of New York," he said.

In a statement, the insurance companies responded to suggestions that a merged entity would deliver diminished care at a higher cost. "EmblemHealth emphasized at public hearings in January that it must remain competitive in its premiums and quality of service," the statement read. "Because of more efficient access to capital available to a publicly traded company and because of economies of scale, EmblemHealth expects to remain competitive."

A spokesman for HIP, Pat Smith of the public relations firm Rubenstein Associates, declined to comment on compensation the company's top executives were promised. "It is premature to speculate on stock options since the state Insurance Department has not even approved a plan of conversion," he said.

In another twist, the city has said it wants part of the funds from an initial public offering if Mr. Dinallo permits the companies to convert into a for-profit entity.

In testimony before the Insurance Department in January, Deputy Mayor Edward Skyler said if insurance officials approve EmblemHealth's plan, they should impose a cap on premium increases to protect members. The department should also guarantee the city receives its "fair share of the proceeds from any public offering of HIP and GHI stock," he said.