KENTUCKY SUIT FAULTS ANTHEM'S HANDLING OF BLUES' ASSETS

FRANKFORT, Ky.-Anthem Insurance Cos. is coming under fire for its 1993 acquisition of Blue Cross & Blue Shield of Kentucky.

Kentucky Attorney General Albert Chandler III sued the Indianapolis-based mutual insurer late last month, alleging it owes the state at least $230 million in charitable assets he claims Anthem illegally pocketed when it acquired the Blues plan four years ago.

Anthem called the lawsuit "flawed" and said it will "vigorously defend" the allegations.

At issue is whether the Kentucky Blues plan is a charitable organization. In Kentucky, as well as in other states, a charity may not be terminated or dissolved without transferring its assets to another charity operating with-or as close as possible to-the same charitable purpose.

Charitable assets became an issue with Blues plans in 1996 when Blue Cross of California converted to for-profit status after merging with its publicly held subsidiary WellPoint Health Networks Inc. As part of the conversion, Blue Cross of California transferred more than $3 billion to charitable foundations at the request of state legislators (BI, June 3, 1996).

According to the complaint, filed in Franklin Circuit Court in Frankfort, Ky., the attorney general claims the Kentucky Blues plan's roots are as a charitable entity incorporated in 1938 for the "purpose of promoting public health for the benefit of all mankind." He claims all of BC/BS of Kentucky's as

sets were held in a charitable trust until 1993 when, he alleges, the assets were illegally converted by Anthem to its own for-profit use. In the process of completing the deal, the suit alleges Anthem made "unfair, false, misleading and deceptive representations and omissions."

Anthem refutes the claims.

BC/BS of Kentucky "is not and never has been a charity," Anthem said in a statement.

While the Blues plan is a not-for-profit company, not all non-profits are charities. The company has never met the qualifications of a charity, it said.

Furthermore, Anthem states the Blues plan merged with a mutual company, not a for-profit company, so the assets that were developed by the Blues plan are working on behalf of all Anthem BC/BS members and not outside investors.

In addition to Kentucky, Anthem also operates Blues plans in Indiana, Ohio and Connecticut.

Attorneys general in Connecticut and Ohio are said to be considering similar actions related to charitable assets.

Anthem and BC/BS of New Jersey halted their merger agreement last year due to regulatory delays and litigation related to the charitable assets issue.