State regulators freeze assets of large HMO

February 22, 1991|By Peter H. Frank

Because of incorrect information supplied by the Maryland Insurance Division, the negative net worth of CareFirst and an affiliated company were misstated in an article on the health-maintenance organization yesterday. The two companies were found to be $11.7 million below the $2.9 million in net worth required by regulators. Their combined negative net worth was $8.8 million.

The Sun regrets the error.

State insurance regulators froze last night the assets of CareFirst, one of the largest health-maintenance organizations in Maryland, in an extraordinary step to protect the 118,000 members covered by the financially impaired company.

Yesterday's action came soon after the Insurance Division of the state Department of Licensing and Regulation determined that the debts of CareFirst and an affiliated company exceeded their assets by $11.7 million and that attempts to raise much-needed cash were not proving fruitful.


The action also came just days after the company replaced its president, David D. Wolf, with a Florida executive, Warren Stowell, and the day after Virginia regulators notified two ZTC affiliated companies that they were "financially impaired" under state law, officials said.

Maryland regulators stressed yesterday that their action was meant to ensure the continuing operation of the company and that all medical services would continue uninterrupted.

"CareFirst is continuing to function as a health-care provider under my supervision," said Maryland Insurance Commissioner John A. Donaho, who was named court-appointed conservator of the Maryland-based companies last night. "There will be no interruption of services to members as a result of these actions."

A formal hearing has been scheduled for March 4 in Baltimore City Circuit Court to determine whether a permanent court order will be issued allowing the regulators to remain in control of the companies.

If court approval is granted, Mr. Donaho said, he will consider a number of alternatives to ensure that current CareFirst members receive uninterrupted coverage.

Under state law, regulators could continue operating the HMO while seeking a buyer or ask for a court order requiring other HMOs in the state to accept CareFirst's members during an open enrollment period.

The Columbia-FreeState Health System, an HMO owned by Blue Cross and Blue Shield of Maryland, has been negotiating to buy all or part of the CareFirst system, regulators said.

CareFirst is the operating name of an HMO owned by the HealthCare Corporation of the Mid-Atlantic. The company earned for the three months that ended Sept. 30 on revenue of $28.4 million. It had assets of $15.7 million.

Maryland regulators also seized the assets of a sister company, the HealthCare Corporation of the Potomac. Both companies are owned by HealthCare Corporation of America, a subsidiary of CareFirst Inc.

CareFirst's financial difficulties appear to stem, in part, from a buyout of the company in the mid-1980s that loaded the private company with tens of millions of dollars in debt, regulators said yesterday.

In all, CareFirst owes more than $66 million to creditors, including $22 million to Maryland National Bank. Unpaid interest on that debt has grown to about $3 million, regulators said.

The decision to seek control of the companies was prompted by a regular examination completed by the Insurance Division Feb. 6. It found HealthCare/Mid-Atlantic had a negative net worth -- or liabilities exceeding assets -- of $9,117,134, according to court documents. Health Care/Potomac was found to have a negative net worth of $2,624,749.

Regulators declined to discuss why the figures were not in line with numbers submitted by the companies showing a combined total net worth of nearly $15 million as of Sept. 30.

Mr. Donaho said he held at least two discussions with representatives of CareFirst during the intervening days but that yesterday's action became necessary because a lawyer for the company said it might file for Chapter 11 bankruptcy protection, which would have blocked the power of regulators to seize control.

Representatives of CareFirst could not be reached last night for comment.

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