It came with shocking swiftness. On a Thursday night, Feb. 21, regulators took over CareFirst.
It didn't seem quite possible. CareFirst was the only major health maintenance organization in Baltimore consistently reporting earnings each year. The HMO's financial statements showed a strong net worth. And revenues had been growing, year in, year out.
Suddenly, though, the state's Insurance Division said CareFirst was more than $7 million in the hole. David D. Wolf, the company's chief executive for six years, had been fired. CareFirst's bank accounts were frozen. A proposed sale was in the works. Bankruptcy had become a serious threat.
To the outside world, the collapse of what once had been the highest-flying, newest wave in the local health insurance scene occurred with no warning. Even some top officials at the company had little idea what was happening.
To those in charge at CareFirst, however, it had been a long, painful and rancorous time coming. Enormous debt, missed payments, shrinking membership and growing animosities among directors culminated in a financial collapse and a boardroom coup that ultimately forced the hands of regulators.
What happened at CareFirst was more than just a mid-1980s leveraged buyout gone bad.
No other soured LBO had the medical care of 118,000 people -- mostly Marylanders -- hanging in the balance. Few were able to hide their problems so well for so long. And few CEOs were reinstated as regulators took control of the insolvent companies.
Indeed, Mr. Wolf, who declined to be interviewed for this article, has come through his company's failure with his career and reputation on the rise. He could even be heading a larger HMO network before it's all through.
Peers and regulators describe the 40-year-old Baltimore native as an honest and competent executive. Blue Cross and Blue Shield of Maryland, which courted the ailing HMO for a year and appears to have finally bagged its prize, has promised Mr. Wolf that he will stay on if the deal goes through.
How did Mr. Wolf, a promising young accountant-turned-medical-executive, survive phoenix-like as his company turned to ashes during the past few weeks? Was it a well-wrought plan or plain luck?
What apparently saved Mr. Wolf was the same thing that helped bring down his company.
A complex corporate structure helped shield the HMO's financial performance from its increasingly troubled parents. A highly secretive ownership structure helped keep the company's problems out of the public eye. And board in-fighting, which led to a threat of bankruptcy and spurred the regulators' action, kept the spotlight of blame on others while Mr. Wolf picked up the pieces.
Through a series of interviews with top CareFirst officials, regulators and other industry players, a picture of an HMO succumbing to financial illness develops. Most, however, declined to be identified by name, citing the delicate nature of the pending sale of CareFirst to Blue Cross and the likelihood that the HMO would continue operating under Mr. Wolf's direction.
From the beginning, CareFirst had an unlikely combination of owners. It was born in 1978 -- at the start of the HMO industry -- through the concerted efforts of unions, management and doctors.
The idea behind the business was rather simple. Medical costs were rising, and the federal government was looking for ways to hold the expenses in check. HMOs, using a technique called managed care, appeared to be an answer.
Instead of paying a doctor's bill after procedures were performed on a patient, these managed-care companies would find doctors willing to treat members for a set monthly fee.
If a doctor was receiving a set amount each month per patient, the doctor might think twice about prescribing unnecessary tests -- or so the reasoning went. In addition, while HMOs typically picked up hospital costs for their members, doctors were forced to use their monthly payment to cover the costs of sending their HMO patients to specialists.
Within a few years, however, CareFirst was hurting badly. The company did not have the money to expand its operations in the face of growing competition and increasing costs.
In 1984, a New York investment firm, Adler & Shaykin, agreed to buy out the owners of CareFirst for roughly $3.5 million. Within months, in January 1985, Mr. Wolf was hired.
At 34, Mr. Wolf had already done well. A graduate of Overlea High School, he enrolled in Loyola College, where he earned a bachelor's degree in accounting in 1972 and an M.B.A. in finance in 1977. At the Coopers & Lybrand accounting firm, he rose quickly. By 1978, he was wooed away to run the administrative end of the largest physicians' group in the state, Chesapeake Physicians P.A.