CareFirst's sale to Blue Cross gets state's approval Regulators gain oversight over subsidiaries of HMO

April 01, 1991|By Peter H. Frank

State regulators have approved the sale of financially impaired CareFirst to Blue Cross and Blue Shield of Maryland as part of a complex agreement that gives the state greater oversight of the health maintenance organization and its subsidiaries.

The pact, which received final approval Friday, would create the largest HMO system in the state. Nearly 120,000 CareFirst members would eventually be merged into the Columbia-FreeState Health System, owned by Blue Cross.

With nearly 300,000 HMO members under the newly enlarged Blue Cross umbrella, the company -- already the state's largest health insurer -- would control roughly one-fourth of the HMO market in Maryland.

Blue Cross is expected to announce the deal as early as today. Representatives of the company could not be reached yesterday to comment on the agreement, the terms of which were learned recently by The Sun.

Final approval of the sale of the HMO, valued at slightly more than $25 million, awaits the outcome of a hearing scheduled this morning before Baltimore City Circuit Court Judge Joseph H. H. Kaplan.

If Judge Kaplan lifts the temporary order that gave the state control over CareFirst's assets, the sale could proceed as planned.

"I think that it's in the best interest of the members, the subscribers, the employers and the employees now that it's a subsidiary of Blue Cross and Blue Shield of Maryland," David D. Wolf, the long-time president of CareFirst, said in an interview yesterday.

Mr. Wolf said he will continue to run the company under Blue Cross.

After years as one of the most profitable and fastest-growing HMOs in Baltimore, CareFirst and two affiliated HMOs were found in early February to have nearly $12 million less than the amount of capital required by the state.

Under Maryland law, insurance companies must maintain a minimum reserve of funds that acts as a financial cushion to protect members against possible losses.

Blue Cross has been seeking to purchase CareFirst for about a year, and the two companies continued to negotiate as state regulators seized control of CareFirst's assets. An agreement between the two companies was reached in late February, pending regulatory approval in Maryland and Virginia.

In an unusual twist, state regulators gave approval for the sale at the end of last week -- but only after using the opportunity to achieve a number of the state's desired aims.

Under the terms of the agreement, Maryland officials attached a string of conditions to the sale that strongly enhances the state's overall regulation of Blue Cross' HMO system, much of which had previously been beyond the state's regulatory powers.

Blue Cross must dissolve within six months at least nine subsidiaries that are part of Columbia-FreeState's operations but are currently outside the jurisdiction of state regulators because they are not insurance companies.

The string of unregulated subsidiaries would either be moved into operating divisions of the Columbia Medical Plan Inc., which operates the Columbia half of Columbia-FreeState or would be dissolved altogether.

Those subsidiaries are: Twin Knolls Pharmacy; Patuxent Medical Group; Columbia Dental Plan; Patuxent Surgicare Inc.; Patuxent Medical Laboratory Inc.; Judgment Process Co.; Columbia FreeState Optical; Free State Management Co.; and Columbia Free State Management Co.

In turn, the operations of CareFirst and an affiliated Baltimore-area HMO, Potomac Health, would merge with the Free State Health Plan Inc. within roughly two years, according to the terms of the agreement.

The order signed by regulators also calls for a strictsegregation of the HMOs' operations from the parent Blue Cross business and requires that reports outlining the HMOs' financial condition and the ongoing merger be filed with regulators on a quarterly basis. Blue Cross has also promised to bring CareFirst's capital up to required regulatory levels.

A third HMO owned by the CareFirst operations, Physicians Health Plan Inc. in Virginia, has been purchased by Blue Cross of Maryland, but with the stipulation that it will be sold to Blue Cross and Blue Shield of Virginia by the end of this month, said Kenneth J. Schrad, a spokesman for the Virginia State Corporation Commission, which regulates insurance companies.

The agreement between the neighboring Blue Cross plans to sell the Virginia operations was reached Thursday.

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