WASHINGTON -- Maryland's insurance commissioner accused the state's largest health insurer, Blue Cross and Blue Shield of Maryland, of poor management yesterday, saying its executives set up money-losing subsidiaries outside his purview, ignored regulatory orders and have spent lavishly on themselves and others at a time when the insurer appears "barely solvent."
In testimony before a Senate panel investigating abuse and fraud in the insurance industry, John A. Donaho expressed concern about Blue Cross' ability to cover claims. He said his attempts to regulate the company have been stymied by its "deliberate" attempt to thwart his authority and by its lobbying power in Annapolis.
Mr. Donaho sharply questioned Blue Cross' use of excess cash. Hecited executive salaries he said were as much as $285,000 several years ago, the recent "quiet purchase" of a sky box at Oriole Park, the company's largess at Preakness celebrations, and an estimated $600,000 in gifts last year to groups such as the Baltimore Symphony Orchestra.
"There is a reason to take a look at the Blues," Mr. Donaho told the Senate Permanent Subcommittee on Investigations. "We do have problems with them in Maryland, and we do have problems with them nationwide, at least in terms of solvency."
Carl J. Sardegna, chairman and chief executive of Blue Cross and Blue Shield of Maryland, declined comment through a spokesman. In a news release, the company called Mr. Donaho's charges "irresponsible," and noted it has turned a profit for the past three years. Blue Cross also denied it is headed toward insolvency.
Mr. Donaho, a member of a panel of state insurance commissioners convened in June to investigate Blue Cross plans, and Robert M. Willis,the top insurance regulator for the District of Columbia, were the first witnesses in hearings on the financial health of the nation's 73 Blue Cross plans.
Investigators for the Senate panel said they already have found problems in Blue Cross plans, including questionable management, a pattern of establishing for-profit subsidiaries whose books are off-limits to state regulators, and questionable contracts with executives and board members. The staff also questioned millions of dollars in legal fees paid by Blue Cross plans, including more than $800,000 that Maryland officials said went to Baltimore firms.
Under questioning by U.S. Sen. Sam Nunn, D-Ga., subcommittee staffers said state regulators lack adequate information not only to assess insurers' financial health but also to approve or reject rate increases.
Blue Cross and Blue Shield plans provide health insurance to 95 million people nationwide, including 1.4 million in Maryland. If these plans failed, as happened in West Virginia in 1990, most people would wind up paying their own medical bills. Only 18 states, including Maryland, have a guarantee fund to guard against bankrupcies of health insurers.
The Senate hearings follow last month's assessment by Florida-based Weiss Research Inc. that 29 percent of all Blue Cross plans are in poor financial shape. The firm rated Blue Cross of Maryland as weak, based on an inconsistent level of reserves in recent years. Blue Cross officials say that rating does not take into account recent financial improvements.
Blue Cross of Maryland has reserves of $74 million to cover medical claims. Some insurance executives say this safety net should be as high as $116 million. The insurer wrote or administered $1.4 billion worth of premiums last year for 1.3 million Maryland residents. State law requires reserves of only $75,000, a figure Mr. Donaho called clearly inadequate.
Responding to the yesterday's charges, Blue Cross and Blue Shield of Maryland said in its release, "It is our view that we are the most highly regulated insurance company in Maryland." It also said its largest subsidiaries are health maintenance organizations regulated by Maryland.
The insurer declined to provide the salaries of its top executives, saying a private consultant found them at or below the market rate. Blue Cross defended the purchase of a stadium box, which it said cost $75,000, and donations to charitable organizations, saying they were marketing necessities.
It acknowledged that some subsidiaries have lost money, but said an arbitrage subsidiary criticized by Mr. Donaho actually had contributed to the insurer's surplus.
In their staff report yesterday, Senate investigators raised concerns that Blue Cross plans around the country were avoiding state regulation and limiting public scrutiny.
Senate staffers, who interviewed more than 100 people in a preliminary probe, found Blue Cross plans that:
* Paid a chief executive officer $350,000 plus membership in a country club.
* Paid $9 million over two years to one law firm.
* Paid $200,000 in legal fees to the law firm of a director. Mr. Donaho identified this as a payment to Maryland's Piper & Marbury, whose partner, George Russell, is a member of the board of Blue Cross and Blue Shield of Maryland. Blue Cross called the figure inaccurate. It said it paid $58,000 to the firm for work in 1991 and said legal business is spread throughout the city's law firms.
* Paid $600,000 to a law firm "merely to incorporate a subsidiary." This payment, according to Maryland officials, involved the law firm of Frank Bernstein Conaway and Golden, which liquidated recently. It handled Blue Cross' acquisition of CareFirst, a health maintenance organization.