State fails to do review of Blues ordered by Assembly

July 11, 1992|By Heath insurer lobbied governor and commissionerPatricia Meisol and Ann LoLordo | Heath insurer lobbied governor and commissionerPatricia Meisol and Ann LoLordo,Staff Writers

The Schaefer administration has failed to undertake a comprehensive management study of Blue Cross and Blue Shield of Maryland that was ordered by the legislature in 1990.

The review would have come at a time when the state's largest insurer has been confronted with serious financial concerns and management problems. The study might have publicly revealed possible problems.

The state's insurance commissioner, who had sought the review to better assess the company's finances, was about to award a contract to one of the "Big Six" accounting firms when Blue Cross waged a lobbying campaign -- including visits by its chief executive to Gov. William Donald Schaefer -- that stopped it, according to interviews with some of those involved.

At one point, members of the Blue Cross board of directors pressured the insurance commissioner, John A. Donaho, to accept instead a study conducted by the company's own consultant, a plan that eventually held sway, according to Mr. Donaho.

He said the directors objected to having the division award the contract because "to have a study made by us would result in a public document, available for public scrutiny, which would be an embarrassment and harmful to the image of the Blues."

Mr. Donaho said he decided not to award the contract, which he had believed was within his authority, after discussing it several times with the governor and learning of his objections. "He [the governor] was of the view that Blue Cross should be given the opportunity to undertake its own study," Mr. Donaho said in an interview this week.

Mr. Donaho said he received only an oral briefing on the more-limited internal management study the Blues subsequently conducted. "Our own study would been more comprehensive," he said, adding that he still wants to take an in-depth look at the insurer's claims operations and subsidiary companies.

In testimony to Congress last week, Mr. Donaho, who took over as Maryland's top insurance regulator three years ago, said Blue Cross had tried to subvert the regulatory process by lobbying in Annapolis.

Blues Chairman Carl J. Sardegna said in an interview yesterday that because the Blues were concerned about the possibility of proprietary information leaking out, the company tried to stop the state study, preferring to conduct its own internal management study to address weaknesses.

Mr. Sardegna said his earlier conversations with the governor concerned whether the study was within the authority of the insurance commissioner.

The Blues received a legal opinion from the law firm Piper & Marbury that it was not, he said. The Insurance Division's own lawyers weighed in on the side of the insurance commissioner.

Mr. Donaho said that in the company's attempt to persuade him to accept its review as sufficient, he was visited by three Blues board members -- George Russell Jr., managing partner with Piper & Marbury; J. Owen Cole, chairman of the executive committee at First Maryland Bancorp; and William A. Beasman Jr., chairman emeritus of the Bank of Baltimore.

None of the three men returned phone calls requesting comment yesterday. A spokeswoman for Mr. Schaefer, Page W. Boinest, said the governor "didn't want to comment on any of this."

In a lengthy interview at Blue Cross headquarters in Owings Mills yesterday, Mr. Sardegna repeated many of his company's earlier statements disputing Mr. Donaho's harsh public criticism of his company. He also stressed that:

* A management study released to the public would leave the Blues at a disadvantage with its competitors.

Mr. Sardegna declined to release a copy of the study. But he said yesterday that the consultant told Blue Cross it should improve its health maintenance organizations' profits; reduce its administrative costs, and put into place a monitoring system to check on costs.

* The study by the Blues' own consultant, Booz-Allen & Hamilton, led to creation of a system to provide a detailed oversight of the company's costs. In another problem area -- claims payments -- the company is introducing a computerized system to solve late or slow payment of claims, he said. Finally, the insurer laid off 8 percent of its work force, or nearly 300 people, as a result of the study.

* The commissioner worked with Booz-Allen and with the Blues' board to design the study and was briefed on its findings and recommendations. Also, Mr. Sardegna noted that the commissioner could have ordered his own study if he had wanted.

Mr. Sardegna also said he was "totally shocked" by the commissioner's testimony to Congress last week, partly because Donaho raised no similar concerns when he appeared before the Blues board in November. Indeed, at that board meeting, the Blues chief said, the insurance commissioner expressed pleasure with the changes.

"My question is, why weren't those questions raised in front of the board and me before going to a Senate committee?" he said.

The Blues chief said he told Mr. Donaho last week that he was bringing Booz-Allen back to assess the changes.

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