Maryland's insurance commissioner and Blue Cross and Blue Shield of Maryland face off today in a legislative hearing convened to investigate allegations that the state's largest health insurer has skirted regulatory authority, set up unregulated subsidiaries and paid its executives hefty salaries while the company was losing millions.
The panel is expected to hear from state Insurance Commissioner John A. Donaho and his staff; Carl J. Sardegna, chief executive of Blue Cross; and other high-level corporate executives. Some members of the Blue Cross board -- a panel of Maryland business leaders, many of whom have close ties to Gov. William Donald Schaefer -- are expected to be present.
The hearing before the House Economic Matters Committee in Annapolis follows by three weeks Mr. Donaho's startling claims before a U.S. Senate subcommittee that Blue Cross appeared "to be barely solvent," undermined his authority through its influence in the state capital, persisted in creating subsidiaries that are beyond the scope of his regulation and used excess cash in questionable ways, including the purchase of a stadium sky box and corporate donations.
Mr. Donaho's allegations stunned executives at Blue Cross' Owings Mills headquarters and put them on the defensive.
Within days of Mr. Donaho's appearance in Washington, legislative leaders in Annapolis received a point-by-point refutation from Blue Cross' lobbyist Fran Tracy. It noted that Mr. Donaho had been a guest at its sky box at Oriole Park at Camden Yards and at its hospitality tent at the Preakness.
The Blues also hired Benjamin R. Civiletti, U.S. attorney general during the Carter administration and managing partner of Venable Baetjer & Howard, to represent them before the Senate Permanent Subcommittee on Investigations, which has subpoenaed the company's records as part of its nationwide probe of Blue Cross plans.
Yesterday, the insurer ran full-page advertisements in The Sun and The Evening Sun that proclaimed, "The Name You've Trusted for 50 years is Still the Name of Trust."
Mr. Donaho's charges also caught off guard some legislators, who contended that the insurance commissioner has repeatedly assured them that he had the tools to do his job. Among them was Del. Casper R. Taylor Jr., chairman of the Economic Matters Committee, which oversees insurance. Mr. Taylor called for today's hearing in an effort to separate "fact from fiction."
"The kind of publicity that has been brought to bear on that insurance company is the kind of publicity that by its very nature is very damaging," Mr. Taylor said. "It's paramount to get the VTC questions that have been raised answered as quickly as possible."
The Allegany County Democrat accused Mr. Donaho of not substantiating his charges against Blue Cross but also has said that he expects the insurer to provide a "full reporting" on its for-profit subsidiaries, solvency, executive salaries and a report on its management structure by a consultant hired by the Blues.
The study, which replaced one ordered by the General Assembly more than two years ago, has not been seen in full by Mr. Donaho.
"I've got to believe if the insurance commissioner is going [to] see it, we better see it and if we see it, the public ought to see it," Mr. Taylor said.
Mr. Donaho has declined to elaborate on the allegations he made July 2 to the Senate subcommittee, which is investigating fraud and abuse in the insurance industry.
State officials are operating under a gubernatorial order not to comment directly to the press. Mr. Schaefer has refused to comment.
Blue Cross, however, has moved to refute what it has described as "irresponsible" charges and to correct the "inaccurate financial picture" presented.
Last week, the company issued its second-quarter earnings six weeks early -- profits of $19.8 million for the quarter that ended June 30, a 141 percent increase compared with the same period last year.
The Blues also said they boosted reserves in that quarter by 40 percent, to a five-year high.
In the past week, Mr. Civiletti has met at least twice with Mr. Donaho to review an inch-thick executive summary of the study prepared for Blue Cross by Booz-Allen & Hamilton. Mr. Sardegna has maintained that Mr. Donaho was briefed on the report's findings upon its completion.
It is unknown, however, whether the executive summary includes the salary structure of Blue Cross executives. The company has refused to share those figures with Mr. Donaho.
In 1988, the base salaries for top Blue Cross executives were $275,000 for Mr. Sardegna, $175,000 for Stephen E. Bailey, now a senior vice president, and $160,000 for Fred M. Gloth, the company's chief legal counsel, according to figures filed with the insurance commissioner's officer in the summer of 1989 and obtained at that time by The Sun.
In 1988, the company posted a loss of $3.2 million, following two years in which it lost a total of $107.3 million.
Last Wednesday, the company issued a special press release on its 1991 charitable donations, which it said totaled $400,000 -- more than double what it said its donations were in 1987. The company, which said it restricts its corporate giving to less than 3 percent of its earnings, attributed the increase in part to a stronger financial position in recent years.
"I want to see a healthy insurance industry. I want to see a healthy Blue Cross plan," said Mr. Taylor, the House committee chairman. "To the extent the industry or any part of the industry in Maryland is not healthy, then steps have to be taken to make it healthy."