At The Senate Hearing

September 26, 1992

ON REGULATING THE BLUES

Sen. Sam Nunn, D-Ga."Do you you think Blue Cross and Blue Shield of Maryland is just too big? . . . Are they too big to regulate?"

John A. Donaho:"I don't think anything is too big to regulate. It's a question of guts and competence. I think we have the guts and I think we are in the process of achieving the confidence to properly regulate the Blues."

ON EXISTENCE OF THE BLUES' SUBSIDIARIES

Mr. Donaho: "As late as 10:30 last night we were looking and trying to figure out which ones we had never been informed about. My education is getting more complete by the minute. . . . Looking at the charts there are some things I never heard of. There are some outfits that we thought had died which seem to have been reborn."

ON CEO'S COMPENSATION

Senator Nunn: "Do you believe you can justify taking home $610,000 in 1990, $850,000 in 1991, to the policyholders of Maryland who had their premiums go up rather dramatically during this period of time and to the providers who complain they are not being paid on time?"

Carl J. Sardegna: "I do not make my own salary adjustments. I do not determine what my salary is. The board does. . . . They determine that by looking at the competition. I agree with the philosophy of making sure the base salary is only at the average of our competition. Everything else is based upon performance."

ON BUSINESS TRIPS AND OTHER MARKETING EXPENSES

Senator Nunn: "Isn't it hard for you to justify sending people to the Olympics and raising rates at the same time? Doesn't that give you some pause?"

AMr. Sardegna: "When I look at the rise in health care costs . . . that is extremely disturbing to me. It is clear, however, that what I will be doing as part of our total review of all of our expenses is to make sure our marketing costs in effect do have the cost benefit they were assigned to have. If they do not, and we cannot justify that in fact that expenditure directly relates and we can show we are maintaining and improving business on that basis, I will discontinue those practices. I would like to point out, if you take all of those marketing expenses together, it represents about two tenths of one percent of revenue."

Senator Nunn: "Mr. Sardegna, do you worry with all the health care problems that we've got in this country, with the price of premiums going up for the American family, with so many small businesses not being able to afford insurance, with 36 million uninsured people, with major businesses saying they are having a hard time competing with the Japanese and Germans because every automobile -- every American-made automobile -- has $700 built into it for health care costs, does this give you some real pause when you're investing in sky boxes and you're investing in trips to the Olympics, even if your competitors are doing it? Does it bother you?"

Mr. Sardegna: "I worry a lot about the future of health care. I have to live today in the current competitive environment. I believe major fundamental changes are necessary. . . . I will go back and make sure those expenditures are getting the bang for the buck."

Senator Nunn: Did the plan pay for you to accompany the Baltimore Symphony to Russia?"

Mr. Sardegna: "Yes, it did. . . . The business purpose was there were a significant number of businessmen who went with the Baltimore Symphony, and I went along with them."

Senator Nunn: "You don't have any trouble justifying that as a business purpose? . . . You make a pretty good salary. Why couldn't you pay for it out of your own pocket?"

Mr. Sardegna: "Senator, in hindsight, I probably would have made a different decision."

ON AD RUN IN BALTIMORE SUN

Senator Nunn: "It says 'To the People of Maryland: You should know the facts. Blue Cross and Blue Shield of Maryland is financially sound. We have more than $360 million in reserves and surplus to meet any and all claims obligations." . . . Isn't this in effect misleading though, Mr. Swenson, because it basically is portraying the long-term basic stability of the company and yet what you are including is the short-term immediate debt that you are about to have to pay right then? . . . It's a little misleading, isn't it?

James R. Swenson, Blues corporate actuary: "Senator, if the man on the street believed that we have $360 million in surplus, I would agree with that characterization. I'm looking at it, I guess perhaps with more knowledge, in the sense that I recognize that from an actuarial background I recognize that a reserve is a liability."

Senator Nunn: "Wouldn't a better way to say it is 'we owe $260 million immediately and we have enough to pay that immediately and we have $100 million for later obligations'?"

Swenson: "That's a fair characterization, Senator."

Senator Nunn: "I don't believe that's the way the ad -- whoever did the public relations -- intended that to be read, do you?"

Mr. Swenson: "Senator, I guess [pause] . . . I look at those ads from my perspective."

Senator Nunn: "You wince, don't you?"

REGULATING THE BLUES

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