No more skirting of rules, Md. warns Blues

October 08, 1992|By Patricia Meisol | Patricia Meisol,Staff Writer

The state insurance commissioner has told Blue Cross and Blue Shield of Maryland that he will not allow it to get around industry accounting rules this year.

The move could force the insurer to lower the worth of its assets by roughly $80 million. As a result, the health insurer's net worth would plummet.

In a two-page letter hand-delivered to Blues President Carl J. Sardegna Tuesday, state Insurance Commissioner John A. Donaho said he was "determined" to hold the insurance company to strict industry accounting standards in calculating NTC how much its assets are worth come year's end. This was the first time Mr. Donaho has given the insurer formal notice that he would not allow it to follow rules other than the industry standard, as he has in the past.

Under the specifics laid out in Mr. Donaho's letter, the insurer would likely be forced to cut about $80 million from its reserve fund. Blue Cross listed $101 million in reserve as of June 30.

Cathy Campbell, a spokeswoman for the Blues, yesterday downplayed the commissioner's letter, saying none of the points in it was "really new." She said the insurer has enough money to pay claims and is "feeling good about the future." She declined to comment on the effect on the company's reserve.

The reserve is the money left over after all bills are paid -- net worth in other industries. The insurance industry uses stricter accounting standards than other industries when it comes to assessing the value of assets because these must be quickly convertible to cash. The value of assets, in turn, affects a company's net worth, in this case the reserve.

Mr. Donaho said yesterday that he did not know whether holding Blue Cross to the same rules used in the rest of the insurance industry would leave it insolvent at year's end. His agency is conducting a full-fledged examination of Blue Cross to determine its financial condition. The exam is to be completed in the spring and will give a current picture of the insurer's financial health as of Dec. 31, 1992.

A reduction in Blue Cross' reserve would come at a time when the industry is expected to enter a business down cycle that the insurer's own consultant, Booz Allen & Hamilton, predicts could result in $100 million in losses over three years' time.

Mr. Donaho's action comes after three months of public controversy over the Blues' financial condition -- a controversy he began in July when he questioned the Blues' practices before a U.S. Senate subcommittee. At a hearing two weeks ago that focused on the Maryland Blues, the Senate subcommittee staff detailed a history of management problems and questioned whether the current management is able or willing to guide the company through the expected industry downturn.

Mr. Donaho said his letter was intended to ensure that the Blues clearly understood his position that exceptions to accounting rules granted by the state earlier this year would not be extended. It was delivered two days before the Blues' board of directors were to meet today in a special session.

Several directors reached yesterday said they expected Mr. Sardegna to bring them up to date in the aftermath of the Senate inquiry and to answer any questions directors may have.

In the letter, Mr. Donaho said he was "determined that for the year ending Dec. 31, 1992, these assets will be strictly evaluated in accordance with accepted standards, including those standards articulated by the NAIC [National Association of Insurance Commissioners]."

"This will certainly result in various assets being treated differently . . . and may very well result" in a lower reserve, the commissioner said.

Blue Cross for several years has -- with permission from state regulators -- used accounting rules not generally allowed in the insurance industry -- a move that allowed it to add as much as $100 million to the value of its assets, The Sun reported in mid-September.

In his letter, Mr. Donaho noted that the Blues' accounting practices have recently received considerable attention from lawmakers and the press. He said he has had, and continues to have, "a responsibility to the public to ensure that assets held by [the Maryland Blues] are fairly and accurately valued."

Specifically, Mr. Donaho told the Blues not to assume that he would accept $32 million in value for CareFirst, a health maintenance organization acquired by the insurer last year. The HMO's value is closer to $8 million under industry standards.

He also said that Blue Cross should not assume that the $52 million value Legg Mason gave to the company's two other HMOs "will have any relevance whatsoever." These are valued at about $7 million under rules set out by the National Association of Insurance Commissioners.

In addition, Mr. Donaho said that since the Blues told Sen. Sam Nunn, D-Ga., last week that it could write off $42 million in bad debts this year if ordered to by the state, he could no longer justify allowing them to be written off over six years.

Lastly, the commissioner said that while he would hire an outside firm to assess the value of the company's HMOs as part of the Blues' plan to create a new holding company and sell part of it to the public to establish a market price, he would not necessarily be bound by the consultants' findings.

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