Blues set course for comeback Negative image is first hurdle, officials say

December 07, 1992|By Ann LoLordo Patricia Meisol | Ann LoLordo Patricia Meisol,Staff Writers

The chairman and interim chief executive of Blue Cross and Blue Shield of Maryland vowed over the weekend to move aggressively to overcome its financial problems and a negative public image that they worry could do even more damage to the state's largest provider of health insurance.

On Friday, the Blues' board of directors accepted the resignation of Carl J. Sardegna, who headed the company for nearly seven years but came under withering criticism beginning last summer.

Mr. Sardegna oversaw an aggressive expansion program into several health-related fields, but the efforts drained the insurer's financial resources and skirted regulatory safeguards. He obtained large salary packages for himself and top associates and spent heavily on entertainment, travel and other corporate perks. Meanwhile, the Blues' core insurance business suffered as did the quality of service it provided to 1.4 million Maryland subscribers.

All the while, the insurer's directors approved of Mr. Sardegna's management decisions. But a highly critical U.S. Senate investigation, released in September, helped highlight many instances in which the board had not been informed fully by top management before casting its votes.

Frank A. Gunther Jr., a retired businessman who sat on the board, assumed chairmanship from Mr. Sardegna after the Senate's investigation. He oversaw the board's own nine-week review of the insurer's status, which culminated in a series of meetings last week, including the one at which Mr. Sardegna resigned.

During that review, the board was surprised repeatedly by what it learned of business decisions. Just two weeks ago, Mr. Gunther revealed in a two-hour interview Saturday, he learned that the national association that licenses the Blues' programs set three year-end goals in April. If the troubled Maryland insurer fails to achieve the goals for cash flow, reserves and service by the end of the year, it risks losing its license to operate as a Blues plan.

Mr. Gunther and William A. Beasman, a retired banker on the board who on Friday was named interim chief executive officer, plan to go to Washington today to try to convince the Blue Cross and Blue Shield Association that, despite a recent drop in cash flow, the Maryland health insurer expects to meet the goals for cash flow and reserves.

In the interview Saturday, Mr. Gunther and Mr. Beasman stressed the need for the board to move aggressively but deliberately to repair the insurer's finances and its relationships with regulators and, most importantly, customers.

They are especially concerned that the public's perception of the company as "on the verge of going out of business" could overtake the Blues' opportunity to prove its worth and carry out its commitment to change.

That perception already has cost the company business, a situation that could reduce cash flow and ultimately, reserves, Mr. Gunther said. A drop from 1.4 million to 1 million customers could put the Blues out of business, he said.

"We're going through a time where perception is more important than fact," Mr. Gunther said. "There's a perception out there that [Blue Cross] is hanging by its fingernails . . . [and if the company loses business], we will be out of business," he said.

The insurer's board, they said, has already begun the arduous task of changing the company's direction, righting wrongs of the past and countering public perceptions. Although the departure of Mr. Sardegna and other top executives will temporarily place unusual management responsibilities on the board, Mr. Gunther and Mr. Beasman stressed that they had no timetable for finding a new CEO and would move carefully to ensure a wise selection.

In the meantime, directors are forming three board committees to intensify their oversight of company operations, including reviewing the insurer's finances monthly, increasing public communications and improving service to the public and medical providers, Mr. Gunther said.

Also, the insurer will issue quarterly reports of the sort offered by companies with public stockholders, including business successes as well as failures, complete financial data, annual salaries for executives and service delivery.

As for themselves, the directors cut their salaries in half to $4,000 a year and reduced their monthly meeting fees from $800 to $400.

Mr. Gunther said the insurer would be left with $19 million in reserves this year, assuming that state regulators require Blue Cross to value its assets more conservatively. That is in addition to the money it needs to pay medical claims. While this is far below the level recommended by industry standards of about $120 million, the reserve is expected to grow.

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