Blues told to hold up pay for two Donaho says pacts could hurt insurer

January 07, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

A photograph on page 20D in Thursday's editions of The Su was incorrectly identified as that of Frank A. Gunther Jr., chairman of Blue Cross and Blue Shield of Maryland.

The Sun regrets the errors.

Maryland's insurance commissioner has temporarily blocked Blue Cross and Blue Shield of Maryland from paying multimillion-dollar retirement and severance packages to two executives, saying the payouts could cripple the health insurer financially.

The commissioner, John A. Donaho, issued an order Tuesday to withhold payment, saying that Blue Cross had failed to adequately respond to issues he raised in two previous written inquiries.


In his order, Mr. Donaho demanded that the state's largest health insurer tell him the precise amount of retirement and severance pay due former chief executive Carl J. Sardegna and current Senior Vice President Fred M. Gloth Jr., the source of money available to pay them and the justification for paying them.

Frank A. Gunther Jr., chairman of the Blues, said yesterday that the insurer had set aside money to pay what could be a maximum of $6 million. He did not say what amount was being held in reserve for the retirement and severance packages.

Responding to Mr. Donaho's concerns, Mr. Gunther said the commissioner had been notified verbally of the insurer's plan to hire a lawyer to examine the retirement packages. But, he said, the company was reluctant to "throw around dollar amounts" until it heard from lawyers and determined whether it could legally refuse to pay the money.

The order barred Blue Cross from paying, or taking steps to pay, "any sum" to either Mr. Sardegna or Mr. Gloth until the commissioner "determines that the payment will not have a deleterious effect on the financial condition of the company."

The insurance division first expressed concern about the retirement packages in early December.

"More than one angry citizen has inquired as to the justification forproviding a severance package to Mr. Sardegna, at this point, view of the current financial condition of the company, the relatively few years Mr. Sardegna was employed by the company and the circumstances of his resignation," Donald Brandenberg, associate commissioner, wrote Dec. 8.

Neither Mr. Sardegna, who quit Dec. 4, nor Mr. Gloth, who is scheduled to retire sometime in 1993, returned calls seeking comment.

Yesterday John A. Picciotto, Blues general counsel, said the contracts included a "breach clause" that would allow the insurer to refuse to pay money in instances of malfeasance or nonfeasance of duty.

Mr. Sardegna, 55, who joined the company in 1986, quit Dec. 4, two months after a subcommittee headed by Sen. Sam Nunn, D-Ga., concluded in a scathing report that the Blues' management team hadneither the talent nor the will to guide the company through tough times ahead.

The report highlighted how Blues executives hid the company's precarious financial condition from the public through unusual accounting methods. It also detailed the use of executive perks and high salaries even while the company's profits were being eaten up by poorly managed subsidiaries.

Sardegna's retirement plan is worth about $2 million, and he qualifies for additional severance pay of about $400,000. The package was approved 4 1/2 years after he joined the company.

Mr. Gloth, 67, the No. 2 Blues executive, is due to retire this year. He is entitled to $1.2 million from his regular company pension because of more than 40 years' service. But a second retirement plan approved by Blues directors brings his total to $3.6 million.

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