Bill could make 50 Blues officials responsible for finances Aim is to alert state about solvency

February 03, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

ANNAPOLIS -- As many as 50 people inside Blue Cross and Blue Shield of Maryland would be responsible for alerting regulators in the event the company became insolvent under a bill presented yesterday at a legislative hearing.

But the health insurer testified that's 48 people too many.

"This requirement could be subject to abuse," Blues senior counsel John A. Picciotto told the House Economic Matters committee about the proposal to expand responsibility for the company's financial condition to officers and directors.

He said many in the group, including himself, have no financial expertise and would face an undue burden. He suggested the reporting requirement be expanded to include only the chief financial officer as well as the chief executive officer, who is currently charged with that responsibility.

Forcing directors to take more responsibility was one of a battery of reforms proposed by state Insurance Commissioner John A. Donaho in the wake of recent evidence of abuses and mismanagement at the state's largest health insurer.

The changes, including even more stringent requirements for board members that were proposed in a separate bill by Del. Casper R. Taylor, D-Allegany, were modeled after those put in place for bank directors following the savings and loan crisis.

Both bills would add two consumer representatives appointed by the governor to the Blues' board of directors and limit directors' terms to a total of six years. To help ensure that directors and officers fulfill their responsibilities, including providing financial information to the insurance commissioner, civil penalties for directors would be increased to $5,000 from $1,000 and for officers of the company up to $50,000.

Del. Joan B. Pitkin, D-Prince George's, said making company managers and directors subject to fines for failing to report insolvency would prevent situations such as that which occurred in 1988. That year, Blues officials lobbied state officials to halt an examination that would have found the insurer insolvent and would have alerted the public to its plight.

Del. John A. Hurson, D-Montgomery, agreed: "Given what happened, why not have every officer responsible to report their view that the company may have financial problems?"

But Mr. Picciotto said the insurer's 14-member board of directors believes "it will be difficult to find people to serve" if they were forced to watch over finances and, under a separate proposal, be subject to removal by the insurance commissioner for actions deemed "likely to be detrimental" to the company. He said the proposal was too vague, leading to possible abuse by regulators who disagreed with company decisions.

The commissioner's bill forces the nonprofit insurer to disclose far more of its finances than previously required, restricts its business to health-related activities and requires the company to submit audited financial statements for all affiliated businesses.

The bill also sets a minimum reserve requirement of 8 percent of the insurer's annual premiums. For the Blues, that amounts to a fund of $56 million to pay bills beyond those anticipated. The requirement would be phased in over four years, and regulators said the insurer could easily meet the first year's $23 million minimum.

Since the disclosure last fall that the company's assets were inflated because of the use of unusual accounting procedures and the ouster of six top managers, Blues officials have provided state regulators information on a daily basis, according to testimony last week.

The company supports many of the changes, it said. But yesterday, Del. Elijah E. Cummings, D-Baltimore, wondered whether the insurer was being "humble enough" when it opposed the provision that would give the insurance commissioner the power to remove directors. "Seems to me a pretty fair process," he said.

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