Insolvency for Blues threatened Donaho is upset by altered bill

April 03, 1993|By John W. Frece | John W. Frece,Staff Writer

The state insurance commissioner threatened yesterday to drive Blue Cross and Blue Shield of Maryland into insolvency if the General Assembly fails to pass legislation he believes is needed to assure the fiscal health of the state's largest insurer.

Commissioner John A. Donaho, who is pushing legislation that would give him broad authority to oversee the Blues' operations, upset because Blue Cross has persuaded a Senate committee to amend a bill already passed by the House.

Mr. Donaho believes those amendments significantly weaken the bill.

And the commissioner fears that the Senate panel's insistence on the amendments will create an insurmountable dispute with the House -- thus scuttling any chances for reform this year.

"The failure of the [House] bill would be a disaster because it would cause me to impose on the Blues burdensome solvency requirements and would send a message to the U.S. Congress and other states concerning the failure of state regulation," the commissioner said yesterday.

He was more specific in a strongly worded letter sent yesterday to Blues President William L. Jews.

In the letter, the commissioner said that if the bill fails he would have no choice but to require the insurer to maintain a surplus of $238 million against unexpected claims or losses -- a level so large the company would be unable to comply. The company's surplus -- which represents its net worth -- was $24.9 million as of Dec. 31, 1992.

"Should the proposed legislation be enacted, it would be unnecessary for me to issue this directive," he said in the letter, a copy of which was obtained by The Sun. "However, if it becomes apparent that this legislation will fail, I would issue such an order immediately."

Unstated in the letter is the possibility that if Blue Cross is declared insolvent, the state might be forced to take over operations of the nonprofit company, which handles the health insurance of some 1.4 million Marylanders.

Mr. Donaho told Mr. Jews, "It is in our mutual interest that you do what you can to abet the passage of this legislation." For months, Mr. Donaho has been fighting to gain more control of Blue Cross.

Last summer, he told the U.S. Senate's Permanent Subcommittee on Investigations that he was concerned about the solvency of Blue Cross and Blue Shield of Maryland.

In the fall, he initiated a detailed examination of Blue Cross' financial condition, to be completed later this spring.

In December, he proposed legislation that would increase the company's surplus and reserve requirements; give the commissioner broader authority to control and audit subsidiaries; allow him to fine the company for violations; and empower him to remove directors or officers who fail to obey an order from the commissioner's office.

The House passed its version of the bill on Feb. 23 by a vote of 134-1. But the measure was bottled up in the Senate Finance Commmittee until this week.

The General Assembly is scheduled to adjourn April 12.

The Finance Committee's amendments to the legislation, which

will be debated by the full Senate beginning Monday, make several key changes that would:

* Eliminate the requirement that a minimum surplus level be set in state law, and instead give the insurance commissioner discretionary power to set a lower level.

* Remove a requirement that before any stock of a Blue Cross subsidiary may be counted as a company asset it must be liquid enough to be available to pay present losses.

* Allow current members of the Blues board of directors to remain in their jobs until they have served for a cumulative period of 12 years. The House bill would cut that down to nine, which would force half of the directors off the board when their terms expire next January and ensure that all current directors would ,, be replaced within three years.

The Senate bill also would eliminate a requirement that board members live in Maryland; repeal a requirement that two consumer members be appointed to the Blues' board; and lower from 70 to 60 percent the number of meetings that board members must attend without being reported to the commissioner.

Del. Casper R. Taylor, the Allegany County Democrat who chairs the Economic Matters Committee that approved the House version of the Blue Cross bill Mr. Donaho supports, said he shares the commissioner's concern that the Senate amendments weaken the bill.

John A. Picciotto, senior vice president and general counsel for Blue Cross, disagreed.

Mr. Picciotto said he did not understand Mr. Donaho's concern that the Senate amendments weakened solvency protections.

"In our view, the amendments strengthen the bill because they make clearer when the commissioner can act in certain instances, and give more definition to his authority. In certain specific areas, it gives him broader powers," he said.

The Blues currently have a surplus of about $28 million and would have to increase that to approximately $58 million in four years under the bill. But, Mr. Picciotto said, if Mr. Donaho were to set the requirement at $238 million, "that would be unreasonable." In his letter, however, Mr. Donaho said that without passage of the legislation he would be bound by current law in setting surplus requirements.

He said an attorney general's opinion makes it clear that the Blues must keep as surplus two months worth of the prior's year's outstanding claims and operating expenses -- which amounts to $238 million.

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