Md. Blues sued by consultant

December 13, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

A New York consulting firm has accused Blue Cross and Blue Shield of Maryland and eight of its directors of fraud and negligence in a countersuit filed in federal court in Baltimore.

The consultant, Booz Allen & Hamilton Inc., the international management firm hired by the Maryland insurer to review its computer system and other matters, asserted in its countersuit that Blue Cross, its directors and its former chief executive intentionally misled Booz Allen as the consultant prepared a study of the insurer. The study was intended to head off a state audit of Blue Cross that had been sought by the state insurance commissioner.

In its countersuit, Booz Allen also asserts that if Booz Allen is held liable for any damages alleged in a separate lawsuit by subscribers, Blue Cross should pay the tab. Booz Allen seeks a minimum of $50,000 on each of five counts, plus compensatory damages on the fraud charge.

The consultant, which was hired by Blue Cross in 1991, has been sued both by subscribers and by Blue Cross over its report on these matters.

Blue Cross sued in October, asserting that Booz Allen misled it on the status of the computer system and on a second matter -- a study of executive pay. Subscribers sued Blue Cross in March alleging fraud in a case that also targets Blue Cross directors and officers. The insurer and the subscribers are battling in court over whether subscribers can sue Blue Cross and its board for damages.

Those named in the Booz Allen countersuit are directors J. Owen Cole, George L. Russell Jr., William A. Beasman Jr., Barry P. Bosworth, Daniel J. Colussy, M. Thomas Goedeke, Frank A. Gunther Jr. and Robert D. Kunisch and former Chief Executive Carl J. Sardegna.

The countersuit contains stronger charges of fraud and dishonesty against board members than did the separate lawsuit by subscribers. In its lawsuit, Booz Allen accused three of the eight Blue Cross directors of "active and deliberate dishonesty" in regard to the executive-pay study.

A spokesman for Blue Cross said the company would have no comment. Attempts to reach several board members yesterday were unsuccessful.

Booz Allen was paid $2 million by Blue Cross to conduct a management study of its computer system, a purported solution to the company's poor claims-processing and service record. The computer was to be up and running by 1990 at a cost of $9 million. In its lawsuit, Blue Cross argued that the consultant failed to tell directors of a second report it prepared that raised the cost to develop the computer to $56 million.

Booz Allen said, however, that board members were fully aware that it was at work on a more detailed report. Mr. Sardegna himself told board members in a Sept. 17, 1991, letter that the company was at work on a second report, it said.

The consultant said its managers told the board orally that it would take $20 million to $30 million more to get the computer to a point where it could execute the insurer's managed-care strategy. Booz Allen said in its lawsuit that the report was oral because it had been repeatedly cautioned to limit what it put in writing because the final report might find its way to the insurance commissioner or even be made public.

Booz Allen also noted that the insurer's directors had been aware of the computer system's problems for at least five years before 1991.

An investigation by lawyers hired by Blue Cross concluded this fall that Mr. Sardegna had failed to fully disclose Booz Allen findings, but Booz Allen said in its lawsuit that its former manager, Hadley C. Ford, had discussed the second report in the presence of a director, Mr. Cole, during a meeting with state regulators.

Booz Allen also prepared a study of executive compensation for Blue Cross that was roundly criticized by a U.S. Senate subcommittee investigating the insurer last year. The study relied on old data by another firm. It was used by Blue Cross directors to justify paying high executive salaries. Mr. Sardegna earned about $900,000 in compensation before he was fired, making him one of the top-paid insurance executives in the country. Executives of similar-sized nonprofit Blue Cross plans nationwide earned far less.

In the lawsuit, Booz Allen said the directors of Blue Cross were fully aware that it lacked the resources and expertise to examine and compare the level of executive pay at the insurance company.

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