Blue Cross subscribers lose appeal

August 26, 1994|By Patricia Meisol | Patricia Meisol,Sun Staff Writer

A 17-month-old class action lawsuit filed by subscribers of Blue Cross and Blue Shield of Maryland came to an end yesterday when the state's highest court ruled they have no standing to sue the insurer for mismanagement.

In a 35-page ruling, the Maryland Court of Appeals dismissed the subscribers' argument that they should have the same right to sue as do stockholders in a corporation or members of a co-operative. The subscribers had argued that because the not-for-profit Blue Cross has no shareholders and that its board had presided while former executives mismanaged the company, they were the only independent parties who could sue to recover the losses that resulted.

The Court of Appeals declined to expand such rights to subscribers, saying that the only people with standing to sue are members of the board of directors and the state's attorney general.

A lawyer for the subscribers, Jon W. Brassel of Annapolis, expressed disappointment at the ruling yesterday.

"The ultimate issue is, people are putting money into health care that paid for sky boxes," he said, referring to the Blues' 1992 purchase of luxury seats at Oriole Park at Camden Yards. The insurer has since sold the sky box.

Maryland Attorney General J. Joseph Curran said yesterday that he was pleased by the Blues board's attempts to recoup money earlier this year, at his urging, and he said he will review the subscribers' claims to decide what action his office should take.

Blue Cross spokesman Michael Streissguth said yesterday the company would have no comment on the ruling.

The issue of standing arose almost immediately after six subscribers sued the health insurer in March 1993, saying their premium money had been recklessly wasted or misspent and that there was no one in a position to seek redress. A circuit court judge dismissed their claim in November 1993, saying a higher court should first decide if they had the right to sue.

Specifically, the subscribers argued that the board of directors was in no position to investigate mismanagement and losses of tens of millions of dollars because the directors themselves presided over the losses and elected each other, year after year, in a closed system of succession.

The lawsuit followed a report by the U.S. Senate Permanent Committee on Investigations that found the Maryland plan's executives spent lavishly on perks such as foreign travel, presided over losses of more than $120 million in a decade and then used unorthodox accounting measures to hide the company's true financial picture. In March, a federal grand jury charged two former executives with fraud, claiming they had directed more than $1 million to businesses in which they secretly held interests.

Blue Cross, the largest health insurer in Maryland, is a not-for-profit corporation with no stock.

In oral argument before the Court of Appeals in May, its lawyers argued that subscribers are akin to customers, who have no financial responsibilities or the right to sue for alleged mismanagement under state law.

The subscribers' suit named 10 current and past board members, six former executives and a consultant, Booz Allen & Hamilton Inc., and sought $145 million in damages the plaintiffs planned to return to the insurer.

Two days after it was filed, and at the urging of Mr. Curran, a special committee of the insurer's board investigated the subscribers' charges. Based on the findings, Blue Cross last fall sued Booz Allen in a narrower case, seeking about $2 million in damages. The insurer also sued its former lawyer, Fred M. Gloth Jr., for the return of what it said was an unauthorized bonus. Both lawsuits are pending.

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