Blues to pay ex-official $2.8 million

July 01, 1995|By John Fairhall | John Fairhall,Sun Staff Writer

Blue Cross and Blue Shield of Maryland has been ordered to pay nearly $3 million to a former executive who played a central role in the financial scandal that left the company close to insolvency several years ago.

Blue Cross and the state attorney general had strongly opposed paying Fred M. Gloth Jr., former general counsel, money he said was owed him under a lucrative supplemental retirement plan that the company later canceled.

But an independent arbitrator ruled June 14 that the company owed Mr. Gloth $2.2 million under the supplemental plan, plus $306,000 in interest and $330,000 in legal fees -- a total of $2.8 million.

The Blue Cross board, advised by its lawyers that the company had no choice, reluctantly voted Thursday to pay Mr. Gloth, the company confirmed yesterday.

Blue Cross officials said subscribers' insurance rates would not be affected. Money to pay a possible award to Mr. Gloth had been set aside, they said.

But the arbitrator's decision comes at an awkward time. Blue Cross, which with 1.3 million subscribers is the state's largest insurer, has been aggressively cutting corporate costs and, beginning today, is reducing retirement benefits of 300 former workers.

Attorney General J. Joseph Curran Jr. said yesterday that he disagreed with the arbitrator's decision and chided the company for having initially approved the supplemental plan for Mr. Gloth.

Mr. Curran said in a letter to Blue Cross that he is "disappointed and dismayed at the unfortunate, and avoidable, lesson that was learned here and would urge that in the future the board not approve such extraordinary compensation arrangements."

Mr. Gloth could not be reached for comment.

The company established a trust fund to cover possible payments to Mr. Gloth and to former Blue Cross President Carl J. Sardegna, who had been promised a supplemental retirement plan worth about $2.5 million.

Blue Cross' board canceled both retirement plans in February 1993, after then-Insurance Commissioner John A. Donaho barred Blue Cross from paying Mr. Gloth because of the company's perilous financial health. That led Mr. Gloth to invoke an arbitration clause in his contract with the company.

Mr. Sardegna has not been paid, Blue Cross said. He could not be reached for comment and company officials would not discuss his case.

Mr. Donaho said yesterday that he is "disappointed" with the arbitrator's decision, adding, "I don't think it's in the public interest."

The current insurance commissioner, Dwight K. Bartlett III, said in a letter yesterday to Blue Cross that he has no authority to overrule the board's decision to pay Mr. Gloth. He noted that the company, which has been headed by William L. Jews since mid-1993, "is in much stronger financial condition" than at the time Mr. Donaho issued his order.

Mr. Sardegna and Blue Cross management were severely criticized in 1992 by a U.S. Senate subcommittee, which charged that the company overstated its financial worth by as much as $100 million and hid its true condition from state regulators.

The company charged ever-higher rates for subscribers even while its executives spent lavishly on salaries and perks. Mr. Sardegna received $850,000 in salary and bonus in 1991, making him one of the highest-paid insurance executives in the nation.

Mr. Gloth's compensation jumped from $99,000 in 1986 to $573,000 in 1991.

Mr. Sardegna and Mr. Gloth quit in the wake of the Senate investigation.

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