Blue Cross plans given merger OK But Md. and D.C. impose conditions that would add to control

Company would be No. 1

Regulators also seek to protect charitable assets

Health care

December 24, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

The Maryland and District of Columbia Blue Cross plans won regulatory approval yesterday to combine their business operations -- a move that would create the region's largest health insurer, covering 2 million people.

In their orders approving the consolidation, the Maryland and District of Columbia insurance commissioners both imposed conditions designed to give them more regulatory control and to protect charitable assets of the nonprofit insurers.

The two Blue Cross plans had no comment on the orders yesterday, saying they needed time to analyze the 63-page Maryland document and the 22-page D.C. order.

"Officials of both companies are presently reviewing the independent and collective impact of the commissioners' orders determine whether the original business goals can be achieved," Blue Cross Blue Shield of Maryland said in a statement.

Consumer groups that had expressed qualms about the combination praised some of the conditions but said they did not go far enough.

"We would like to see 100 percent of charitable assets protected," said Frank McLoughlin, staff attorney for ( Boston-based Community Catalyst, which monitors Blue Cross and hospital transactions nationally.

Despite some "useful protections for consumers," said A. G. Newmyer 3rd, chairman of the D.C.-based Fair Care Foundation, "Santa Claus came early to Blue Cross management. Fair Care is going to ask a judge to review the merger to be sure that Scrooge doesn't ruin Christmas for the public."

The deal would set up a new nonprofit holding company, which in turn would control the boards of both Blue Cross plans. The two insurers would continue to exist as separate companies -- maintaining most employees at their respective headquarters -- but, over time, would combine sales forces, product offerings and networks of doctors and hospitals.

Together, the two companies have $3 billion in annual revenue and 5,000 employees. No money changes hands in the deal, except for $500,000 from both Blue Cross plans to create the holding company.

Steven B. Larsen, the Maryland commissioner, said in his order that the consolidation is "in the best interest of Maryland residents, including subscribers" of both plans.

"Over the long term, a combined regional entity is the best way to ensure a viable Blue Cross Blue Shield plan," he said. "I regard the continuation of a substantial nonprofit entity as being in the public interest."

Blue Cross plans have been consolidating rapidly as they battle to compete with for-profit insurers. From 128 Blues plans in 1975, mergers and other combinations dropped the number to 86 in 1985, and to 61 in January, when the Maryland-D.C. deal was announced. Today, that number is 56.

The Maryland and D.C. Blue Cross plans have been at a disadvantage trying to sell policies to employers with operations in both the Baltimore and Washington markets, said Douglas B. Sherlock, a health care analyst at Sherlock Company in Gwynedd, Pa.

Also, Sherlock said, they have trouble matching regional commercial competitors such as NYLCare and Mid Atlantic Medical Services Inc., "who are able to sell [policies] at Maryland prices and buy [medical] services at much lower D.C. and Virginia rates."

The holding company would, in the words of the order by D.C. Insurance Commissioner Patrick E. Kelly, "reflect the dominant position" of Maryland Blue Cross, which is roughly double the size of the D.C. plan. The current Maryland board will get to pick a majority of holding company board members.

The chief executive officer of Maryland Blue Cross, William L. Jews, will be president and CEO of the holding company, which will be incorporated in Maryland, and chairman of both Blue Cross operating companies. The CEO of Blue Cross Blue Shield of the National Capital Area, Larry C. Glasscock, will be CEO of both operating companies and chief operating officer of the holding company.

Conditions imposed by Larsen and Kelly include:

The holding company must be licensed as a nonprofit health services plan, which would make it subject to the insurance commissioner's regulatory oversight.

The plans should take a "snapshot" of assets at the time of the deal, so the assets can be distributed fairly if there is a conversion later to for-profit status.

Maryland Blue Cross must submit a plan to offer an open enrollment product similar to the rate-subsidized one offered in the District of Columbia. The likely result would be a policy with lower premiums and richer benefits than the current Maryland Blue Cross open enrollment product.

No executive severance packages can be paid, Larsen directed, unless both insurance commissioners and an independent consultant have a chance to review them. Glasscock could receive a package worth about $3 million under his current contract.

D.C. Blue Cross, according to Kelly's order, must maintain current employment levels in the District of Columbia and the current ratio of D.C. residents among employees, or justify any change to him.

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