Md., D.C. Blue Cross combine Operations

New holding company, CareFirst Inc., is based in Owings Mills

January 17, 1998|By M. William Salganik | M. William Salganik,SUN STAFF

Breaking through a territorial boundary that has been in place for more than half a century, the Maryland and District of Columbia Blue Cross plans combined their operations yesterday under a new holding company.

The consolidated operation, called CareFirst Inc., will be the seventh largest Blue Cross plan in the country, said William L. Jews, who has been chief executive of the Maryland plan. He now is president and chief executive officer of the holding company.

At first, there will be no impact on the 2.3 million subscribers to the two plans and little change for most of the 5,000 employees, Jews said. During a period of six months to a year, he said, the two companies will combine their sales forces, products and medical networks.

The goal is to create a company with regional reach comparable to that of its commercial competitors.

"They're much better positioned to market to employers throughout the area," said Stewart Gold, president and chief executive of Doctors Health System, which contracts with Blue Cross. Gold is a former executive of Blue Cross of Western Pennsylvania.

Combining territories, Jews said, should allow the company to grow, particularly in the District of Columbia and its suburbs, where the Blue Cross market share -- about 20 percent -- is half what it is in the rest of Maryland.

The combination also promises savings, particularly in computer information systems, where each company would have needed to invest tens of millions of dollars over the next few years if they had remained separate.

The deal creates an operation with more than $3 billion in annual revenue, and moves Blue Cross from a turnaround phase to one of expansion.

Jews, a former hospital executive, took over Blue Cross of Maryland in 1993, when it was on the edge of insolvency. He squeezed administrative costs, cut staff and improved financial performance at a time when competition held down premiums.

To continue to be competitive, he said, Blue Cross needed a larger territory and better access to capital. Two years ago, Jews offered a plan to create a for-profit subsidiary, but that was shelved after regulators and legislators raised questions. Then, he turned to the D.C. Blues, which had made a similar journey out of financial crisis.

Over time, he said, Blue Cross will look for further expansion opportunities. "Our market territory, over the long term, is from Pennsylvania south," he said. But expansion is unlikely until the Maryland and D.C. plans mesh their operations smoothly.

"While we can't put our heads in the sand regarding the competition," he said yesterday, "the first year has to be really focused on making this work for our customers."

Until now, Blue Cross Blue Shield of the National Capital Area has had exclusive rights to market Blue Cross Blue Shield insurance in Montgomery and Prince George's counties, the district and Northern Virginia. Blue Cross Blue Shield of Maryland covers the rest of the state and a small part of southern Delaware.

CareFirst is based at the Owings Mills offices of Blue Cross Blue Shield of Maryland and will be nearly invisible to subscribers. Jews said marketing would still feature the familiar cross-and-shield logo and Blue Cross name, "among the most respected and recognized" in health insurance.

The D.C. plan will retain its headquarters. Other offices maintained by the two companies, including one employing about 400 people in Baltimore, will remain open.

Larry C. Glasscock, who was CEO of Blue Cross Blue Shield of the National Capital Area, will be chief operating officer of CareFirst and president of the two Blue Cross plans.

Beyond that, CareFirst will have a strong Maryland flavor. Three executives from the Maryland plan -- John A. Picciotto, general counsel and corporate secretary; Mark Chaney, chief financial officer; and David D. Wolf, executive vice president for medical systems and strategic planning, will report to Jews as CareFirst's top management, in addition to Glasscock.

The CareFirst board will, over time, control the boards of the two Blue Cross operating companies. It will consist of 12 members from the Maryland Blue Cross board and six from the board of the D.C. plan.

Dan A. Colussy, who has been chairman of the Maryland board, is the CareFirst board chairman, while Ed Baran becomes vice chairman of the CareFirst board and chairman of the board for the D.C. plan.

Blue Cross and Blue Shield plans began in the Great Depression, often thanks to efforts by local hospitals and medical societies, and were among the pioneers of mass health insurance. As commercial HMOs grew, the Blue Cross plans' traditional indemnity insurance business declined and they have been busily reinventing themselves to compete in the changed market.

From 128 Blues plans in 1975, mergers and other combinations have reduced the number to 56. Some converted to for-profit or mutual insurers.

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