An appeals court ruled yesterday that District of Columbia regulators improperly excluded consumer groups from discussions that changed the terms combining the Maryland and D.C. Blue Cross plans.
In a 23-page ruling, the District of Columbia Court of Appeals threw out a Jan. 16 letter by regulators that followed an order three weeks earlier with terms governing the merger.
The court concluded "that the modifications made were issued without proper notice and opportunity" for opponents to be heard. The court dismissed several other claims made by consumer groups.
The effect of the ruling was unclear yesterday. The Fair Care Foundation, a Washington-based group that fought the combination, hailed the ruling as a victory and said it could result in the return of some of the $6.5 million in severance pay for 26 executives -- including a $2.8 million severance package awarded to Larry C. Glasscock, chief executive of the Washington plan.
"This is important," said Tim Law, an attorney who represents Fair Care. "It says orders that are required to be made in public can't be changed in private. That's what happened here."
CareFirst Inc., the consolidated operation formed Jan. 16 -- the day the letter was issued -- said the ruling will have little effect. The company also said the ruling would not force it to revisit severance pay.
"The effect of the court's reversal of the January letter will be minimal from an operational standpoint," said John Picciotto, general counsel for CareFirst. "As far as I can see there is no need for us to take any action."
CareFirst also seized on several decisions in its favor by the court, which rejected claims that the District of Columbia Department of Insurance and Securities Regulation improperly denied cross-examination rights to opponents and misused legislation to the detriment of opponents.
The court also rejected arguments that the District's regulatory agency abused its authority by disregarding the charitable nature of the D.C. plan. The court also upheld the dismissal of a lawsuit that charged the District Blues with breaching fiduciary duties.
"Commissioners acted reasonably and thoroughly and their decision to let the combination go forward was the right decision," Picciotto said.
In legal challenges to the deal filed in January, the Fair Care Foundation accused the Blues plans and regulators of coziness that tainted regulatory review. In one appeal, the foundation said district insurance regulators excluded two of its board members from key discussions after the agency approved the transaction last Dec. 23.
The approval included 27 conditions on the transaction. The group said that regulators in the Jan. 16 letter modified the order "based on private meetings with" the representatives of the two plans.
The group complained that the Jan. 16 letter undermined restrictions on severance compensation packages, and removed the requirement that CareFirst be licensed as a medical services corporation -- and thus closely regulated.
Law, the Fair Care attorney, said the original order required the D.C. plan to alter executive severance pay pursuant to "a change in control" provision. The obligations of such contracts would have to be assumed by CareFirst, with severance pay "in the same proportion of the initial capitalization of the holding company," according to the conditions.
The Jan. 16 letter excluded contracts negotiated in 1995 or earlier -- a change that Law contends gave Glasscock and other executives generous severance packages. "Looking at the order, it looks like they're going to have to do something about that," Law said.
But CareFirst said no changes would be necessary. Jeff Valentine, a spokesman, said the new company had assumed the obligation of that compensation. He also said that regulators decided that the severance was reasonable, after analyzing the executives' 1997 contracts and consulting a compensation expert.
"As far as we're concerned that issue is over with," Picciotto said.
CareFirst said it would abide by the initial order's provision that it be licensed as a D.C. medical services corporation. That designation is important to consumers, who worry that CareFirst will seek to become a for-profit entity.
CareFirst, the seventh largest Blue Cross plan in the country, has about 2.3 million subscribers and about 5,000 employees.
Pub Date: 9/02/98