Md. CareFirst link to Del. Blues OK'd

Additional economy, services expected

Managed care

March 22, 2000|By Robert Little | Robert Little,SUN STAFF

A proposed alliance between CareFirst BlueCross BlueShield in Maryland and its counterpart in Delaware received final regulatory approval yesterday, clearing a path for creation of the mid-Atlantic region's largest not-for-profit managed-care company.

Maryland Insurance Commissioner Steven B. Larsen issued his approval of the deal yesterday, subject to some conditions. Regulators in Delaware and the District of Columbia, whose consent also was required, gave similar approval Monday. Officials at both companies said they will review the regulators' reports before proceeding with the alliance, but called the announcements a welcome development.

"Obviously, we're very pleased. A quick read suggests that [regulators] recognize the value of this transaction," said Jeff Valentine, CareFirst's director of communications. "But we have to look at everything very closely before we make any announcement, and that won't happen today."

CareFirst, parent company of the Blue Cross Blue Shield health plans in Maryland and the District of Columbia, is much larger than its Delaware cousin. The Owings Mills-based CareFirst had 2.6 million members in 1999, compared with 207,000 for Blue Cross Blue Shield of Delaware.

Company officials said an alliance between the two will save money by eliminating some shared costs, and give customers a broader reach of services and more flexibility.

CareFirst executives have gone as far as to call the alliance critical to the company's survival against mounting competition from for-profit giants such as Aetna and UnitedHealthcare.

CareFirst had record membership last year, and annual revenue rose 15 percent to more than $4.5 billion, but the company's net income declined 9 percent to $68.9 million as it continued to lose money on its Medicare and Medicaid plans.

"It's not necessarily that bigger is better," CareFirst Chief Executive Officer William L. Jews said during a regulatory hearing last year. "As we're able to employ economies of scale, we're able to not increase our premiums so quickly."

The deal is not considered a merger or takeover, because both companies will remain separate corporations for financial, legal, tax and regulatory purposes. But the proposal calls for Jews to oversee the Delaware affiliate's executive staff.

Insurance regulators in Maryland and Delaware have reviewed the proposed alliance since last fall to determine whether it would benefit policyholders, and now say it will.

"From everything that I can determine, this is a very positive thing for both entities and for their customers," said Delaware Insurance Commissioner Donna Lee Williams.

Both regulators placed conditions on their approval, designed mostly to ensure regulatory control and to keep one company from profiting at the expense of the other. The conditions are nearly identical to those imposed when the Blue Cross Blue Shield plans in Maryland and Delaware formed the alliance that became CareFirst Inc. in 1998.

A potential dispute over which company would pay $15 million in severance packages to officers of the Delaware company was resolved.

A condition of Larsen's approval was that the Maryland company not offer severance pay to the Delaware company's employees, should any of them be terminated after the deal closes. Williams recommended that her state's attorney general monitor any severance agreements, but said Blue Cross Blue Shield of Delaware can offer severance packages without violating state law. The company has established a $5.5 million fund for that purpose.

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