Insurer files to convert, be sold

CareFirst now faces a review process of many months

Is $1.3 billion too low?

January 12, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

Boosting its case and telling more about how it arrived at the deal, CareFirst Blue- Cross BlueShield filed officially yesterday to become for-profit and sell itself for $1.3 billion.

The formal filing triggers a complex review process - expected to take at least a year - in which insurance regulators and other officials in Maryland, the District of Columbia and Delaware will decide whether the conversion and sale is in the public interest and whether the price is fair. The regulators will conduct public hearings and employ independent experts (at CareFirst's expense) to review the plan.

CareFirst, the state's largest health insurer with 3.1 million members, announced a month and a half ago its plans to be acquired by WellPoint Health Networks, Inc., which operates Blue Cross plans in California and Georgia. Already, consumer groups, hospital trade associations and medical societies have lined up to scrutinize - and in some cases oppose - the deal.

Seeking to answer those critics, the CareFirst filing presents an impact statement from Accenture, a consulting firm hired by CareFirst, saying "the transaction may well enhance CareFirst's ability to improve availability, accessibility, and affordability of health care."

The merger could bring about cost savings, the statement says, so that, despite WellPoint's need to recoup its investment, "premiums for most CareFirst members will not change substantially beyond normal inflation." The report does note that conversion would end CareFirst's nonprofit exemption from premium taxes. This would mean a 2 percent premium increase (or $4.34 per member per month) for Maryland and Delaware subscribers, but an additional $29 million in tax revenues for the states.

A report from CareFirst's investment banker, Credit Suisse First Boston (CSFB), says the $1.3 billion price is fair, and outlines the process CareFirst used in meeting with potential suitors. Some, such as health economist Carl Schramm, who studied CareFirst in a report for the Abell Foundation, say they believe that $1.3 billion is too low.

The price - and the process CareFirst used to arrive at a deal - are important because a nonprofit company is essentially owned by the public. When it converts to for-profit, the value of the company is paid to a foundation or other public purpose.

The CSFB report says CareFirst received and evaluated two offers, one from WellPoint and the other from a Virginia company it identified only as "Atlantic." Since Blues plans can effectively be acquired only by other Blues plans, "Atlantic" is almost certainly Trigon Healthcare Inc., which has said it is interested in expanding from Virginia to neighboring states. The report provides no information about the offer.

Another for-profit Blues operator, Indiana-based Anthem Inc., expressed interest, according to CSFB, but CareFirst "declined to include Anthem in the acquisition process."

There were also discussions between CareFirst and Highmark Blue Cross Blue Shield, a nonprofit operating in the western half of Pennsylvania, according to CSFB.

James P. Day, a CareFirst spokesman, declined to discuss other offers or explain why Anthem had been excluded. "We're not going to comment on details of negotiations," he said. Lauren Green-Caldwell, an Anthem spokeswoman, said "We generally do not comment on transactions." A Trigon spokeswoman, Brooke Taylor, said her company only comments on completed transactions, but "you can probably draw your own conclusion."

Even before the filing had landed on the desks of insurance regulators, consumer groups expressed skepticism. For example, Robert Brandon, a steering committee member and spokesman for a D.C.-based group called CareFirst Watch, said yesterday that his group hoped to hire experts to study the potential impact on the availability and cost of health insurance to see whether the foundations are receiving fair value.

"The chance of this deal getting done as proposed is zero," said A.G. Newmyer 3rd, chairman of Fair Care Foundation, a D.C. consumer group which is a member of CareFirst Watch. "The Blues would have to spend on lobbyists all of the money they've saved by denying care and claims. We believe that the protections for the public are laughable."

If the deal is approved, WellPoint - which has also announced an offer to buy the Missouri Blues plan - would become one of the largest health insurers in the country, with 16 million members and $13 million in annual revenue. Based in Thousand Oaks, Calif., WellPoint in 1996 became the first Blue Cross plan to convert to for-profit.

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