Shady CareFirst deal should be scuttled

January 16, 2002|By A. G. Newmyer III

FOLKS WHO run charitable, nonprofit organizations are supposed to focus on the needs of the beneficiaries, not themselves. In particular, they are not supposed to divert public assets for private gain.

As my kids would say, "Duh!"

These facts are so obvious that it seems odd to repeat them. But they do seem to have eluded the management and board of CareFirst BlueCross BlueShield, the nonprofit holding company for the Blue Cross plans in our region, whose plan to sell out to WellPoint Health Networks in California for $1.3 billion is an affront to the public interest.

The stakes for Maryland are huge. For-profit insurers generally spend a smaller percentage of premium dollars for care, though CareFirst's sharp-pencil approach to claims is well-known. The company has already taken steps to reduce its coverage of those who need it most. And the money belongs to the public.

Regulators and legislators have pledged to carefully examine the consequences of the proposed deal for the public. If they take an equally careful look at the consequences for those who negotiated the deal, a clearer picture might emerge.

Blue Cross executives around the country have concocted myriad ways to feed at the trough of consolidation among health insurers. Now that the Maryland plan wants to play "me too," the odd incentives in selling charities are coming to light.

In this transaction, unlike most, CareFirst managers have no economic stake in the price because the money goes to the public. But they do have a stake in simply getting the deal done, at which point they get new jobs, new stock options and new compensation packages. The buyer, on the other hand, wants to get the business for as little as possible. So the price generally does not reflect the true value of what is being sold.

Governing magazine recently wrote about Blue Cross conversions, opening with, "They say you should never accept the first offer an insurance company makes you." Wall Street analysts are smirking at WellPoint's offer for CareFirst, noting that the bulk of the price would be paid in stock or possibly in notes of arguable value.

One aspect of the deal demonstrates just how far CareFirst has strayed from its charitable, nonprofit origins. The Blues have agreed to pay WellPoint a breakup fee of $37.5 million if a better offer comes along. This one detail is eye-popping. The press has reported that CareFirst's CEO makes millions each year in base pay and that CareFirst's board gets directors' fees higher than what Microsoft pays. That same public-spiritedness led them to approve a deal in which they would sell the nonprofit to WellPoint for a questionable price - and would pay WellPoint $37.5 million of the public's money if another company wanted to pay the public more for CareFirst!

These obvious breaches of common sense and of fiduciary duty should lead the insurance commissioner and attorney general to just say no. A comprehensive and thorough recent report by the Abell Foundation uncovered no compelling reason for the abandonment by CareFirst of its nonprofit status or its sale.

Blues plans across the country offer the same mantra in defense of these schemes: Once they are publicly traded, they will have access to capital necessary to compete. But, of course, this totally ignores the fact that our local plan has become the dominant insurer in the region, winning market share just fine as a charitable nonprofit.

The regulators have pledged extensive hearings and a careful examination of the proposed deal. They should begin by reviewing the hearing record five years ago, when the Blues plans in Maryland and Washington were merged to form CareFirst. The sworn statements of Blues managers at that time, and their regulatory sleight-of-hand during the ensuing years, should enormously magnify the skepticism of the regulators this time around.

Truthfulness and trust are vital, particularly at the company that controls health care throughout the region. Over time, consumers will find that the proposed CareFirst conversion is based upon neither.

A. G. Newmyer III is chairman of the Fair Care Foundation, a charity based in Chevy Chase that focuses on improving access to quality health care.

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