Executive greed zaps CareFirst's justified sale

March 10, 2002|By Jay Hancock

CAPITALISM is a great system, but sometimes its worst enemies are the capitalists.

We can probably blame at least half of all commercial regulation on a few executives or firms whose misbehavior brought the arm of government down on everybody. Two kids shoot rubber bands and the whole class misses recess.

CareFirst BlueCross Blue- Shield boss William L. Jews and his lieutenants are trying to sell the health insurer to WellPoint Health Networks Inc. of California.

The deal makes sense. It would add efficiency to the country's bloated system of financing health care and make $1.3 billion available to foundations to address unmet medical needs in Maryland, Delaware and Washington.

Some 15 cents of every health care dollar are spent not on medicine but on claims processors and other paper shuffling. The CareFirst merger would help tame soaring health insurance costs by funneling more reimbursements through fewer administrators.

WellPoint has agreed to pay $1.3 billion for CareFirst. Because CareFirst is a nonprofit corporation - owned not by shareholders but by its community, more or less - the $1.3 billion could become a private endowment, a deep well for financing the uninsured.

Maryland would double its money overnight, keeping existing CareFirst reserves to cover future medical claims under WellPoint's administration and gaining a rich, new, separate philanthropical source. As part of WellPoint, CareFirst would become for-profit and substantially increase its contribution in Maryland taxes.

Unfortunately for everybody, the deal is virtually dead. And the people who killed it are the CareFirst executives who worked so hard to promote it.

By agreeing to pay $25 million in merger bonuses to its seven top executives and another $8 million in retention pay to 67 lower-level managers, CareFirst has blown away any public support it had left for the transaction.

The bonuses, revealed Thursday by CareFirst ahead of this week's public hearings on the plan, are a stunning political miscalculation. Recall that Carl Sardegna, Jews' predecessor, got in hot water a decade ago for collecting a mere $850,000 in pay and renting a $75,000-a-year Orioles skybox for customers and employees.

The General Assembly went bonkers, and even though Jews' CareFirst is healthier than Sardegna's, to this day company managers know the plusher parts of Camden Yards are out of bounds for expense accounts. What did they think the legislature was going to say about the new gravy? "Sorry CareFirst, don't you ever again spend Maryland's medical dollars at Boog's Barbecue. But please be our guest in using the WellPoint merger to set up your bosses like the pasha of Tripoli."

Politics aside, the bonuses lack a logical or moral case.

Multimillion-dollar corporate pay is OK when executives take major risks to earn big returns for shareholders. But there are no risks and no shareholders at CareFirst - just a few executives holding buckets to catch cash from an industry consolidation that was going to happen anyway.

Is the merger proposal making Bill Jews work harder? You betcha.

Should he get the best deal he can for Maryland? Absolutely.

But those aren't reasons to pay him an extra $9.1 million, his portion of the bonuses. He has the same obligation toward his employer as any of us - to pitch in and get results. The idea that he would slack off if not for the $9.1 million is insulting to Mr. Jews.

Nor does he deserve the guarantee of an additional $18.6 million if he leaves the merged CareFirst-WellPoint for any "good reason" - those are the words in a pre-existing job contract. An $18.6 million payoff and an endless golf vacation seem like good reasons to me.

CareFirst and its hired "experts" will try to show that these packages are standard in big business. That doesn't make them right, especially in nonprofit companies run by community trustees.

When Citigroup pays gigabucks to Chairman Sandy Weill, it does so under the governance of the shareholders footing the bill. Perhaps CareFirst would like to submit the bonus package to a state referendum.

CareFirst says selling out to WellPoint would produce "tangible benefits for the communities we serve," and it's true. The deal would tap a new ocean of insurance reserves and enable reform of the state's clunky medical insurance regulations, which post one set of rules for CareFirst and another for everybody else.

Unfortunately, CareFirst bosses seem more concerned about their own tangible benefits than Maryland's. That will probably lead to a continuation of the present system and even more regulation.

People running big, important institutions, including nonprofits, should be paid very well.

But everybody agrees that somewhere between zero, at the bottom, and the net worth of a company, at the top, executive pay crosses the line into outrageousness. People just don't concur on where the line is, and in fact excessive pay is tough to define.

But so are lots of things in life, such as obscenity. Maybe you can't describe it in a few words, but you know it when you see it.

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