CareFirst to make case this week

Insurer to point out in 3 days of hearings how sale helps state

Criticism is growing

Executives to get millions in bonuses if deal goes through

March 10, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

With revelations last week of fat executive payouts riding on the deal, the pressure will be on CareFirst Blue- Cross BlueShield this week to show that its plan to convert to for-profit operation would be good for Marylanders.

News of $33.2 million in "merger incentive" and "retention bonus" payments to 74 CareFirst managers - including $9.1 million to Chief Executive Officer William L. Jews - has given ammunition to those who oppose the deal.

The payments hinge on whether the nonprofit health provider succeeds in becoming a for-profit company, a change that will allow it to be sold to WellPoint Health Networks for $1.3 billion.

But the incentives will be only one of the key issues on the table this week, as Insurance Commissioner Steven B. Larsen conducts three days of hearings to allow WellPoint and CareFirst to lay out their case for a radical makeover.

"We've always seen it as our obligation to provide a good reason" to approve the transaction, said Ken Ferber, WellPoint's vice president for corporate communications. "That's our goal [for the hearings] - to begin that process."

According to pre-filed testimony, CareFirst's compensation consultant will say the incentives are "justifiable, appropriate and commercially reasonable." The company also has filed prepared testimony and supporting documents for nine other witnesses.

"We'll be following up on all the material and the written testimony, and that includes the compensation agreements," Larsen said.

He's also interested in how the deal makes business sense.

A similar conversion-acquisition was rejected last month by the Kansas insurance commissioner, who found that the local Blue Cross insurer, a mutual company, had failed to show how the deal would save money.

Instead, she assumed that premiums would rise by tens of millions of dollars to enable the acquiring company to achieve the profit margin it wanted.

David M. Funk, the lawyer representing CareFirst and WellPoint in the regulatory review in Maryland, said his preparation for the hearings was guided by the state law setting out the conversion process.

In order to win approval, he has to convince Larsen on these key points:

Whether the deal is fair to CareFirst members, and how it is likely to affect cost, access and service.

Whether CareFirst executives and directors exercised "due diligence" in deciding to convert to for-profit and in choosing to sell itself to WellPoint, which is based in Thousand Oaks, Calif. This will include a look at whether any CareFirst officials or consultants have a conflict of interest.

Whether the $1.3 billion price is fair. Since nonprofits are, in effect, owned by the public, the purchase price must go to a state health foundation. Larsen and his District of Columbia and Delaware counterparts also will have to decide how the money gets divided among the jurisdictions.

WellPoint Chief Executive Officer Leonard D. Schaeffer, CareFirst CEO Jews, and Daniel J. Altobello, chairman of CareFirst's board of directors, are scheduled to be the leadoff witnesses.

Kansas and Maryland represent a new phase in a decade-long trend for Blues plans to consolidate and change their business form, said Dawn Touzin, of Community Catalyst in Boston.

Her organization works with local consumer and community groups on issues relating to the conversion of nonprofit health insurers and hospitals, including working with a Maryland group that opposes the CareFirst deal.

In the dozen or so states where there have been Blues conversions, much of the focus has been on how to manage the conversion, Touzin said.

"In other states, the Blues plans said, `If you don't let us do this, we're going to go bust,' " Touzin said. "Kansas and Maryland are the first where the plans were unquestionably solvent."

So, she said, the debate has shifted from how to convert to whether to convert.

Robert Cunningham, author of The Blues: A History of the Blue Cross and Blue Shield System, said that in both Maryland and Kansas there seems to be increasing focus on out-of-state control of the local insurer. "A lot of people are concerned about the `absentee owner' issue," he said.

Also, Touzin said, regulators and consumer groups are becoming more sophisticated in how to review conversion proposals. "Maryland is allowing a greater level of questioning than in any other state," she said.

Funk, the lawyer representing CareFirst and WellPoint, agreed.

"It really is a terrific process," he said, adding that the process "ought to be played out" - a comment aimed at the General Assembly's efforts to block the deal altogether, rather than leave the decision to Larsen.

Since CareFirst also operates the Blue Cross and Blue Shield plans in the District of Columbia and Delaware, regulators in those jurisdictions will have a voice in the deal, though neither has scheduled hearings.

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