CareFirst's bonus plan defended

Blues chairman calls $33.2 million `success fee' justified

First of three hearings

Insurance chief questions timing of sale `incentives'

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

CareFirst BlueCross Blue-Shield executives deserve bonuses as a "success fee" if the company is sold, Daniel J. Altobello, chairman of CareFirst's board, told Insurance Commissioner Steven B. Larsen yesterday.

"It is the fair and right thing to do," Altobello said of the plan to give CareFirst bosses $33.2 million - including $9.1 million to Chief Executive Officer William L. Jews - if they complete the $1.3 billion sale to WellPoint Health Networks Inc. "This is the management that created this $1.3 billion of value," he said, "and if it were a stock company, they would have been reaping the rewards."

Yesterday, Larsen held the first of three hearings this week in which CareFirst and WellPoint present their case for Larsen to approve CareFirst's conversion to for-profit operation and its sale. Hearings resume tomorrow, with Jews expected to be the first witness.

Altobello and yesterday's other witness, WellPoint CEO Leonard D. Schaeffer, each gave a brief summary of pre-filed testimony, then answered several hours of questions from Larsen.

The commissioner quizzed Altobello on CareFirst's filings that the "merger incentives" were designed to encourage top managers to negotiate the best deal possible. He noted that the bonuses were approved in July, when many of the terms of the sale had been decided.

"This was almost at the end of the process. Does that reasoning really apply, given the timing?" Larsen asked.

"Shame on us for not acting sooner," Altobello answered. He also said the bonuses were important to keep management in place until the deal was completed, since "no intelligent buyer would try to acquire this service company without the continuation of management."

Altobello also told Larsen, "This whole compensation discussion is a red herring. The real discussion should be about where the $1.3 billion will go and what it can do."

As a nonprofit, CareFirst is, in effect, owned by the public, and the purchase price will be paid to health-related foundations in Maryland, Delaware and the District of Columbia, where CareFirst also operates.

Schaeffer testified that WellPoint had taken the executive bonuses into account - along with all other CareFirst commitments, such as leases - in determining how much it was willing to pay for CareFirst.

Schaeffer said there had not been any discussions with Jews about how much Jews would be paid after the sale is completed, but "it's reasonable to assume his salary won't go down." If the sale goes through, Jews would head WellPoint's regional operations.

Schaeffer said WellPoint expected to get a return on its investment by increasing membership and by selling more products to each member, as it had done with the Blue Cross plan it operates in California and in the Blues it bought in Georgia and Missouri.

"There will be no increase in premiums as a result of this transaction," he said.

Based on WellPoint's Georgia and Missouri experiences, he said, there might be some "modest synergies" in areas such as payroll and human resources, which would be centralized, but he expected Maryland employment to grow over time. "It isn't so much about cutting costs but about the low cost of adding additional customers," he said of the economic advantages of the deal.

However, he said, he did not want to guarantee maintenance of employment levels as part of the deal. "We can't be put in a position where we're prevented from exercising business judgment," Schaeffer told Larsen.

Schaeffer also expressed no interest in paying the entire purchase price for CareFirst in cash, as some legislators have urged. As negotiated, the deal calls for $450 million in cash and $850 million in WellPoint stock, which would be newly issued for that purpose.

If the state or the foundation wants cash, Schaeffer said, "it makes more sense for the state to sell the stock."

He said the foundation created by the sale of the Missouri Blues sold about 60 percent of the stock it received in the first month.

If the legislature were to require that the deal be all cash, Schaeffer said, "that is a material change, and we would have to evaluate that."

And Schaeffer said he did not expect WellPoint to leave any of CareFirst's current market segments. Rather, he said, his company weighs its entry into any market carefully, then stays.

"We don't want to say, `The profit margins are going down, so we're exiting,'" he said. "That does not build confidence."

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