CareFirst's future bleak without deal, CEO warns

Jews urges senators not to block sale plan

March 13, 2002|By Michael Dresser | Michael Dresser,SUN STAFF

William L. Jews, chief executive of CareFirst BlueCross BlueShield, warned Maryland senators yesterday that the company could rapidly find itself in a "downward cycle" if its proposed conversion to a for-profit company fails to go through.

"This company is at a critical juncture in its history," Jews told the Senate Finance Committee at a briefing, before the panel held hearings on several bills inspired by opposition to the insurer's proposed $1.3 billion sale to a California company.

Venturing into what has become unfriendly territory for CareFirst, Jews painted a bleak picture of the $6 billion company's future if the sale to WellPoint Health Networks is blocked.

Phones would not be answered as quickly, claims would not be processed as fast, employment would drop and the insurer would become "less viable and less valuable" if the transaction isn't completed, Jews said.

"In a worst-case scenario, minor events could take us back to where we were in 1992," Jews warned, referring to a time when the company was on the brink of insolvency.

He urged the senators to leave the conversion decision to Insurance Commissioner Steven B. Larsen, who will resume hearings on the transaction today. Various bills before the General Assembly would prohibit the conversion outright or impose conditions that could scuttle the whole deal.

The CareFirst chief received a skeptical but respectful hearing in the Finance Committee, where Chairman Thomas L. Bromwell set a tone of open-minded if wary neutrality. It was probably the least hostile venue Jews could find in a General Assembly that has been swamped by protests over the proposed sale - especially in the wake of last week's disclosure of $33 million in planned payments to senior managers on completion of the transaction. Jews has not ventured before the House Economic Matters Committee, where Chairman Michael E. Busch has led the opposition to the CareFirst conversion and sale.

Bromwell, a Baltimore County Democrat, told Jews he supports letting the insurance commissioner's proceedings go forward but stressed that he is not necessarily backing the conversion.

Even in the plush, polite confines of the Senate hearing room, Jews and CareFirst Chairman Daniel J. Altobello faced tough questioning on the compensation package, the purchase price and allegations of conflict of interest on the part of its investment banker.

Jews, who would receive a $9 million "success fee" on the merger's completion, referred questions about the payments to Altobello.

Altobello insisted the compensation package was fair and well within industry standards. He said the board knew from the beginning the package would be controversial but would stand up for what it considers a correct decision.

"It has never been about Bill Jews asking our board for one penny," he said. "It has always been about the board doing the right and proper and just thing to do."

Sen. Robert R. Neall, the Senate's most outspoken critic of the deal, asked Jews and Altobello about the independence of Credit Suisse First Boston, the investment banking company that vouched for the fairness of the purchase price. Neall questioned an arrangement under which CSFB would receive a higher payment if the merger were completed, as well as the disclosure that the investment banker trades in WellPoint stock.

"I think I would have looked for a more circumspect adviser," the Anne Arundel County Democrat said.

Altobello said CSFB was chosen because of its extensive experience in the health care industry. He also said tying compensation to the transaction's approval makes sense. "Why should we pay them if we don't have success in completing the merger?" he said.

Jews praised WellPoint as one of the most respected health care companies in the country. He did not promise lower premiums but said increases would likely be smaller under the combined company.

CareFirst said the $1.3 billion purchase price of the insurer, which also operates in Delaware and the District of Columbia, would produce about $750 million for the Maryland foundation set up to receive the money.

Jews said that money, if invested at 5 percent interest, could yield about $35 million to $40 million a year to go toward providing health care for Marylanders who have trouble getting insurance. With the end of the premium tax break CareFirst enjoys as a nonprofit, and changes to an open enrollment program, the state could have as much as $100 million a year to spend for that purpose, he said.

After Jews and Altobello departed, the committee approved a consensus bill putting the burden of proof on CareFirst that the sale to WellPoint is in the public interest. That measure, which has passed the House, has the company's blessing and is expected to pass without difficulty.

Altobello's defense of the executive compensation package failed to dissuade Neall from pushing a bill that would deny extra compensation to company officers as the result of conversion.

"The reason is very clear," he said. "This is not their company. This is a company that has been entrusted to them by the people of Maryland."

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