CareFirst quizzed on finances

Md. insurance chief disputes firm's claim it needs to convert

`Things are going well'

But company CEO warns of a looming `downward cycle'

March 14, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

At a time when some companies are being accused of concealing their financial weaknesses, officials of CareFirst BlueCross BlueShield were quizzed yesterday about whether they are concealing financial strengths.

CareFirst, a nonprofit health insurer covering 2 million Marylanders, has told regulators and legislators that it needs to convert to a for-profit operation and sell itself to assure its financial health.

"The failure to convert would propel CareFirst, especially its Maryland plan, into a downward cycle," William L. Jews, chief executive officer, testified yesterday.

As competitors improve products and services, CareFirst would lose business and "work force reductions would be inevitable," he said.

Insurance Commissioner Steven B. Larsen, however, citing a CareFirst presentation to rating agency Standard & Poor's and filings with insurance regulators, asked Jews and other CareFirst executives to comment on:

A projection that "strong financial results" this year will produce an increase in company net worth of more than $100 million;

A jump in CareFirst's market share from 28 percent to 38 percent over the past five years, giving it 2 1/2 times as many Maryland members as its nearest competitor;

An expected 15 percent increase in net income for this year;

A reported growth in revenue last year of 20 percent.

"Can you tie this into your business case for conversion?" Larsen asked Jews. "You get a picture that things are going well."

Jews replied, "The company is doing well today, but if you look down the road two, three, four, five years, I think there will be a widening gap. We want to move while the company is doing well. It's not an issue of impairment, of going out of business. But others, who have adequate capital, will able to invest in technology, invest in products and underprice us."

Larsen asked Jews about CareFirst's approach to withdrawing from unprofitable markets. Jews said CareFirst had closed its Medicare HMO for seniors, dropped out of the Medicaid program for the poor and pulled its FreeState HMO out of individual and small-group markets because those lines of business "became so financially onerous I felt we had to exit."

It would be unfair, he said, to ask other customers of other products to subsidize those that were losing money.

Jews said CareFirst, which is more profitable in the District of Columbia and Delaware, operated at a near break-even level in Maryland, in part because regulators had not approved premium increases at the level CareFirst sought, public programs don't pay enough and the state has extensive coverage mandates.

Results depressed

G. Mark Chaney, CareFirst's chief financial officer, conceded that CareFirst's results in Maryland had been depressed from $19 million in losses last year on business that CareFirst administers for self-insured employers, particularly local governments. He said CareFirst, in some cases, was charging an administrative fee below its actual cost because "it's important to maintain those relationships."

Larsen noted that the self-insured programs were not regulated by the state.

Jews is expected to resume his testimony this morning. While most of this week's sessions have been devoted to CareFirst presenting its case for conversion and sale to California-based WellPoint Health Networks Inc., this afternoon's hearing will also offer an opportunity for public comment.

There may be additional hearings next month. Larsen also plans another set of hearings in the fall, after consultants for the state have studied CareFirst's plan.

In other testimony yesterday, Gary S. Mendoza, who as California's commissioner of corporations approved the conversion of Blue Cross of California to create WellPoint in its current form, said that conversion was "the only way to maximize" the value of a nonprofit plan for the public, and would be "in the best interest of the people of Maryland, Delaware and the District of Columbia."

Since the public, in effect, owns a nonprofit, the $1.3 billion price for CareFirst would be paid to foundations in three jurisdictions.

Those foundations, said Mendoza, an attorney now in private practice, would generate "tens of millions of dollars a year" to address unmet health needs - far more than CareFirst could contribute as a functioning nonprofit.

Stuart F. Smith, managing director of Credit Suisse First Boston, the investment bank that advised CareFirst on the deal, said CareFirst had bargained hard with WellPoint and a rival suitor, Virginia-based Trigon Inc.

`The best terms'

"From my own personal perspective, these are the best terms we could get," Smith said.

Larsen, echoing concerns expressed by some legislators, said there "appears to be a conflict" for Credit Suisse in that the bulk of its fee - $13 million, or 1 percent of the purchase price - is contingent on completing the deal.

"The group advising the board has a financial interest in the board concluding that it is a fair price," Larsen said.

Smith said that investment banking was "a business premised on reputation and integrity," and that Credit Suisse would not imperil its standing by endorsing a bad deal.

Besides, he added, if "you want to be mercenary about it," Credit Suisse could have gotten a larger fee by advising CareFirst to do a public stock offering on its own rather than selling itself to WellPoint, allowing the investment bank to collect 6 percent or 7 percent as underwriter.

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