CareFirst sale called beneficial

More affordable policies possible, says insurer witness

3 days of hearings end

Citizens of Maryland to be `losers' if deal's allowed, expert says

March 15, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

Two executives of WellPoint Health Networks Inc. said yesterday that Maryland is likely to see innovative insurance products and a smooth transition if WellPoint is allowed to buy CareFirst BlueCross Blue- Shield, Maryland's largest health insurer.

In the third day of hearings this week on the proposed deal, Insurance Commissioner Steven B. Larsen questioned a lawyer and a compensation consultant on the legality of $33.2 million in "merger incentives" and "retention bonuses" for CareFirst executives - including $9.1 million for Chief Executive Officer William L. Jews.

Gene E. Bauer, a compensation consultant hired by CareFirst, said the bonuses were legal because "they are trying to preserve an asset and deliver value at the end of the day."

After several days of witnesses for CareFirst and WellPoint, the public got to offer opinions. Most were opposed.

"The winners will be the WellPoint shareholders and the losers will be the citizens of Maryland," said Walter S. Hill, executive director of the Washington Psychiatric Society.

The public comments concluded this week's hearings.

Larsen said he plans to hear additional testimony next month, and will have another series of hearings in the fall, after consultants for the state have studied the deal.

Insurance regulators in the District of Columbia and Delaware, where CareFirst also operates, plan to hold hearings as well.

The WellPoint witnesses yesterday brought the focus, for the first time, to how CareFirst might operate if it were allowed to convert to for-profit operation and sell itself to WellPoint for $1.3 billion.

Deborah Lachman, a senior vice president of Blue Cross of California, which is owned by WellPoint, said her company was working to develop lower-cost products (with more deductibles and co-payments) to appeal to employers and individuals who haven't been able to afford conventional policies.

"The uninsured is the biggest single business opportunity we have," Lachman said.

"This business is a lot more than trading customers with competitors." A recent study, she said, found that 66 percent of California employers offer health insurance now, compared with 48 percent in 1999.

Among WellPoint's popular offerings, she said, is a product called HMO Saver, with standard HMO benefits for doctor visits but a $1,500 deductible for hospital stays. Premiums are 20 percent to 25 percent below standard HMO rates, she said.

In general, she said, WellPoint's premiums are comparable to those of other companies in California.

Mike Burks, vice president of BlueCross BlueShield of Georgia, a for-profit health plan bought by WellPoint a year ago, said Well- Point had sent in a chief executive from California, but 12 of the 14 top managers there are holdovers.

He said there had been a reorganization, with some functions, such as payroll, moving to WellPoint's California headquarters. However, he said, overall Blues employment in Georgia is now 3,304, up from 3,021 when the sale was completed a year ago. The fate of CareFirst's 6,500 employees has been a concern; WellPoint officials said they expect the work force to grow, but that they couldn't guarantee job levels.

Burks said the Georgia Blues have raised doctor reimbursements to cover inflation, and generally have not cut hospital payments.

Potential payments to CareFirst executives drew several questions from Larsen. He cited the state law on conversions of nonprofit insurers, which directs him to "ensure that no part of the public or charitable assets of the acquisition inure directly or indirectly to an officer, director or trustee of the nonprofit health entity."

Bauer, managing director of the consulting firm the Hay Group, and Robert W. Smith Jr., a Baltimore attorney who advised CareFirst on the deal, said the executive incentives were consistent with Maryland law and typical for similar deals.

The $1.3 billion purchase price is to be paid to foundations in Maryland, the District of Columbia and Delaware.

In the public comment portion, Janet Rosen, executive director of the Maryland chapter of the Juvenile Diabetes Research Foundation, urged Larsen to approve the deal. She said the foundation would then have money - perhaps as much as $100 million a year in Maryland - to support medical research, help cover the uninsured and address other health needs.

She said CareFirst had contributed to her foundation in the past, and that it was "a good corporate citizen" that needed to be preserved by allowing it to merge.

But Dawn Touzin, of Community Catalyst, a Boston consumer group that works on issues surrounding conversions of nonprofit hospitals and health insurers, said focusing on the foundation "ignores the impact of those who would be added to the cracks in the system" if a for-profit insurer raised rates or reduced coverage.

Also yesterday, aiming to scuttle the deal, the House of Delegates passed without dissent a bill that would require any sale of the insurer to be an all-cash transaction.

The bill, sponsored by House Economic Matters Committee Chairman Michael E. Busch, an Anne Arundel Democrat, takes aim at a provision of the proposed sale to WellPoint that says $850 million of the price would be paid in WellPoint stock. WellPoint has said such a change could force it to reconsider its offer.

The measure now goes to the Senate, where its prospects are uncertain. Senate Finance Committee Chairman Thomas L. Bromwell, a Baltimore County Democrat, has indicated that he would prefer to leave the decision whether to approve the sale in Larsen's hands.

Sun staff writer Michael Dresser contributed to this article.

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