Insurer saw doubt grow

CareFirst was slow in responding to foes of proposed sale

March 23, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

A slow response by CareFirst BlueCross BlueShield allowed opposition to build to CareFirst's plan to sell itself, deal opponents and CareFirst said yesterday.

"They thought the deal would sell itself, and it didn't," said Nancy Fiedler, senior vice president of the Maryland Hospital Association, one of the groups fighting the deal.

"I'd give them a D in public relations," said Carl J. Schramm, a health economist who wrote a report for the Abell Foundation that concluded there was no business justification for CareFirst to be sold.

John A. Picciotto, CareFirst's executive vice president and general counsel, said CareFirst couldn't talk about the advantages of a sale through much of last year - when a deal was widely rumored but hadn't been announced - because it was in delicate and confidential negotiations with two publicly traded companies. While CareFirst was locked into silence, "organized groups were able to work very strongly to plant some seeds of doubt and confusion," Picciotto said.

In November, CareFirst announced its intention to convert to for-profit operation and be acquired for $1.3 billion by WellPoint Health Networks Inc. The money would be paid to foundations in Maryland and in the District of Columbia and Delaware, where Owings Mills-based CareFirst also operates Blue Cross plans.

By the time the deal was announced, Picciotto said, opponents had been raising objections - invalid ones, in his view - that had gone unchallenged. "The red herrings had colored a lot of thinking before we entered the room," he said. CareFirst, he said, was "digging out of a hole."

Over the past few months, consumers have been negative toward the deal at public hearings, and a number of bills that would block the deal outright or attach conditions that could effectively kill it have been moving through legislative committees.

WellPoint said yesterday that it wouldn't comment on the impact of any of the bills. "We're not going to comment on pending legislation; it's a local decision," said Ken Ferber, WellPoint's vice president for corporate communications.

Noting that lawmakers had created a conversion process several years ago that gave the state's insurance commissioner final authority, Picciotto said, "our assumption was that the legislature would trust that process." CareFirst expected to make its case through the regulatory process, he said, and did not plan on a more public campaign.

Even now, said T. Michael Preston, executive director of the Medical and Chirurgical Faculty of Maryland, CareFirst has failed to make a positive case for converting to for-profit, focusing instead on claims it would run into financial trouble in the future if the WellPoint sale were blocked.

"We still haven't seen the up side," Preston said. "The argument they're now making is doom and gloom if it doesn't happen, not `It's so good.' " His organization, which is the state medical society, was one of the earliest and most vocal critics of CareFirst's plans.

Critics say CareFirst also ran into a series of events - some of its own making, some not - that have made winning approval more difficult. Those events, Schramm said, came drop by drop "like a Chinese water torture."

Released in December, "Schramm's report made a huge difference," said Preston. "He's a business figure who made the business argument that the deal doesn't make sense, and he has a lot of credentials." A former health policy professor at the Johns Hopkins University, Schramm founded several businesses and headed the national trade association of for-profit health insurers.

Picciotto conceded tha tthe Schramm report, released in December, had an impact. "For people on the fence, it raised issues with them," he said. However, he said, anyone reading the report carefully would have "legitimate questions" about Schramm's methods and conclusions.

Last month, the Kansas insurance commissioner turned down a plan by her state's Blue Cross plan to convert to for-profit and sell itself, saying, "It would have cost Kansas businesses, small employers and families millions of dollars in additional health insurance premiums."

CareFirst pointed to the differences between its plan and the one in Kansas: Kansas Blue Cross is a mutual company, while CareFirst is nonprofit; and the proposed acquirer in Kansas, Anthem Inc., is not WellPoint. But critics of CareFirst pointed to the finding on raising premiums - a point on which consumers were already fearful.

This month, a CareFirst filing showed that its executives would pocket $33 million - including $9.1 million for chief executive William L. Jews - if the deal went through.

"As people have learned about the particulars of the deal, they've become outraged," said Del. Dan Morhaim, a Baltimore County Democrat. "It's an obscene amount of personal profiteering by executives selling a business that belongs to the public."

Morhaim had introduced a bill in January saying CareFirst executives shouldn't profit from the sale and said some of his colleagues were skeptical of the need for legislation. With the details public, he said, his bill cruised through the House of Delegates on a vote of 137-0.

"In the end, citizens drive the process," Morhaim said. "You can go into all the obscure points, but when they see a public trust company being broken up and the executives getting millions of dollars, they know that's bad."

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