CareFirst may have sold for too little

Trigon officials testify they would have bid more

Regulators eye $1.3 billion deal

August 22, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

Executives of Trigon Health- care Inc. testified under oath that they were prepared to pay more for CareFirst BlueCross BlueShield, but the Maryland insurer failed to push for a better price, sources said yesterday.

The officials of Trigon, a losing bidder for CareFirst, answered questions from state Insurance Commissioner Steven B. Larsen at a private session - similar to a deposition - in Washington on Monday.

Trigon officials also testified, the sources said, that during the sale process, Trigon took issue with CareFirst's plan to pay its executives $33.2 million in bonuses for completing the deal, including $9.1 million to Chief Executive William L. Jews.

John A. Picciotto, CareFirst's general counsel, said that to believe that Trigon never raised its bid because it wasn't asked, "you'd have to believe in the tooth fairy."

He said it was "categorically incorrect" that executive bonuses were the issue that led CareFirst to reject Trigon's bid.

"We intend to respond to Commissioner Larsen to clear up the record," Picciotto said.

CareFirst, the area's largest health insurer, signed a deal in November to sell itself to WellPoint Health Networks Inc. of California for $1.3 billion.

Virginia-based Trigon also offered $1.3 billion, according to testimony and regulatory filings. CareFirst officials and its investment banker have said they chose WellPoint for a variety of reasons, including prospects of maintaining local employment and guarantees to pay full price even if its stock value dropped.

The price is important because the price paid for CareFirst - a nonprofit business since it was launched in 1937 - will go to foundations in Maryland, the District of Columbia and Delaware, for purposes such as covering the uninsured.

Larsen and other regulators are reviewing the CareFirst-WellPoint deal to determine whether the price is fair and if the merger is in the public interest. The transaction, which already faces stiff opposition, would be in deeper trouble if it appears that CareFirst did not do all it could to get the highest price.

"This certainly puts a huge cloud over this specific deal," said Del. Michael E. Busch, the Anne Arundel Democrat who chairs the House Economic Matters Committee. If CareFirst missed a chance to get a better price, he said, "It's tough to believe their intentions were in the best interests of Maryland health care and not more in the interests of what the executives and board were getting."

Calvin Pierson, president of the Maryland Hospital Association, which opposes the conversion and sale, said that if the reports are accurate, "It's further evidence that CareFirst's process of selling itself was flawed, and that the proposed sale should be rejected by the insurance commissioner."

An expert on conversions said actions taken by a nonprofit to get a top-dollar deal are important in regulatory reviews.

"Clearly, in an auction process, you would want to go back and get the best price," said R. Bruce Den Uyl, who has consulted for insurance commissioners and attorneys general on nonprofit HMO and hospital conversions in more than a half-dozen states.

The job of a valuation consultant is to determine "what a willing buyer would pay," he said, and the process used in the bidding can be more important than other methods of judging the value of a company, such as projecting future cash flow.

Den Uyl, a principal in the firm Alix Partners, said it is legitimate for a nonprofit's board to consider factors beyond price, such as impact on consumers.

Larsen declined to discuss Trigon's testimony, but confirmed that the company submitted documents related to the deal and offered sworn testimony Monday.

Trigon said that its chief executive, Thomas G. Snead Jr., and its senior vice president for corporate development, Timothy P. Nolan, had "complied fully" with Larsen's subpoena and had "answered all the questions."

Larsen's subpoena to Trigon, issued Aug. 2, shows his areas of concern. He sought Trigon's records relating to how much Trigon thought CareFirst was worth and to any after-merger jobs or bonuses for CareFirst executives.

Larsen said the meeting with Trigon executives lasted from 9 a.m. to 5 p.m. Monday. He said some questions were asked by his consultants, who will report to him on the value of CareFirst and the process its board followed. David M. Funk, a lawyer representing CareFirst and WellPoint in the regulatory process, also attended, but did not ask questions, Larsen said.

Besides the points covered in the subpoena, Larsen said, the testimony touched on a number of other issues, including projected post-merger headquarters location and employment levels.

He said the Trigon testimony would be made public after he receives a transcript and can review it to ensure that no proprietary information is disclosed.

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