CareFirst says it feared layoffs despite pledge of losing bidder

Trigon management plan was seen as unworkable

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

As part of their effort to buy CareFirst BlueCross BlueShield, executives of Trigon Healthcare Inc. promised not to cut jobs in Maryland and said the company's chief executive would buy a house in the Baltimore area and spend two days a week here, sources said yesterday.

But CareFirst officials said they were skeptical about the no-layoffs pledge and accepted a bid from a company that made no job guarantees. And they rejected Trigon's planned management structure as unworkable.

Employment levels and management structure are two of the issues that Maryland's insurance commissioner, Steven B. Larsen, is considering as he decides whether to approve CareFirst's plan to convert to a for-profit operation and be acquired by WellPoint Health Networks, a California insurer, for $1.3 billion. Virginia-based Trigon had also offered $1.3 billion.

On Monday, in a process similar to depositions in a court case, Larsen took sworn testimony from Trigon executives about their bid for CareFirst.

According to sources, the Trigon officers testified that they would have paid more than $1.3 billion but were not pressed for a higher bid. They also said they took issue with CareFirst's plan to pay its executives millions of dollars in bonuses for completing the deal.

Jeffery W. Valentine, a CareFirst spokesman, said yesterday that the Owings Mills-based insurer is "asking the insurance commissioner for the opportunity to provide formal testimony that will clarify the facts and misstatements" in the Trigon executives' testimony.

John A. Picciotto, CareFirst's general counsel, said the company had been advised by consultants that, given Trigon's relatively small size and nearby location, a Trigon deal - despite assurances - was likely to result in "significant layoffs of the rank and file."

Trigon's proposed post-merger management structure, he said, was viewed by CareFirst's board as "a two-headed CEO monster" that "would never work."

Larsen - and his counterparts in the District of Columbia and Delaware, where CareFirst also operates - are going through a complex review process to decide whether the CareFirst-WellPoint combination is in the public interest and if the $1.3 billion price is fair.

Regulators can also approve a deal with conditions. Several insurance regulators, for example, have imposed conditions about local employment levels. Their decisions on the CareFirst deal are expected by early next year.

Major issues

Employment levels and management structure are important issues in such transactions because consumers and regulators "still want to feel the localness of the plan, to have confidence that decisions reflect the local community," said Dawn Touzin, director of the Community Health Assets Project at Community Catalyst.

Her Boston-based group works with community and consumer groups in states where Blue Cross conversions and acquisitions are proposed, and has advised local groups about the CareFirst deal.

Del. Shane Pendergrass, a Howard County Democrat who opposes CareFirst's conversion, said, "Given the economy today, jobs ... are important."

But job protections can conflict with efforts to keep costs as low as possible for consumers.

"We can suffer some level of job loss if the payoff is the assurance of lower insurance costs," said House Speaker Casper R. Taylor Jr. "But I don't know that that kind of commitment is possible to get."

Neither Larsen nor Trigon would confirm the content of the testimony given by Thomas G. Snead Jr., Trigon's chief executive, and Timothy P. Nolan, a vice president who worked on acquisitions, including the CareFirst deal. WellPoint also declined to comment yesterday.

Competing plans

However, the sources, and an extensive public record, provide comparisons of the Trigon and WellPoint plans for employment levels and management structure.

Daniel J. Altobello, chairman of CareFirst's board, said in written testimony prepared for March public hearings that the board, "based on its review and external expert input," believed the Trigon deal "would have resulted in substantial layoffs of the CareFirst work force because of the relatively small size of Trigon vis-a-vis CareFirst. WellPoint, because of its significantly larger size and, more importantly, the management structure of the organization that it proposes, does not pose that threat.

"Thus, despite Trigon's written promise that layoffs would not occur, the financial reality of the Trigon proposal could not be overcome," Altobello stated.

While WellPoint did not offer job guarantees, its chief executive, Leonard D. Schaeffer, testified in March that it had increased employment at the Georgia and Missouri Blue Cross plans after acquiring them.

Schaeffer said WellPoint performs some functions, such as human resources, centrally, so the mix of jobs in each location might change after acquisition.

CareFirst has about 6,400 employees in five states, including more than 3,000 in the Baltimore area, Valentine said.

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