WellPoint going ahead on CareFirst

Calif. health company decides Md. insurer is worth pursuing

Regulatory review to resume

Process was held up pending review of higher cost estimates

September 28, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

WellPoint Health Networks indicated yesterday that it would move ahead with its effort to purchase CareFirst BlueCross BlueShield, Maryland's largest health insurer.

The regulatory approval process had been in a semi-official pause while WellPoint reviewed a preliminary report of a state consultant on the value of the CareFirst deal.

WellPoint had formally suspended its application for CareFirst in Delaware and had asked Maryland Insurance Commissioner Steven B. Larsen to hold off briefly on other consulting work.

WellPoint wanted to avoid additional expenses - it has to pay for the consultants hired by the regulatory agencies, at a cost of $5 million in Maryland alone - until it had determined that the cost estimates of the consultant were reasonable.

WellPoint decided to go ahead with the purchase, even though the consultant determined that CareFirst was worth more than its $1.3 billion offer - probably several hundred million dollars more.

"Maryland becomes significantly more expensive on Monday" now that all its consultants can resume work, said Debbie Rosen McKerrow, director of communications for the state's Insurance Administration.

California-based WellPoint also said yesterday that it will renegotiate with CareFirst to meet new terms for the sale set by the Maryland legislature, and hopes to have a revised agreement with the health insurer in about 60 days.

The legislature decided earlier this year that the $1.3 billion deal must be all cash - WellPoint initially proposed to pay $850 million in company stock - and to block bonuses for CareFirst executives.

Under a plan approved by CareFirst's board, the executives were to pocket $33.2 million in "merger incentives" and "retention bonuses" - including $9.1 million for chief executive William L. Jews - when the deal was completed.

Though the legislature blocked those bonuses, executives still have employment agreements under which they stand to collect $48.9 million - $18.9 million of that for Jews - if WellPoint terminates them or they leave the company for "good reason," such as a refusal to accept a transfer out of town.

In addition to negotiating changes to comply with the new Maryland requirements, WellPoint said, it plans to re-file its application in Delaware to resume the review process there.

The deal also must be approved in the third jurisdiction where CareFirst operates, the District of Columbia, but the review there had not been put on hold.

Todd B. Richter, an analyst with Banc of America Securities, said that WellPoint, in deciding to move ahead, was saying, in effect, that "'CareFirst has to get itself in a position so we can buy them, and we'll help them.'"

CareFirst has taken the lead in winning approval for the deal but has run into strong opposition in the legislature, particularly after the bonuses became public.

CareFirst officials declined to comment yesterday.

Larsen, who wants to get all of his consultants working so he could finish his review, had given WellPoint until yesterday to say whether it would continue pursuing CareFirst. After the announcement, he said he would advise his consultants to resume work Monday.

Larsen says he's on track for a final ruling by early next year on whether the deal is in the public interest and whether the price is fair.

Regulators in Delaware and District of Columbia will go through a similar process. After those regulatory rulings, the Maryland legislature and the Washington City Council can review - and potentially block - them.

Larsen named a new team to replace a consultant initially picked to study the effect of the deal on consumers.

The consultant withdrew to avoid the appearance of a conflict of interest after it accepted work for the national Blue Cross Blue Shield Association.

Wakely Consulting Group, with headquarters in Florida, will work on the consumer-impact study with Roger G. Brown & Associates, a Missouri law firm that is also doing other consulting work on the deal.

Larsen's consultant on the value of CareFirst, the Blackstone Group, reported earlier this month that CareFirst is worth between $1.35 billion to $2.25 billion.

If the deal is approved, the proceeds would be divided among health-related foundations in the region. The money seeks to compensate for the loss of CareFirst as a nonprofit public asset.

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