The tug of war over CareFirst

Dispute: Testimony shows personal issues weighed heavily in talks on who would buy Maryland's CareFirst.

October 06, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

As CareFirst BlueCross BlueShield held negotiations for its sale, discussions involved hundreds of millions of dollars and thousands of jobs - but also included protracted talks over such personal issues as who would represent a merged company at the Blue Cross Blue Shield Association meetings.

Now those personal issues - and their potential impact on shaping the deal - have come under the scrutiny of Maryland Insurance Commissioner Steven B. Larsen as he weighs whether to approve CareFirst's deal to be acquired by California's WellPoint Health Networks, transcripts of testimony released last week show.

In particular, Larsen and the lawyers and consultants bore in on two questions:

Why did CareFirst, which had identified Virginia-based Trigon Inc. as its favored partner in late 2000 and 2001, suddenly switch to favor WellPoint, the company with which it ultimately signed a sales agreement?

Why did CareFirst refuse to entertain a bid from Anthem Inc., an Indiana company that has bought Blue Cross plans in eight other states?

Larsen is, of course, pursuing the more sensational charges made in the testimony. Thomas G. Snead Jr., chief executive officer of Trigon, and his deal-making lieutenant, Timothy P. Nolan, testified that Trigon told CareFirst's investment banker that the $1.3 billion purchase price it had on the table was "not our best offer by any means," but CareFirst didn't ask Trigon to increase its bid.

And Nolan said he told CareFirst that a planned $33.2 million in deal-related bonuses for top executives - including $9.1 million for Chief Executive Officer William L. Jews - was "greedy, stupid and illegal."

CareFirst officials and its investment bankers, in sworn testimony and affidavits, say those accounts are untrue.

Eventually, CareFirst accepted a $1.3 billion bid from WellPoint, which agreed to pay the executive bonuses.

Larsen is reviewing the deal to see if it is in the public interest and if the price is fair. The price is a significant issue because, since CareFirst is a nonprofit, it would be paid to health-related foundations in the region.

In addition to the 879 pages of testimony by Trigon and CareFirst executives, the story of the deal unfolds in 14 notebooks filled with board minutes, correspondence and other documents CareFirst produced in response to a subpoena from Larsen. Together, the documents show that what Trigon called "social issues" - management jobs and titles, board seats, office location - were frequent topics of discussion.

`A big cherry desk'

At one point, in an otherwise serious letter to Jews in June 2001 spelling out executive responsibilities, Snead wrote that since he would work several days a week at CareFirst's Owing Mills headquarters., he wanted an office next to Jews.

"I'd like a big cherry desk in an office with a window facing east - the rising sun wakes me when I fall asleep at the office; blue carpet, of course; a big potted plant and a hanger for my suit jacket. P.S. Given the difference in our heights, I am OK with my desk being a little smaller than yours," he wrote.

While the quip about desk size was light-hearted, it's clear that the duties of leadership were serious issues in the talks, and that perceived slights were factors that helped turn the deal.

Through much of 1999, CareFirst was in talks with Trigon, a for-profit Blue Cross plan based in Richmond, Va., and Highmark Blue Cross Blue Shield in Western Pennsylvania.

Highmark is nonprofit, so the affiliation would have been similar to the union of the Maryland and District of Columbia Blues plans that produced the nonprofit CareFirst.

By February 2000, CareFirst's board approved the advice of its investment banker that Trigon be "a primary partnership candidate."

Trigon, with about 2 million members, was smaller than CareFirst, with about 3 million. Trigon, however, was more profitable and already listed on Wall Street, so it had the money to buy its smaller neighbor.

Although Trigon was the buyer, given the relative sizes, "We were viewing Trigon as a merger," David D. Wolf, CareFirst executive vice president and "point man" on the deal, testified.

`Not about me'

Jews thought the headquarters should be in Owing Mills, and that he should be chairman, chief executive and president.

"This is not about me," Jews testified when asked about negotiations over his position. Rather, he said, the CareFirst "board was specifically concerned about my staying in the company because we had the largest company, with 6,500 people," and because Jews and other CareFirst executives had experience combining companies.

Nolan testified that Jews said he wanted to represent the merged company at Blues association meetings - a duty, Nolan noted, that is reserved by bylaws for the CEO.

Snead and Jews discussed a plan under which Jews would be chairman and run the "northern" operation, while Snead would remain overall CEO and run the "southern" operation in Virginia.

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