CareFirst drops plan for millions in bonuses

Executives would get jobs with purchaser WellPoint

January 21, 2003|By M. William Salganik and Michael Dresser | M. William Salganik and Michael Dresser,SUN STAFF

Trying to quiet opposition to their plan to sell CareFirst BlueCross BlueShield, company executives have told the state they will drop a highly criticized proposal to give top executives up to $119.6 million in bonuses.

Insurance Commissioner Steven B. Larsen said last night that the reworked deal includes a provision giving CareFirst executives employment contracts with the proposed buyer, California-based WellPoint Health Networks.

The terms of the contracts could not be determined last night, but dropping the bonuses removes a potential legal impediment to the deal. Larsen has hinted strongly that his reading of state law would compel him to turn down the deal if the bonuses were included.

Details of the revised purchase application are to be disclosed today, Larsen said. Larsen still would have to determine whether the sale is in the public interest, and after he rules next month, the legislature will review his decision.

However, a powerful state legislator expressed skepticism about the changes.

"It's a shell game," Del. Michael E. Busch, speaker of the House, said last night. "They just moved the money around."

The bonus proposal angered many in Annapolis, giving more ammunition to critics who don't want to see nonprofit CareFirst convert to a for-profit and be sold for $1.3 billion to WellPoint. Legislators are preparing to ask questions about the employment contracts and how much they will pay.

Del. Dan K. Morhaim, the only physician in the House, said he would not be satisfied by mere technical changes.

"From my point of view, it doesn't matter if you call it a bonus or a severance if there are millions of dollars going to a few select executives," the Baltimore County Democrat said. "If they've truly eliminated the payments by any other name, that's a step in the right direction but I still think [conversion is] a bad deal."

Larsen also is scheduled to release a thick package of consultants' reports today on the impact of the deal on consumers, on potential use of the purchase price for a health-related foundation, and on the process CareFirst's board used in negotiating with WellPoint.

Jeffery W. Valentine, CareFirst's director of corporate communications, confirmed last night that there would be an announcement today, but said he could not comment further because of federal rules governing WellPoint as a publicly traded company.

Valentine said CareFirst's board had not yet acted, so "no changes have been approved to the definitive [sale] agreement."

WellPoint officials could not be reached for comment.

WellPoint has said previously that it intends to amend its proposal to pay the purchase price in cash. The original deal called for a mix of cash and stock, but the legislature voted last year that it should be an all-cash deal.

Because CareFirst is a nonprofit, in effect owned by the public, money from the sale would go to health-related foundations or similar purposes in Maryland, Delaware and the District of Columbia, where CareFirst operates.

Early opposition to the deal centered on whether the state's largest insurer should remain local and nonprofit.

"The compensation issue has never been one we've focused on as much as whether it's in the public interest overall," Nancy Fiedler, senior vice president of the Maryland Hospital Association, said last night. "We need a local or regional Blue Cross plan that is a partner in making health care more accessible for all Marylanders."

Since March, however, when the bonus plan was announced, it has served as a focal point for opposition. Chief Executive William L. Jews was to pocket $39.4 million in bonuses, severance pay and tax benefits the day the CareFirst sale went through.

Robert R. Neall, a former state senator who lost his re-election bid in November after helping to lead opposition to the conversion and sale in last year's legislative session, said last night that dropping the bonuses seemed to be "an attempt to take the stuff that got the most negative press and remove that, and see if they could salvage the deal."

A consultant to Larsen, Jay Angoff, former Missouri insurance commissioner, issued a report in November condemning the bonuses as excessive and illegal. Most of the bonus money (for example, nearly $26 million of Jews' $39.4 million) violated a 1998 Maryland law governing Blue Cross conversions and a 2002 law banning bonuses.

The legal portion of the money, Angoff said, was deferred compensation or vested pension that the executives would have received without the deal. The rest, however, would have been triggered partly by the deal and partly if the executive chose to leave at the time of the "change of control."

Daniel Altobello, CareFirst's board chairman, said at public hearings last month that the board did not plan to revise its application until after Larsen rules. However, WellPoint has said it wants to make revisions to comply with Maryland law.

CareFirst had argued previously that the bonuses were legal under the 1998 law. Jews had said the 2002 law should not apply retroactively, since it was passed after CareFirst's board approved the bonus plan.

However, the attorney general's office had issued opinions that laws passed in 2002 after the deal was announced would apply as state officials reviewed the deal.

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