CareFirst sale still is facing many hurdles

Dropping bonus payments doesn't mean clear sailing

Important questions remain

Is sale of health insurer in the public interest?

January 26, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

The controversial bonuses are gone, but plenty of hurdles remain.

CareFirst BlueCross BlueShield and the company that wants to buy it, WellPoint Health Networks Inc., announced last week that they were junking $70 million in deal-related bonuses and severance pay for CareFirst executives that had been called illegal by a consultant to the insurance commissioner.

CareFirst's plan to convert from a nonprofit to for-profit operation and sell itself to WellPoint for $1.37 billion gets a final public review this week and next from Maryland Insurance Commissioner Steven B. Larsen.

"The bonuses were probably the most visible negative element, but not the most important," said Calvin M. Pierson, president of the Maryland Hospital Association and a vigorous opponent of the deal.

Beyond the bonuses, Larsen has to rule on whether the deal, on balance, is in the public interest.

Among the considerations: Are there benefits in having the state's largest insurer be nonprofit and local?

If so, how do those balance against any advantages a much bigger company could bring and the hundreds of millions of dollars Maryland would get to finance a foundation or public programs to expand insurance coverage?

Larsen's decision - which is subject to General Assembly review - is expected Feb. 20. His ruling is likely to carry a lot of weight in Annapolis, with a rejection seen as almost certain to kill the deal.

"The legislature is waiting patiently for Steve to make his decision," said Del. John Adams Hurson, the Montgomery County Democrat who heads the House Health and Government Operations Committee. "If he approves the deal, there will be efforts to overturn that. If he turns it down, there is not a legislative solution that will permit it."

Last week's changes in the deal also introduced a greater chance of competing bids for CareFirst. WellPoint agreed to waive its $37.5 million breakup fee for 60 days if CareFirst accepts a higher offer from another company.

Analysts said Anthem Inc., an Indiana company that has competed with California-based WellPoint in buying up Blue Cross plans, is a potential bidder, although a bid might not come until after Larsen's ruling.

Finally, if all the Maryland authorities sign off on the WellPoint-CareFirst deal, it faces reviews in Delaware and the District of Columbia, where CareFirst also operates.

Next up - and clearly crucial - is Larsen's review.

The insurance commissioner already has held six regional public forums and eight days of formal hearings - and reviewed, by his estimate, "approximately 85,911 pages of documents."

Seven more full days of hearings are on tap this week and next.

So far, Larsen has asked a lot of tough questions but given little indication of how he's leaning, with the exception of a strong hint that the original executive payouts would have led him to reject the deal.

There will still be a review to see if the revised executive pay plan - CareFirst executives still stand to collect retention bonuses if they stay two years under WellPoint's ownership - is legal.

The 1998 law that governs such conversions spells out a number of other issues for the commissioner to consider. These include whether the deal is fair to CareFirst's nearly 2 million Maryland policyholders, whether it will reduce availability and accessibility of health insurance in the state, and whether CareFirst's board followed proper procedures in negotiating the sale.

Those three concerns are slated to be the main topics over the next two weeks, although there will also be testimony on the new executive pay arrangements and a review of CareFirst's contract dispute with Children's National Medical Center.

David M. Funk, a lawyer for CareFirst and WellPoint, said a batch of consultant reports released last week show that the deal is in the public interest and "demonstrate that WellPoint is the best strategic partner that CareFirst could find."

The consultants, who will testify at the hearings, generally predicted that a WellPoint takeover would have only modest effects on cost and quality of heath coverage.

The experts said the health foundation that is to be financed from the proceeds of the sale could help with a number of community medical needs, but, compared with the overall gaps in Maryland's health care system, should be viewed as "a supplemental problem-solving resource."

Opponents, of course, read the reports differently from Funk. "We believe the studies contain arguments we've made - that CareFirst doesn't need to convert, and that it would not be in the public interest," said Pierson of the hospital association.

In particular, he said, WellPoint failed to meet its burden of proof because it declined to provide detailed information about some of its business practices, such as how it measures health risks in deciding whether to issue individual policies.

It's also unclear how much the last-minute changes in the deal might influence already skeptical state lawmakers.

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