WellPoint CEO felt it had to agree to CareFirst bonuses

Schaeffer thought sale of company hinged on executive package

February 01, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

The California insurer trying to buy CareFirst BlueCross BlueShield believed the tens of millions of dollars in sale-related bonuses for CareFirst executives were inappropriate but felt it had little choice but to agree to them, its chief executive testified yesterday.

"At the end, it was sort of a take-it-or-leave-it deal," said Leonard D. Schaeffer, CEO of WellPoint Health Networks Inc.

Although WellPoint has made several other acquisitions, Schaeffer said, "We never had one of these" bonus plans.

His testimony came at hearings conducted by Insurance Commissioner Steven B. Larsen, who will decide this month whether the sale of Maryland's largest nonprofit health insurer is in the public interest.

Larsen also sharply questioned CareFirst's board chairman, Daniel Altobello, about a role played by an outside lawyer, Isaac M. Neuberger.

Larsen said Neuberger had represented CareFirst CEO William L. Jews in 1998, negotiating with CareFirst's board over Jews' employment contract, then represented CareFirst in 2001 during talks over selling the company.

"It at least seemed to me that was a conflict of interest," Larsen said.

Altobello said he was unaware of Neuberger's work for CareFirst, and "he was certainly not presenting anything to the board." Neuberger did not return several telephone calls seeking comment.

Jews said previously during a sworn deposition that Neuberger was working for the company in 2001, but not for Jews personally, as CareFirst talked to potential buyers about conditions of a sale, including jobs and pay for CareFirst's executives.

As part of a sale agreement in November 2001, WellPoint agreed to bonuses that CareFirst's board had negotiated with Jews and other top managers.

A consultant to Larsen who studied those agreements said that nearly $70 million of the potential $119.7 million in bonuses, severance pay and tax benefits was illegal in Maryland.

State law forbids private enrichment when a Blue Cross insurer converts from nonprofit to for-profit, as CareFirst is trying to do in its proposed sale to WellPoint for $1.37 billion.

In a revised sale agreement negotiated on the eve of Larsen's final round of hearings, the executive bonus plan was dropped. But the revised deal still allows CareFirst executives to collect retention bonuses of double their annual compensation (triple for Jews) if they stay with WellPoint for two years after an acquisition, or if they are fired.

Schaeffer, the WellPoint CEO, testified that his company agreed with Larsen's consultant on the bonus issue.

Schaeffer was asked in a later interview to elaborate on his comment that the bonuses had been a "take-it-or-leave-it" part of the original sales agreement.

"At a certain point in negotiations, each side has a position. In the end, this was part of their transaction," he said.

He said in the interview that the retention bonuses in the revised agreement were "very similar to what is now in place in Missouri," where CareFirst acquired a Blue Cross plan exactly a year ago.

During the interview and in his testimony, he said the retention payments were offered in part to persuade CareFirst executives to waive their earlier bonus and severance agreements.

"This is the best outcome we can have in this situation, and I don't think there's anything in it that's egregious," he said of the newest compensation plan. "If this were not a negotiation but a top-down resolution, it might be a little different."

Larsen has asked his consultant to review the revised compensation agreements, and testimony on that issue is expected next week.

In an interview, Larsen said he wants to review Altobello's testimony - which he said was "obviously candid but also a surprise" - before deciding whether to pursue Neuberger's role further.

He said billing records showed Neuberger spent extensive time meeting with CareFirst's executives, investment bankers and other lawyers as the insurer's sale was being negotiated. Larsen, who reviewed Neuberger's billing records, estimated that CareFirst paid Neuberger about $300,000 in 2001.

"The chairman of the board did not believe he [Neuburger] was working on behalf of CareFirst, the corporation, but that doesn't necessarily mean he wasn't," Larsen said. "We also know as a fact he was negotiating on Bill's behalf against the company in '98."

David Wolf, a CareFirst executive vice president who was involved in the sale negotiations, said yesterday after the hearing that Neuberger's firm had done legal work for him in the past, but was not doing any in 2001 when it was representing CareFirst.

Thomas M. Geiser, WellPoint's chief counsel, said no one from WellPoint had dealt with Neuberger during the negotiations. Neuberger did attend some meetings between representatives of CareFirst and Trigon Inc., another bidder, according to previous testimony.

Besides quizzing Altobello on Neuberger, Larsen questioned the board chairman aggressively on whether the board fully discussed the implications of changing its nonprofit mission.

While a number of issues in the sale bargaining - such as headquarters location and management structure - were set out in board minutes and presentations in "excruciating detail," Larsen noted, he saw no discussion of change in mission.

"There is not a perfect transcript of every [board] committee meeting," Altobello replied, but "in the course of debate and discussion, these matters were properly aired."

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