CareFirst decision expected Thursday

A `yes' is likely to come with conditions, and a `no' just might mean `maybe'

Larsen in the spotlight

February 16, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

After a 13-month review encompassing eight public comment sessions with about 250 speakers, 10 subpoenas, 15 days of formal hearings, 247 exhibits and 86,911 pages of documents, Insurance Commissioner Steven B. Larsen is scheduled to announce his decision Thursday on CareFirst BlueCross BlueShield's plan to sell itself to a California insurer.

Virtually no one expects Larsen to approve, as is, the deal on the table: that CareFirst, nonprofit since it was created in 1937, would convert to for-profit operation and be bought by WellPoint Health Networks Inc. for $1.37 billion.

The question, however, is not so much whether Larsen will say yes or no. Rather, it's whether his ruling, which he has indicated will be exhaustive, will have enough wiggle room to allow the deal to be salvaged.

If Larsen approves the deal, it is almost certain to be with a set of conditions attached - a "yes, providing." On the other hand, if Larsen turns the deal down, some say, he could do so in a manner that in effect would be an approval with conditions - a "no, unless" scenario.

"Larsen's got to make it look like he pressed this thing to the wall and protected various constituencies," said Clifford A. Hewitt, vice president for health care services equity research at Legg Mason Wood Walker. "He's got to come back with some deal points."

Conditional approval would likely address issues that have become hot spots in the often contentious debate over CareFirst's future.

While CareFirst and WellPoint investment bankers have defended the $1.37 billion purchase price, Larsen is expected to specify a higher figure. Investment bankers hired by Larsen and by District of Columbia regulators have pegged the value of CareFirst at $1.7 billion to $1.8 billion.

Larsen also is likely to address how much of any sale price should go to Maryland. A "snapshot" in 1998, when CareFirst was created by the combination of the Maryland and District of Columbia Blue Cross plans, indicates that Maryland should get about 60 percent of the money, which is earmarked for a health-related foundation. The adviser to the district regulators, however, noting the Washington plan has been much more profitable since the consolidation, has said Maryland should get only 28 percent.

Other conditions attached to a Larsen approval could include various forms of consumer protections and an order striking retention bonuses for CareFirst executives, which have been criticized by another consultant to Larsen. (A much more lavish set of bonuses was already scrapped.)

Shane Pendergrass, a Howard County delegate who opposes the conversion, said she expects Larsen to turn the deal down, but, "If he doesn't, the price will go up, and he will fix the problems with the bonuses."

Even David M. Funk, the lawyer for CareFirst and WellPoint in the regulatory review, concedes that Larsen imposed a number of conditions when he approved the much less controversial combination Maryland-D.C. combination, including a change in the board structure to have less overlap between the Maryland and D.C. directors.

"Using history as a guide," Funk said, "it would not surprise me if he did impose conditions, but I would hope that he would not." Funk said that his clients have met all legal tests for approval.

An apparent rejection could also leave room for CareFirst and WellPoint to reconstruct the deal so it passes muster.

"He [Larsen] could say, `It's possible to do a deal that's in the public interest, but this deal doesn't meet the standard.' He would then explain how to meet the standard - a blueprint for future endeavors," said W. Minor Carter, a lobbyist for Maryland Cares!, a coalition of groups opposed to the CareFirst conversion and sale.

And, Carter continued, the difference between approval-with-conditions and rejection-with-roadmap is "more semantics than substance."

In either case, CareFirst and WellPoint would have to decide whether they were willing to do what Larsen said, then show some evidence of compliance.

There could be conditions that are relatively easy to meet - analysts, for instance, expect WellPoint would pay a somewhat higher price, although there's a point at which it would walk away from the deal. There could also be conditions unacceptable to WellPoint or CareFirst. WellPoint typically is wary of restrictions on employment, product offerings or pricing that would limit its ability to compete with other insurers in the market.

In that sense, a "yes, providing" ruling, depending on the conditions attached, could kill the deal. And a "no, unless" decision, if it spells out steps to make the deal acceptable, could allow the sale to proceed more or less on schedule, with regulatory review in Washington and Delaware proceeding while CareFirst and WellPoint work to bring it into compliance with Maryland.

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