Insurance chief bars $1.37 billion sale of CareFirst

Md. commissioner finds deal loaded for executives

March 06, 2003|By M. William Salganik | M. William Salganik,SUN STAFF

In a stinging rebuke to the top management and board of directors of CareFirst BlueCross BlueShield, Maryland Insurance Commissioner Steven B. Larsen yesterday rejected the insurer's plan to convert to for-profit operation and sell itself.

Larsen said the process CareFirst used to develop the $1.37 billion deal was deeply flawed and violated Maryland law. An executive bonus plan, he said in a news conference, was "a central consideration in this deal" and amounted to "essentially a ransom a bidder would have to pay for the right to purchase the company."

He said the CareFirst board failed to consider its obligations as a nonprofit, that consultants used by the insurer had apparent conflicts of interest, that CareFirst hadn't negotiated to get the best price, that the company didn't have a business need to convert, and that would-be acquirer WellPoint Health Networks Inc. had refused to produce "critical" documents that would have allowed him to judge consumer impact.

Both CareFirst and California-based WellPoint said they need to study the rejection before deciding how to proceed, but the sweep and firmness of Larsen's ruling would appear to spell the end of the current deal, unless a court overturns it.

"It's about as dead as it can be," said Clifford A. Hewitt, a health care analyst at Legg Mason Wood Walker in Baltimore. "I think this is: `Go back to square one.'"

Ken Ferber, a spokesman for WellPoint, said Larsen "made it very clear the current environment in Maryland is just not conducive to a conversion of CareFirst."

Daniel Altobello, CareFirst's board chairman, said he thought it would take "a minimum of a couple of weeks" for CareFirst to analyze the report and decide how to proceed. He said the company's options include "a range of things - from nothing, to [court] appeal, to restructuring the deal."

Eric Veiel, a health care analyst at Deutsche Bank Securities in Baltimore, said, "You can appeal this, but I don't see a lot of room. I don't see a court forcing this deal to get done."

Larsen's criticism of CareFirst touched off calls by advocates and legislators for the board and management to be reshaped, and perhaps even replaced. Legislative leaders were making plans yesterday to have Larsen present his findings Monday to a joint meeting of several House and Senate committees. The General Assembly has 90 days in which it could reverse Larsen's decision, but key lawmakers said there's no chance that would happen.

Some lawmakers also were beginning to work on legislation meant to ensure CareFirst sticks to the nonprofit mission it has had since its creation in 1937.

Larsen said he would also examine whether he could take regulatory action against management and the board. Asked whether he might act as well, Attorney General J. Joseph Curran said, "I really am not prepared to answer that right now." He said an earlier case had limited the action he could take against Blue Cross executives.

Altobello, however, said the board didn't think any changes were needed in structure or personnel. He defended its actions, saying, "We were looking constantly at how this would affect all our stakeholders, and that's looking after your mission.

"I think the board did a very professional job, and I serve on a lot of boards and have been involved in a lot of mergers."

William L. Jews, CareFirst's chief executive officer, was not available for comment.

CareFirst is the largest health insurer in the region. Based in Owings Mills, it operates the Blue Cross plans in the District of Columbia and Delaware as well as in Maryland, insuring more than 3 million people.

WellPoint is the publicly traded company that resulted when California Blue Cross went for-profit. It has bought Blues plans in Georgia and Missouri, as well as several non-Blues insurance companies.

Delaware and District of Columbia regulators said they were unsure whether they would proceed until they hear from WellPoint and CareFirst.

After CareFirst spent two years developing a strategic plan and negotiating with suitors, the two announced in November 2001 that WellPoint would buy CareFirst for $1.3 billion. Jews and his executive team were to become the management of a WellPoint regional subsidiary that would continue to be based in Owings Mills.

CareFirst said it needed to be part of a larger, for-profit company to get access to money it needed to buy new technology and develop new products.

The purchase price would have gone to health foundations or similar public purposes in Maryland and the other jurisdictions the insurer serves. CareFirst argued that this was a major benefit of the transaction - money that could generate tens of millions of dollars a year to provide coverage for the uninsured, subsidize clinics or address other health needs.

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