A healthful decision made in rejecting CareFirst deal

This Just In...

March 07, 2003|By DAN RODRICKS

THAT BIG SPLASH we heard the other day was Maryland Insurance Commissioner Steven Larsen throwing the $40 million potted plant overboard. We should thank Ensign Larsen for being audacious in the face of audacity -- CareFirst BlueCross BlueShield's gross attempt to become a for-profit insurer, to sell itself and create a multimillion-dollar bonanza for its top executives. To the disappointment of no one I know -- I don't golf at Caves with Bill Jews -- Larsen rejected the proposed $1.37 billion sale of CareFirst, Maryland's leading nonprofit health insurer, to the publicly traded WellPoint Health Networks Inc. of California. Next to the backroom dealing over slots in Annapolis, this was Maryland's biggest pee-yew of the last year.

Part of what Larsen rejected,ofcourse,wasthatbig-but-somewha t-diminished-in-the-face-of-howling-public-protest bonus package for CareFirst executives, Jews, the CEO, foremost among them. Originally, Jews was supposed to get close to $40 million in "merger incentives" and "retention bonuses." He actually claimed to have had nothing to do with that idea. When it came to boardroom discussions of bonuses, Jews said, "I was, in essence, a potted plant."

Yeah, a $40 million potted plant.

But our insurance commissioner and his consultant, Jay Angoff, made like Henry Fonda and Jack Lemmon in Mister Roberts, climbed to the bridge deck and threw the despotic captain's beloved potted plant overboard. The CareFirst bonuses violate state law, they said. Splash!

Don't we have enough of this stuff in corporate America without the not-for-profits diving in the trough?

What part of "nonprofit" don't these people understand?

CareFirst is not a charity. But it has, relative to other entities in the complex realm of health coverage, a downright noble mission -- to provide health insurance "at minimum cost and expense." The men and women who run CareFirst have a responsibility to keep it in good financial shape and serve its customers well.

They don't have what executives of a company like WellPoint have -- responsibility to return a profit to shareholders.

Making a profit in this field, Larsen wrote in his report, requires "not only that rates be sufficient to cover expenses but that rates be established to maximize the profit margin of the product in question."

And that's where CareFirst went -- toward the profits side of the ledger, a change in mission likely to make the insurer attractive for sale.

So here we come to one of the most scathing parts of Larsen's report: "In changing its operations to act like a for-profit, CareFirst also adopted the goals and missions of a for-profit company."

Management, Larsen said, started making decisions to fatten up the bottom line a few years ago. By now, he said, "the management of CareFirst sees little distinction of consequence between a nonprofit health service plan and a for-profit insurer."

Minutes of board meetings, Larsen added, "demonstrate that, in making decisions regarding pricing, or even decisions to continue to offer certain products, whether or not the product was `profitable' was the key, and often the only determinant."

Consider, as one example, CareFirst's decision to merge its FreeState HMO into a new HMO, called BlueChoice.

"The problems arose," Larsen reported, "when CareFirst made a decision to require the HMO members of FreeState to be `reunderwritten' to qualify for BlueChoice. As a consequence, thousands of FreeState HMO members who were healthy when they first joined FreeState and had `passed' medical underwriting had since developed medical conditions that caused them not to qualify for BlueChoice."

Some of these people had cancer, high blood pressure, diabetes and hearing loss, Larsen said.

BlueChoice had more stringent underwriting standards. "As a result, some FreeState individuals were not offered policies with BlueChoice, some qualified for policies only with `exclusionary riders' that excluded coverage for a particular medical condition, and some were only offered coverage with high deductibles."

Nice.

"CareFirst broke no law in pursuing this course of action," Larsen pointed out. "However, what was being accomplished through the withdrawal of one CareFirst HMO, FreeState, from the market and the routing of `preferable' business to another CareFirst HMO, BlueChoice, was the shedding of the less healthy FreeState members. ...

"This episode illustrated how the `profitability' of BlueChoice outweighed the significant negative consequences to thousands of FreeState enrollees. ... Indeed, it is hard to imagine a more profit-oriented action taken at the expense of a relatively small but vulnerable population of sicker CareFirst members."

Splash!

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