May 06, 2003|By M. William Salganik | M. William Salganik,SUN STAFF
Less than a month after saying it wouldn't oppose legislation replacing some of its board members and locking its nonprofit mission into law, CareFirst BlueCross BlueShield has sent the Ehrlich administration a legal memo arguing that the legislation is unconstitutional.
Gov. Robert L. Ehrlich Jr. is to decide this month whether to sign or veto the legislation.
"By attempting to replace the CareFirst board and usurp its authority to appoint new board members," said the memo by Piper Rudnick, a law firm advising CareFirst, "the General Assembly has augured a fundamental change in a private corporation."
This, Piper wrote, violates the U.S. and Maryland constitutions, including the state provision that "the General Assembly shall enact no law authorizing private property to be taken for public use, without just compensation."
State officials noted that CareFirst had not raised such objections during legislative hearings on the bill. Though CareFirst's representatives proposed amendments to draft bills, the insurer didn't oppose the reform effort.
For example, in amendments it submitted in March, CareFirst made no change in a draft provision that would have replaced all 12 Maryland board members.
CareFirst expressed enough comfort with the board changes and other proposed provisions that, in late March, Del. John Adams Hurson, a Montgomery County Democrat who is chairman of the House Health and Government Operations Committee, said, "We're on the verge of a love-in here."
"It is not pleasant to see people who were in the room and at the table turning around and saying something different from what they said to us," said Del. Shane Pendergrass, the Howard County Democrat who sponsored the House version of the legislation.
In a cover letter that was sent with the memo last month, William L. Jews, CareFirst's president and chief executive officer, didn't specifically ask for a veto. Rather, in the letter to Kenneth H. Masters, Ehrlich's chief legislative officer, Jews wrote that he hoped to meet soon "to answer any questions and to try to put this legislation in some kind of reasonable perspective."
Masters said yesterday that he is willing to meet with CareFirst and also with the Maryland Hospital Association, which wrote to the governor asking him to sign the legislation. Masters said Ehrlich does not plan to meet directly with any of the advocates.
A CareFirst spokesman, Jeffery W. Valentine, said yesterday that the Piper memo was prepared at the request of the CareFirst board after the legislature had acted. "The board has not yet made a decision as to whether to seek the governor's veto of these bills," Valentine said.
He said the memo had initially been forwarded by Piper, not CareFirst, at the request of the governor's staff.
Piper Rudnick is the law firm that advised CareFirst's board as it considered converting to for-profit operation and selling the company. That plan, announced in November 2001, was blocked in March by state Insurance Commissioner Steven B. Larsen. In his decision, he sharply criticized CareFirst's board for ignoring its nonprofit mission and approving large deal-related bonuses for CareFirst's executives.
After Larsen's ruling, both houses of the legislature unanimously passed bills to prohibit CareFirst from converting for at least five years, limit board salaries and order the replacement of 10 of CareFirst's 21 board members by December. Replacement board members would be selected by a nominating committee made up of members appointed by Ehrlich and legislative leaders.
Currently, the board selects new members as terms expire. If the legislation becomes law, that process would resume once the one-time replacement had been completed. The bills would, however, accelerate the expiration of the terms of all the board members.
A veto of the legislation would leave the current board in place and block the other reform provisions. The General Assembly could override the veto or pass different reform legislation next year.
Larsen, who pushed the legislature to force board changes at CareFirst, said yesterday of the Piper assertions, "Prior opinions of the attorney general strongly suggest that there are no constitutional problems with this bill. The broad issue about whether you can regulate the company, which includes oversight of the board, is a pretty settled issue."
The Piper memo is another complication as Ehrlich considers whether to sign the bills into law. Also, the national Blue Cross and Blue Shield Association has said that the change in the board and the state's involvement in naming new members appears to violate its rules that a Blue Cross plan cannot by controlled by an outside entity.
If the control rule is violated, the association has said, it can prevent CareFirst from using the valuable cross-and-shield trademark.
