Ex-CEO's severance cut

Jews allowed half of $18 million CareFirst package

July 15, 2008|By Laura Smitherman and Paul Adams | Laura Smitherman and Paul Adams,Sun reporters

William L. Jews is entitled to only half of his $18 million severance package from CareFirst BlueCross BlueShield, Maryland's top insurance regulator said yesterday in a ruling that accuses the former chief executive of abandoning the insurer's nonprofit mission.

In a 65-page order, state Insurance Commissioner Ralph S. Tyler wrote that CareFirst's board had violated a 2003 state law requiring executive pay for the nonprofit to meet a "fair and reasonable" standard. The decision marks the first test of the law, which was passed by legislators furious with Jews for trying to convert CareFirst to a for-profit entity and sell it to a California company.

The proposed deal to sell CareFirst included $39 million in potential bonuses for Jews and led to sharp criticism over the insurer's pay to executives, which helped to scuttle the deal. While executive pay has skyrocketed on Wall Street, lawmakers and regulators have argued that CareFirst should be held to a different standard. The company is the region's largest insurer, but its nonprofit status means that its mission should be to provide affordable and accessible health insurance, they contend.

"CareFirst is not just another private company, the board of which is more-or-less free to pay its CEO whatever it deems appropriate," Tyler said in the order. He called CareFirst's mission a "noble" one that "is not advanced by paying $18 million to its departing CEO."

Under Tyler's order, Jews is entitled to nearly $9 million of the $18 million severance package that CareFirst's board approved before the chief executive's departure in 2006. Jews, who says he stepped down rather than fight upset board members, has received $2.3 million in salary and other benefits since his departure. That amount, plus interest, will be deducted from the total.

Jeffery W. Valentine, a CareFirst spokesman, said the company was reviewing the order and had not determined what, if any, action to take. The company could appeal the decision to state circuit court, where the meaning of the 2003 statute has never been established.

Jews could not be reached for comment, and his attorney, Andrew J. Graham, did not return phone calls.

Tyler's ruling drew praise from lawmakers who had been critical of Jews and from corners of the health care community that had fought to preserve CareFirst's nonprofit mission in the belief that Maryland's health system would be ill-served by a corporation driven by profits and returns to shareholders.

"It sends a message about the state of Maryland that we value a not-for-profit culture, that we're not trying to enrich people based on people's health needs," said Del. Shane Pendergrass, a Howard County Democrat and vice chairman of the Health and Government Operations Committee. "I have said consistently that no one is worth $18 million."

Nancy Fiedler, a spokeswoman for the Maryland Hospital Association, said the compensation not paid out to Jews could be used to help the community. CareFirst BlueCross BlueShield agreed this year to fund a $7 million annual program to help seniors bridge a coverage gap under Medicare for prescription drugs.

Tyler's decision in the case follows 4 1/2 days of hearings in late April that yielded a transcript of 1,400 pages and 200 exhibits. It comes nearly two years after Jews left the company - he says he was told that board members were concerned about lingering legislative and news media attention stemming from the 2003 controversies.

Jews is widely credited with helping to shore up CareFirst's finances. After becoming a hospital CEO before turning 30 years old, he was recruited by what was then Blue Cross Blue Shield of Maryland. The company had been under scrutiny for mismanagement and lavish spending and had a scant $25 million reserve. Jews set about reorganizing the company and engineered a series of mergers and other initiatives that led to the creation of CareFirst.

The company's membership more than doubled, and its reserve grew to $1 billion by the time of the proposed sale. Jews said that maintaining a healthy reserve was important to keeping insurance rates stable and ensuring that the company had enough cash for capital improvements.

Then CareFirst sought permission to convert to for-profit operation and sell the company for $1.3 billion to WellPoint Health Networks Inc. Objections from regulators and consumers centered on whether such conversions were in the public interest. Steven B. Larsen, who was insurance commissioner at the time, eventually blocked the transaction largely because of benefits for Jews and other CareFirst executives built into the deal.

Tyler's decision calls into question the performance-based salary and bonus system the insurer uses to reward executives and associates. CareFirst argued that Jews' pay was in line with similar nonprofit Blues plans and that the $18 million was earned pursuant to a valid employment contract. The company also noted that CareFirst's board, which was reconstituted after the 2003 legislation was enacted, had approved it after hiring consultants to review the terms.

Attorneys for the state said Jews' compensation was flawed from the start because it was linked to CareFirst's profits, giving executives incentive to deviate from the insurer's nonprofit mission.



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