The management of CareFirst BlueCross BlueShield was so intent on converting the company to for-profit operation that it created a process that thwarted its ambitions.
In ruling against the insurer's application to sell itself to WellPoint Health Networks Inc., state Insurance Commissioner Steven B. Larsen found that in seeking to peddle the company - and to cash in personally - CareFirst executives tilted the process, causing it to fail.
"A deal like this might be the best result possible for the public," said Walter Smith, executive director of the D.C. Appleseed Center for Law and Justice, "but we'll never know that because these guys so misplayed it."
Smith, whose advocacy group followed the application process, said he had hoped the regulatory review would have examined the impact on consumers of converting the nonprofit insurer to for-profit, so it could be sold to WellPoint.
"(But) we never got to that because of their hubris and greed," he said, leading the deal to be rejected on procedural grounds. "It's a real shame."
W. Minor Carter, lobbyist for the group Maryland Cares!, which opposed the deal, said CareFirst's plans were thwarted because a handful of top executives "got too greedy and overreached."
David M. Funk, the lead lawyer for CareFirst during the regulatory review, defended CareFirst's board and executives yesterday.
"I think they went through a very careful process," he said. "I disagree with the commissioner."
CareFirst has 30 days to decide whether to file a court appeal. The General Assembly also has the power to reverse Larsen's ruling, but key leaders have indicated the focus has shifted to making CareFirst stick to its nonprofit mission.
Larsen's report - 200 pages with another 150 pages of exhibits and appendices - offers a number of frank criticisms.
One of the report's more stinging conclusions was: "There is substantial and credible evidence that the decisions to convert and be acquired were inappropriately influenced by the prospect of large payouts for some individuals."
But it also derives much of its force from the amassing of detail; the 200 pages are peppered with 550 footnotes.
Larsen's report drew on tens of thousands of pages of board minutes, memos, consultant reports and other documents generated as CareFirst weighed, over a period of years, whether to enter the for-profit world and sell the company.
It provides an unusual behind-the-scenes look at executives, board members and consultants putting a deal together.
Almost from the time William L. Jews became chief executive officer of CareFirst's predecessor in 1993, management began "efforts at changing the essential nature" of the company, the report said.
The report noted that the health insurer had been a nonprofit since it was founded in 1937, with the mission of providing medical coverage "at minimal cost and expense."
But in 1994, Jews submitted a plan to move the company's HMOs into a for-profit subsidiary, only to have it rejected by the insurance commissioner at the time.
Management didn't pursue that plan immediately, but over time, Larsen said, CareFirst "assumed all the operating characteristics and corporate goals and mission of a for-profit company."
Management memos referred to plans to "exit unprofitable segments" and adopt "aggressive rate-filing strategies."
Also, Larsen found, "The board did not question the action by management to abandon its corporate mission and took no action to prevent it."
Funk, the CareFirst lawyer, said the insurer was doing what it needed to do to survive.
"I think one needs to look at where Blue Cross and Blue Shield of Maryland was in the early '90s. By the commissioner's admission, it was nearly insolvent" and needed to change its operating methods to "be financially strong and provide the best insurance they could for their subscribers," he said.
When CareFirst began a strategic planning process early in 1999, Larsen found: "It is evident that CareFirst had pre-determined one element of its strategic plan even before hiring its consultant: it would seek to maintain dominance and build scale through 'regional acquisitions and mergers.' "
Accenture, which was hired as the consultant later that year, told the board: "If the opportunity to convert and go public presents itself ... seize it."
Funk disagreed with Larsen's analysis, saying the board was doing what it needed to do:
"In 1999, the company had returned to strength, and it was their job to create a plan for the future that would maintain that strength." The board had "multiple discussions" before deciding on its course, he added.
Once the decision was made to sell the company, Larsen reported, management initially favored a sale to Virginia-based Trigon Inc., noting "synergies" in Northern Virginia, where Trigon's territory adjoins CareFirst's. But as talks proceeded, CareFirst and Trigon could not agree on a management structure - in particular whether Jews would be CEO of the merged company.
Larsen wrote that as "the prevailing winds shifted," in presentations to the board:
"CareFirst management performed a complete turn of 180 degrees, and now what had been perceived as significant advantages with Trigon, such as geographic synergies, were now viewed as colossal liabilities, leading to what Mr. Jews predicted as a possible cut of up to a third of CareFirst's work force."
But negotiations continued, with Trigon attempting to craft a management structure that would please Jews.
"Trigon was suddenly placed back on the radar screen, and little attention was paid to what in April was a fatal disability," Larsen wrote. "When, once again, Trigon was out of favor and WellPoint was back in favor, the jobs issue was resurrected as a key reason why Trigon was not selected."
Larsen reported that it was "evident that CareFirst management focused early in the process on the possibility that the deal could result in large payouts."
Early in 2001, a compensation consultant sent Jews a report comparing his pay to that of the CEOs at Trigon and WellPoint, and spelling out deal-related bonuses when WellPoint had acquired a Blue Cross plan (already converted to for-profit status) in Georgia.
When Trigon's top executives met with CareFirst's management at that time, among other advantages of the deal - ranging from large goals such as sales growth to the mundane such as "mailroom consolidation" - an exhibit used by Trigon presented its "incentive philosophy." It listed opportunities for executive bonuses and stock ownership, promising "new winners at new levels of wealth."
As the WellPoint sale was being wrapped up, CareFirst's board adopted a deal-related bonus plan for its executives. A consultant to Larsen estimated the value of the bonuses, severance payments and tax benefits at $119.7 million, including $39.4 million for Jews. He said the payouts were illegal, and they were later modified.
Larsen concluded that the negotiations with Trigon and WellPoint were structured to end in a tie, allowing management and the board to choose on considerations other than price.
"The process was dominated by the use of selection factors that largely advanced the interests of the management team, rather than the company or more particularly the insureds," Larsen wrote.
Funk said he disagreed with Larsen's characterization of the auction. "Both Trigon and WellPoint were asked to improve their proposals," he said. In the end, Funk said, "all the commissioners' concerns could have been addressed by sending the parties back to the bargaining table."
Then, he said, the deal could have been modified and "the citizens of Maryland could still have secured the benefit of the purchase price" $1.37 billion, which would go to health-related foundations. But Larsen, in his press conference announcing the decision, said, "We concluded the transaction was not in the public interest and could not be rehabilitated by the imposition of terms and conditions." |
