The 10 top executives of the region's largest health insurer stand to collect $ 47.9 million in severance benefits if state regulators allow the nonprofit CareFirst BlueCross BlueShield to be acquired by for-profit WellPoint Health Networks Inc.
Severance packages, including payroll and excise taxes, would cost $ 78 million if all 10 left after a merger, according to WellPoint and a new report from a financial consultant to the Maryland insurance commissioner.
Among CareFirst officials, Chief Executive Officer William L. Jews would receive the most -- $ 18.6 million in after-tax benefits -- while others would net $ 1 million to $ 6.1 million, according to documents and testimony provided to the commissioner.
The disclosures have revived concerns about whether key players at CareFirst are putting their personal enrichment before the best interests of the 3.2 million subscribers of CareFirst in the District and three states.
"We have believed for years that CareFirst senior management was cooking up a scheme to sell the company on a bargain basis to anyone who would agree to make them rich," said A.G. Newmyer III, chairman of the Fair Care Foundation, a nonprofit group that objects to the merger.
A financial consultant hired by Maryland officials concluded that the nonprofit company is worth more than the merger offer and said that California-based WellPoint should pay $ 1.35 billion to $ 2.25 billion to acquire CareFirst instead of the $ 1.3 billion it has offered. Other estimates are due soon, and they could bump the recommended price higher still.
Insurance commissioners in Maryland and the District are conducting detailed reviews of the proposal to determine whether it is in the public interest. If the transaction is permitted, the proceeds of the sale would be distributed to separate foundations to be created in Maryland, Virginia, the District and Delaware to address community health needs.
CareFirst spokesmen, asked for comment, cited a document prepared by the company's executive compensation consultant, the Hay Group. That report said the severance plans are similar to those at corporations of like size and are in the public interest because they keep leaders in place and productive during times of uncertainty and insecurity.
But health care economist Carl J. Schramm, former president of the Health Insurance Association of America, said the nonprofit nature of CareFirst may mean that the board of directors overstepped its authority in approving the severance compensation.
"This is not their property to dispose of as if it were a for-profit company," he said. "In a nonprofit transaction, the magnitude of these severance arrangements would be extraordinary. I think they are reprehensible.
"We have been struggling with the problem of health care costs for three decades," he added. "If premiums were being inflated or will have to be increased to cover tens of millions of dollars of severance payments, this is nothing less than taking premiums from working men and women under false pretenses."
Erik Dryburgh, a San Francisco lawyer who specializes in representing nonprofits and philanthropists, said Jews's severance package is extraordinary. "This is one of the largest I know of for a nonprofit," he said. "Whether it is the largest, that's a little harder to call."
An earlier issue, merger incentive bonuses, was raised by the Maryland General Assembly in the spring, and lawmakers banned $ 41.6 million worth of bonuses and enacted financial restrictions to make it more difficult for WellPoint to purchase CareFirst.
The legislation did not address the executives' severance arrangements, though, which CareFirst officials said were adopted in several actions from 1998 to 2001. The WellPoint sale was proposed in November 2001.
Critics have said the merger could disrupt fragile health care systems across the region that do business with CareFirst-owned health plans.
Walter A. Smith, executive director of D.C. Appleseed Center, a nonprofit public interest group that is a participant in the District's review of the merger proposal, said the severance packages must be thoroughly analyzed by D.C. Insurance Commissioner Lawrence H. Mirel before the merger may be approved. Mirel and the city's corporation counsel are retaining financial experts who will include the severance deals in their analyses.
"To the extent that excessive compensation is driving this deal, it's important," Smith said. "I don't think it's a big number against the [total value of the transaction], but this nonprofit shouldn't be paying excessive compensation to its senior executives."
Maryland Insurance Commissioner Steven B. Larsen questioned Jews under oath last week about the severance payments -- with inconclusive results, he said.
"Mr. Jews provided answers to our questions, but we still do not have our questions answered," Larsen said.
He said that he did not view the size of the packages as necessarily fatal to the chances he would approve the merger but that it was impossible to know until better information is provided by CareFirst about how and when the perks were created by the company's board.
"The more I study them, the more concerned I become about their evolution," Larsen said.
Since it was chartered as a nonprofit, tax-exempt company by the Maryland General Assembly in 1937, CareFirst BlueCross BlueShield functioned as the only insurer that could be counted on to serve disadvantaged and elderly people. In recent years, the company's focus changed as it purchased other insurers, including BlueCross BlueShield of the National Capital Area, and moved away from serving the poor and elderly.
Schramm, who wrote a critical assessment of CareFirst's conduct last year before WellPoint made its bid, said last week that after a merger, WellPoint would "certainly" raise health insurance premiums and might deprive thousands of current customers of affordable coverage. Instead of being answerable to regional political leaders, WellPoint would be obliged to put the interests of Wall Street and investors first, Schramm said.
D.C. Council member Sharon Ambrose (D-Ward 6), who chairs the committee that oversees both the merger and the District insurance commissioner, said the severance packages would be a focus of discussion -- especially because the council passed emergency legislation this summer requiring its approval of Mirel's ruling.
"When you start telling people they may have to pay 17, 18 or 20 percent more for their health plan, and then you start talking about severance packages of $ 14 million or $ 18 million, that starts looking like Enron," Ambrose said. |
