During his 16-month campaign to sell his Maryland-based nonprofit health insurance company to a California-based for-profit insurer, CareFirst BlueCross BlueShield chief executive William L. Jews served up some grim what-if scenarios.
If the $ 1.37 billion sale to WellPoint Health Networks Inc. was not approved by the Maryland insurance commissioner, Jews warned, CareFirst could be doomed to declining revenue and membership. The largest health insurer in the Washington area could be propelled into a "vicious downward cycle."
But now, less than two months after Commissioner Steven B. Larsen rejected the proposed sale, scolding CareFirst's board for undervaluing the company and authorizing "illegal" bonuses and incentives to its top executives, Jews said the future may not be so bleak after all.
"The sky's not falling," Jews said in his first public comments since the sale was denied. He described CareFirst, which insures 3.24 million people, as "solid" and "viable into the long-term future."
But Jews quickly tempered his optimism with another what-if. This one concerned a Maryland bill that would give the state more oversight over CareFirst's operations. "The worst-case scenario in my mind," Jews said, "is that we would receive so much external regulatory oversight or direction . . . that it would be impossible to reasonably run the business."
For now, though, CareFirst remains a "very successful" company capable of serving its customers well, Jews said. That's a theme he plans to underscore at a board meeting Thursday. "The majority of the agenda will be focusing . . . on me reporting to them on how we're progressing," he said. "And I'm pleased to say most of that is very positive."
CareFirst reported that its revenue rose 13 percent, to $ 6.7 billion, last year as enrollment grew 4 percent. The company also posted a net margin of 1.3 percent. Jews said the average publicly traded health insurer's earnings are more than 4 percent.
"These companies, who are our competitors, have the ability in theory to invest more" in improving their operations, he said.
Jews has not ruled out another run at taking CareFirst public. More consolidation among health insurers is inevitable, he said, citing federal government predictions that the 42 Blue Cross Blue Shield plans would shrink to 25 to 30 over the next five years.
Thinking ahead "five to 10 years," one option for CareFirst is "aligning with another not-for-profit Blues plan," Jews said. "Another is to do an IPO as an independent company. Another would be to look at transactions similar" to the proposed merger with WellPoint.
CareFirst surely would have been better off if the merger with WellPoint had been approved, Jews said. The deal would have given CareFirst access to needed capital to invest in technology, he said. In the health insurance world, that usually means faster processing of claims and better overall customer service.
"The WellPoint transaction would have allowed us to throw a pass and get ahead," said Jews, a 6-foot-7 former Johns Hopkins University basketball star who often uses sports analogies to make his points. "Absent the transaction, we need to do a lot of blocking and tackling" -- concentrating more on basics -- "which I am solidly of the opinion we can do."
CareFirst has been in the trenches this spring, lobbying Maryland Gov. Robert L. Ehrlich Jr. (R), who must decide whether to sign the oversight bill, which the General Assembly passed unanimously April 7.
Some legislators say CareFirst has a special obligation to state residents because it received special tax breaks and subsidies in its 66 years as a nonprofit.
The bill was an outgrowth of Larsen's investigation into whether the CareFirst-WellPoint deal was in the public's best interest. Larsen ruled that it was not and concluded that CareFirst requires more oversight because of its board's "egregious" behavior. At one point, the board authorized a $ 9 million bonus for Jews if the merger were to go through.
The law would block CareFirst from becoming a for-profit company for at least five years. It also would oust 10 of the 12 Maryland members on the 21-member board by December. A commission appointed by Ehrlich and legislative leaders would choose replacements. The remaining two Maryland members would be replaced by fellow board members next year.
CareFirst is not alone in opposing the bill.
The Blue Cross and Blue Shield Association said it may no longer license CareFirst if Maryland lawmakers gain such control. The association's agreements with licensees stipulate that their boards must be independent.
Losing the "Blues" trademark would result in a smaller CareFirst, Jews said. "That creates a whole other dynamic in trying to run an insurance company," he said. "How much runoff is there to our competition from our volume? How quickly could we operationally downsize the operations?"
Insurance regulators from the District and Delaware also don't like the bill, saying it could interfere with CareFirst's operations in their regions.
"I didn't have any quarrel with Steve Larsen's decision" to reject the merger with WellPoint, said Lawrence H. Mirel, the District's insurance and securities commissioner. "What I have a quarrel with is that he didn't leave it there. He didn't just say, 'No, this is rejected.' He went after this organization with fury.
"You know, they may have done some things they shouldn't have done," he said. "I'm certainly not going to defend every decision they made. But, you know, it's a private corporation. Its board members are appointed in accordance with bylaws. And it ought to stay that way. The state of Maryland shouldn't take it over and make it into a state plan. This is a tough time for health insurers. They need to be able to compete if they are going to survive. They seem to be attempting to tie the hands of this company, and I hate to see that."
In making dire predictions of declining revenue and membership, Jews said he was wearing the "hat" of a chief executive "looking five years down road."
And he was trying to "throw the long pass," he said, presumably to score points with regulators, legislators and the public.
"I am not deterred," Jews said of his failure to complete the WellPoint deal. "I am not in any way with any angst or animosity about this."
Looking ahead, Jews said his company's challenges have not changed.
"We have a responsibility to our customers. . . . We need adequate days of cash on hand for untold situations such as SARS or whatever might come along," he said. "We have to make sure we are investing in technology."
As a nonprofit, "We may not be throwing the ball 50 yards at a time," Jews said. "But we will run and pass the ball and make three and four and five yards on every run. So we will get to a first down." |
