Maryland's insurance commissioner yesterday rejected the sale of the region's largest health care insurer, saying the board of CareFirst BlueCross BlueShield undervalued the nonprofit firm in striking the deal.
In a searing 300-plus page opinion, Insurance Commissioner Steven B. Larsen found that CareFirst's board of directors abdicated its fiduciary responsibility to policyholders in seeking to convert the company to a for-profit firm and sell it to WellPoint Health Networks for $ 1.37 billion.
Larsen dismissed the CareFirst rationale that the conversion and sale were essential if the company was to have the greater access to capital it needed to grow. And he criticized the nonprofit's board for agreeing to pay $ 119 million in bonus and merger incentives to a handful of top executives despite "numerous warning signs" that the bonuses violated state law.
"This is the most scathing indictment of a company I have ever seen in my public life," Senate President Thomas V. Mike Miller Jr. (D-Prince George's) said of Larsen's report. "When this report becomes public, change is not only going to be imperative; it's going to be demanded."
Larsen's much-anticipated decision moves the CareFirst debate into the political realm, where the state legislature has 90 days to review the decision. General Assembly leaders are already drafting legislation to revamp the board of directors of CareFirst, which serves 3.2 million subscribers in Maryland, Virginia, the District of Columbia and Delaware.
Daniel J. Altobello, the CareFirst board chairman, defended the board, saying he believed it followed a "remarkably complete and thorough process with the advice of competent experts and came to the right conclusion."
The report criticizes CareFirst's board for agreeing to pay the bonuses and merger incentives to executives despite "numerous warning signs" that the bonuses violated state law and were inappropriate.
Larsen said the board conducted a "flawed" auction that favored one bidder over another and failed to produce the best sales price -- a key point, because the proceeds would have gone to the jurisdictions in which the heavily subsidized CareFirst operates.
Officials at WellPoint and CareFirst said they need more time to evaluate whether to appeal the decision to a circuit court. The burden they would have to meet is high: Essentially, they would have to prove that Larsen had no basis for coming to the conclusion that he did.
WellPoint Vice President Ken Ferber said that although the company was disappointed, it would continue to pursue its growth strategy in the Middle Atlantic market.
"It's clear that the local environment in Maryland is not conducive to a conversion of CareFirst to a for-profit at this time," he said.
Critics of CareFirst praised Larsen's decision and said the company, which was created during the post-Depression era and granted heavy tax subsidies, had long ago ceased to perform its stated mission: offering insurance "at minimum cost and expense." Many critics worry that CareFirst will come back with a similar proposal that will be reviewed by a new insurance commissioner -- Larsen's term ends this year -- unless Maryland lawmakers oust current board members.
Terry Newmeyer, chairman of Fair Care, a health care advocacy group, said: "The company has strayed so far from anybody's definition of a charitable and benevolent organization, which is what their charter states, that I think the legislature should seek the resignation of the board and senior management. CareFirst has plenty of money to do what needs to be done to meet unmet health care needs, but you have to start with wanting to do that."
D.C. Insurance Commissioner Lawrence Mirel said he was satisfied with Larsen's decision, which he said would end the District's review of the deal as long as the decision is upheld by the General Assembly.
A spokeswoman for Maryland Gov. Robert L. Ehrlich Jr. (R) said he had not had time to review the decision. House Speaker Michael E. Busch (D-Anne Arundel), who has led the legislative charge against the deal, said the makeup of the board will be considered, as will a proposal to spell out the company's mission more clearly.
Larsen's experts and others have estimated the value of CareFirst at $ 1.45 billion to $ 2.27 billion, far above the proposed sale price. CareFirst, Larsen said, conducted an auction between two bidders that was destined to end in a tie, allowing CareFirst to consider factors other than price.
A critical part of the deal, Larsen said, became the $ 119 million in bonuses to be paid to CareFirst Chief Executive Officer William L. Jews and a handful of other top executives. When those provisions threatened to sink the deal, the two companies agreed last month to replace those incentives with an offer to keep top executives on the payroll for at least two years. Larsen said yesterday the "new bonuses" were illegal under Maryland law. The bonuses, he said, were "essentially ransom that the bidder had to pay in order to buy the company."
Larsen also found what he called a number of conflicts of interest. For instance, the board asked CareFirst's investment bankers to issue an opinion on the fairness of WellPoint's purchase price. Those bankers stood to make $ 13 million if the deal went through, Larsen said. And a lawyer who previously represented CareFirst's CEO played a significant role in advising management during negotiations, which included discussion of bonuses.
Staff writer Avram Goldstein contributed to this report. |
