CareFirst BlueCross BlueShield officials offer a ready answer whenever the company's nonprofit board is questioned about its judgment in blessing a deal to sell the region's largest health insurer to a California firm.
"There has been much made about what the board of directors stood to gain out of this," CareFirst board Chairman Daniel J. Altobello recently declared. "Zero. Unemployment."
In fact, CareFirst inserted a clause into the $ 1.3 billion sales contract with WellPoint Health Networks ensuring that its board members could continue receiving their current pay -- ranging from $ 32,000 to $ 85,000 a year -- for the next two years as members of an advisory panel, according to WellPoint Vice President Ken Ferber.
And one CareFirst board member would be appointed to WellPoint's board, receiving a salary and lucrative annual stock grants that at Friday's close would have traded at $ 116,000, plus stock options.
As Maryland winds down the latest set of hearings tomorrow on whether the sale of the nonprofit insurer is in the public's best interest, much of the debate has come to focus on the motives, methods and mission of CareFirst's 21-member board.
It was the board that agreed to a sales price that experts in Maryland and the District believe is far less than the company's worth. They put the value roughly somewhere between $ 1.65 billion and $ 1.8 billion. An independent auditor asserted last week that the board failed in its fiduciary obligation to obtain the best price.
It was the board that was ultimately responsible for refusing to entertain bids from one potential buyer and for giving WellPoint a competitive edge over another, according to testimony from expert witnesses for Maryland Insurance Commissioner Steven B. Larsen.
It was the board that signed off on a bonus and severance package that would have put $ 119 million into the pockets of CareFirst Chief Executive Officer William L. Jews and a handful of other top executives, a decision that so incensed Maryland lawmakers last year that they outlawed the bonuses and imposed other restrictions.
"This board has brought the company in the wrong direction," said Minor Carter, a lobbyist for Maryland Cares, a coalition of hospitals, doctors, labor unions, seniors, the NAACP and others opposed to the sale. "They have rewarded themselves very richly for not doing the job they were meant to do."
Questions about the board's handling of the sale are critical because the proceeds of the CareFirst deal would be split among Maryland, the District and Delaware. By law, the company is considered a charitable asset, long subsidized by tax breaks and incentives.
Altobello said in an interview that the board exercised "extraordinary due diligence" in deciding, after years of debate, that the sale was in the best interest of the company's 2.3 million customers. Extending board members' pay for two years played no role in the decision, he added, and the compensation does not constitute "a major percentage of anyone's income." He stood by his earlier comments.
"I never said there wouldn't be an advisory board," he said. "That's not gain -- that's payment for services rendered."
But Larsen said last week he was unaware of the arrangement. "It seems to highlight the concern that money may have played a role in the decision-making process and raises questions about whether we have been getting full cooperation from CareFirst," he said.
Even as CareFirst defends the deal, the board has tried to defuse criticism. It struck a revised deal with WellPoint increasing the sale price by $ 70 million and replacing incentive packages with an offer to keep top executives on the payroll for at least two years. CareFirst also settled a rate dispute with Children's Hospital that threatened to leave thousands of sick children scrambling for new doctors.
Larsen is expected to decide this month whether to approve the deal, though the General Assembly can overturn his decision. Already, opponents are drafting legislation to oust the board and refocus the firm.
The company was a Depression-era creation aimed at making health insurance affordable to all Marylanders. Its bylaws require the company to offer insurance at "minimum cost and expense."
But as the insurance industry became increasingly competitive, CareFirst steadily moved away from its original role, even dropping its participation in Medicaid and Medicare programs for the poor and elderly.
CareFirst's board was designed to be a hedge against the financial considerations overtaking the health industry. Maryland lawmakers reconstituted the panel just a decade ago after a severance and pension scandal and allegations of mismanagement.
Current members include a priest, the head of the Baltimore AFL-CIO, a nun who runs Providence Hospital in the District, a doctor, a former Democratic congresswoman, former educators and a number of chief executives such as Altobello, who ran a business that supplied food for aviation companies.
Members choose their own replacements: Altobello, for instance, was recruited by Richard Hugg, a former member who is a close adviser to Gov. Robert L. Ehrlich Jr. (R). The chairman of the compensation committee that helped craft the bonus packages is a longtime acquaintance of the chief executive, Jews.
Barry P. Bosworth, an economist and board member in the early 1990s, said he left because he didn't like the profit-motivated direction in which Jews and other executives were taking CareFirst.
New members had been brought on board "who were not really independent voices and didn't really know how to run a business," he said. They listened to management and the handful of business executives on the board, he said, many of whom believed "the whole notion of a nonprofit was absurd."
CareFirst readily admits that its mission has changed. Returning to its roots would weaken a company that must compete with for-profit giants like Aetna, officials contend. Those same financial pressures, they say, prompted the board to contemplate a merger.
But Larsen took the board to task at a hearing Friday, asking Altobello why there is "absolutely no reference in any documents, in any board minutes, in any presentation" to discussions about how the sale of CareFirst to a for-profit company might conflict with its charitable mission.
Altobello said the board did take that under consideration, prompting an incredulous Larsen to ask what else the board considered that wasn't properly documented.
Experts hired by Larsen have questioned not just whether board members should have struck a deal with a for-profit firm, but whether they did it properly.
Former Missouri insurance commissioner Jay Angoff, hired by Larsen to study whether CareFirst's board exercised due diligence, testified last week that the board failed to engage in a "true auction" for the best price.
In 1999, CareFirst's consultants outlined potential merger candidates. Trigon, a BlueCross BlueShield company based in Virginia, was dubbed the "primary choice," WellPoint was the "alternate choice," and Anthem, a BlueCross BlueShield company based in Indiana, was ranked first in "do-ability," according to records of board minutes.
Yet the board excluded Anthem from the bidding. Larsen has questioned whether there were personal reasons behind that decision. Jews wanted to be chief executive of the new company, but Anthem chief Larry Glasscock had headed the District's BlueCross BlueShield plan and left abruptly after it was absorbed by CareFirst in 1998.
CareFirst and its advisers say they worried that Anthem wouldn't have the cash to complete the deal in time -- a concern that turned out not to be a problem -- and did not consider the company a good "philosophical fit."
Angoff said, "You just can't say no to a reputable bidder."
With Trigon, there is conflicting testimony. In February 2000, the CareFirst board made Trigon its primary negotiating partner. Trigon chief executive Thomas G. Snead Jr. told regulators that he initially planned to offer $ 1.4 billion to 1.5 billion but revised his bid to $ 1.3 billion in response to CareFirst's direction that the number of seats its directors would get on Trigon's board was more important than price.
"Over the course of the months, we inquired as to, 'Do we need to increase our price?' and we were consistently coached, 'No,' " Snead said.
CareFirst officials dispute both assertions. What is clear is that WellPoint was asked to increase its price, while Trigon was not, resulting in a bidding tie at $ 1.3 billion. In April 2001, the board switched its favored partner to WellPoint.
Stuart Smith, one of CareFirst's financial advisers, testified last week that the process produced a "real horse race." Other company officials said the board decided to go with WellPoint in part because it was willing to guarantee its purchase price for three years, a key factor in what was expected to be a long approval process and one that Angoff deemed valid.
But Angoff found that the board considered a number of impermissible factors, such as the location of corporate headquarters, where CareFirst executives would land in the new corporate structure, and a contention by Jews that a sale to Trigon would result in the loss of 2,000 jobs -- an allegation Trigon repeatedly disputed and for which Angoff found no documentation.
And on Friday, Larsen suggested that the board's hiring of a lawyer who had been the personal attorney for Jews represented a conflict of interest. The lawyer was paid up to $ 50,000 a month by CareFirst and attended negotiations with Trigon.
Larsen asked whether Altobello thought that was advisable. "I would not think that's a good idea," Altobello responded, adding that the lawyer did not represent the board and that Altobello was unaware of his involvement.
Similarly, Angoff asserts that the board was unaware of or ignored crucial information in coming to the decision to grant $ 119 million in merger incentive bonus and severance packages to Jews and seven other executives.
Experts hired by the board consulted with Jews and included giant corporations, such as CBS, to determine proper executive pay and benefits. The board's experts acknowledged that they were unable to find any other situation in which a nonprofit board had awarded merger bonus incentives to its executives.
The board, according to Angoff, should have realized that Maryland law might prohibit such payments, and certainly should have been aware of a 1997 decision by Larsen directing that the severance packages for executives be tied to those of comparable nonprofit companies.
In December, Altobello testified that he was only peripherally aware of that decision and didn't consider it relevant.
Altobello said in an interview that he sits on several boards and that while some may disagree with CareFirst's final decision, "it was probably the best process I've ever been involved in."
In an interview, Larsen refused to say which way he is leaning on the deal. But he made clear what he believed to be the board's obligations. "People are known to act in their self-interest," he said. "It's the job of the board to make sure that the interest of the corporation, rather than the individual officers, comes first." |
