CareFirst BlueCross BlueShield's board of directors failed to meet its fiduciary and legal responsibilities when its members approved millions of dollars in bonuses for top officials at the nonprofit health provider, according to an independent report released yesterday by the Maryland Insurance Administration.
The draft report, prepared by an adviser to Maryland Insurance Commissioner Steven B. Larson, concluded that CareFirst board members approved salaries and bonus payments without proper care or consistency. Larson commissioned the report -- which was strongly contested by a CareFirst attorney yesterday -- because he is reviewing CareFirst's plans to convert to profit-making status and merge with a California health-care company. CareFirst's executive pay and merger-related bonuses to senior management have become issues in the merger.
The adviser, Missouri law firm Roger G. Brown & Associates, criticized the merger-related bonuses to CareFirst executives as excessive and probably against the law that governs how managers of nonprofits are compensated.
CareFirst chief executive William L. Jews, according to the report, would receive salary, merger-related bonuses, severance and tax benefits totaling $ 39.4 million under the compensation packages originally drafted by the board. Chief Operating Officer David Wolf would make $ 13.31 million. Jews, Wolf and the other executive officers together would collect more than $ 119 million -- a figure the report and merger opponents call excessive. As evidence, Jews's compensation package is compared in the report with that of 12 for-profit health-care providers. His contractual severance pay -- money paid to an executive who is let go without cause -- exceeds eight of the 12, according to the report.
The Maryland General Assembly this spring banned the merger-incentive payments, chopping $ 9 million off Jews's potential merger-related payout.
The numbers was generated from CareFirst financials and expounded on in a report by Jay Angoff of Roger G. Brown & Associates. Angoff, a former Missouri insurance commissioner, declined to comment on the report until the insurance commission's public hearings in December.
CareFirst attorney David Funk, of the Baltimore-based law firm Funk & Bolton, submitted his own memo to the insurance commissioner calling the Angoff's report unfair and misleading. The firm defended CareFirst's board, saying board members did their job by letting compensation consultants advise them.
"We tell the true story," Funk said. "I believe Mr. Angoff reached his opinion before he looked at the record. I think it is a biased report."
Funk's memorandum says CareFirst's board "engaged in a careful and deliberative process" and reached decisions that "were prudent under the circumstances and supported by the facts."
CareFirst has maintained throughout the process that its compensation and severance packages for executives are comparable to those of similarly sized for-profit health-care insurance companies.
Funk's response did not address many of the specific points raised in Angoff's report. Funk said his firm plans to present Larson with a point-by-point refutation of the independent report in the next two weeks, he said.
Both reports, along with other audits of the merger, will be considered by Larson when he makes his final report to the state legislature before the end of the year.
Angoff's report concludes that CareFirst's board was, at least in part, influenced by Jews while determining the compensation package.
"Jews had substantial involvement in developing and defending the bonuses," according to the report, which documents Jews's meetings with board members and the compensation consultants that helped the company's board of directors structure the severance packages. "The documentary evidence demonstrates the process of authorizing the bonuses was not driven solely by the board."
Jews told Larson in earlier testimony that he had nothing to do with crafting the compensation packages.
W. Minor Carter, a lobbyist and head of Annapolis-based Maryland Cares, a coalition of associations opposed to the conversion, said, "This report strengthens those of us who think it's the wrong thing to do and that it's done for the aggrandizement of the people who did the deal, i.e. CareFirst. They can't justify this compensation."
The report also highlights compensation issues not related to the merger, such as why CareFirst's executive bonuses are triggered by the company meeting minimal and often-changing goals. Last year, executives were paid a bonus for achieving a net income that was 57.7 percent of the prior year's. In 1997 executives were expected to attain net income of 103.5 percent of the prior year's to receive a bonus.
"CareFirst thus appears to allow its executives to receive bonuses by meeting a lower standard than the standard executives at a for-profit company must meet," the report says.
Larson must decide whether to approve the merger -- and with what conditions -- based on a determination of whether the deal is in the interests of the taxpayers, who "own" the nonprofit company by virtue of local tax exemptions.
CareFirst has 3.2 million subscribers, 1.2 million of whom live in the District, in Montgomery and Prince George's counties and in Virginia north of Route 123. Proceeds from the sale would be divided among Maryland, the District, Virginia and Delaware, and given to nonprofit foundations addressing local health-care needs.
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