Maryland Insurance Commissioner Rejects CareFirst’s For-Profit Conversion, Sale to WellPoint

Maryland Insurance Commissioner Steven Larsen on March 5 rejected the $1.37 billion sale of CareFirst BlueCross BlueShield, the largest not-for-profit insurer in the Washington, D.C., region, to Thousand Oaks, Calif.-based WellPoint Health Networks because he said the sale was "not in the public's best interest," the AP/Washington Times reports (AP/Washington Times, 3/6). CareFirst, which has 3.2 million members in Maryland, Delaware and Washington, D.C., spent two years to develop a for-profit conversion plan and negotiate with potential buyers. In November 2001, the company announced a deal under which WellPoint would purchase the company for $1.3 billion. The purchase price was later increased to $1.37 billion. In his review, which took more than one year, Larsen held 15 formal hearings, hired 10 consultants and reviewed 85,000 pages of documents (Salganik, Baltimore Sun, 3/6). In a "searing" 300-page opinion, Larsen said that CareFirst's board of directors "abdicated its fiduciary responsibility" to policyholders in trying to convert the company to for-profit and sell it to WellPoint. He also criticized the board for agreeing to a deal under which top CareFirst executives would receive $119 million in bonus and merger incentives, despite "numerous warning signs" that the compensation package violates state law, the Washington Post reports. Larsen also said that the board conducted a "flawed" auction that favored one bidder over another and failed to produce the best sales price. Larsen also cited a "number of conflicts of interest" by the board (Becker, Washington Post, 3/6). In addition, Larsen said that CareFirst didn't have a "business need to convert" to for-profit and that WellPoint refused to produce "critical" documents that would have allowed him to evaluate the impact the sale would have on consumers (Salganik, Baltimore Sun, 3/6).

Reaction
CareFirst officials said that "any insinuation that the board's process was tainted is unfair" and that the board reviewed everything "with total commitment and reasoned judgment," the Los Angeles Times reports (Peltz, Los Angeles Times, 3/6). CareFirst Board Chair Daniel Altobello said it would take "a minimum of a couple weeks" for the company to analyze the report and determine how it will proceed, adding that the company could appeal the decision in court or restructure the deal (Salganik, Baltimore Sun, 3/6). CareFirst has 30 days to file an appeal of Larsen's decision (AP/Washington Times, 3/6). A.G. Newmyer, chair of the Washington, D.C., patients rights group Fair Care Foundation, called Larsen's decision a "victory for decency and common sense over eye-popping greed" (Rundle, Wall Street Journal, 3/6). Washington, D.C., Insurance Commissioner Lawrence Mirel also said he was "satisfied" with Larsen's judgment, which ends the city's review of the merger as long as the decision is upheld by the Maryland General Assembly. The Legislature has 90 days to review the order and can overturn Larsen's decision (Washington Post, 3/6).

'Return To Mission'
Several lawmakers, consumer advocates and industry analysts on March 5 weighed in on how CareFirst might "return ... to its original mission of ensuring quality health care for all," the Baltimore Sun reports. CareFirst had "begun behaving more like a for-profit company in recent years," such as "shed[ding] high-cost coverage for the poor and elderly and fatten[ing] its cash reserves to make itself a more attractive candidate for a buyout," according to the Sun. The insurer could "reclaim its [not-for-profit] objective" by requiring excess profit to be invested in insurance service programs, restoring financial incentives to serve "the toughest to ensure," appointing some board members who represent consumer and member interests, replacing the company's current management and increasing oversight by state officials, the Sun reports. Some lawmakers also suggested having Maryland Gov. Bob Ehrlich (R) or a commission appoint several independent directors or requiring CareFirst to meet additional annual reporting requirements to ensure that it is following its mission. However, because the insurer's coverage area spans several states and the District of Columbia, oversight would be "complicated," the Sun reports (Ratner, Baltimore Sun, 3/6).