THE SAGA
INTRODUCTION
This article presents in detail
OF A FAILED the relevant facts surrounding
CareFirst’s failed attempt to
CONVERSION
convert to for-profit status and
be acquired by the for-profit
company, Wellpoint Health
TO FOR-PROFIT
Networks, Inc. It chronicles
events and describes the
political environment leading
up to the Maryland insurance
commissioner’s review of the
The CareFirst BCBS application, the review process
and roles played by various
Story, Part 1 stakeholders and the media,
the commissioner’s decision and
rationale, and the aftermath
of actions and reactions by
various parties, including state
legislation to reform CareFirst.
This case study was based on
interviews with several key
Bruce McPherson players, as well as a review of
Inquiry/Volume 41, Fall 2004 numerous newspaper articles
and the wealth of documents
prepared for, and emanating
from the review process.
Providing an in-depth look at
the missteps by CareFirst’s board
and executives, this article sets
the stage for a second one
translating these details into
lessons for other states and for
all types of nonprofit health care
organizations involved in any
kind of strategic decision making
that affects the public interest.
1
The Failed Conversion of CareFirst
Judging from several recent BACKGROUND
failed or aborted conversions
of nonprofit health insurers to The state of Maryland has
Bruce McPherson, for-profit companies – namely enjoyed a long history and
M.H.A., is in Kansas, North Carolina, tradition of partnership among
Maryland, and Washington
executive director state – the pendulum seems
its policymakers, physicians,
hospitals (all but one of which
of the Alliance For to be swinging in favor of is nonprofit) and Maryland
Advancing Nonprofit maintaining an infrastructure BlueCross BlueShield. Maryland
Health Care. of nonprofit health insurers. In
these instances, government
policymakers, by design, helped
CareFirst become dominant
agencies and legislative in the market. As a nonprofit
bodies, in addition to advocacy holding company for BlueCross
organizations and community BlueShield plans based in
groups, have articulated a need Maryland and eventually
to preserve the community in the District of Columbia
benefit component of nonprofit and Delaware, CareFirst was
health insurance plans. exempted from state income
taxes, premium taxes, and
A detailed analysis of property taxes. It also enjoyed
attempts by CareFirst, a a special price differential
nonprofit health insurer in under the Maryland all-payer
Maryland, to convert to for- hospital rate regulatory system.
profit1 status yields important The differential, amounting
lessons for policymakers and to a 4% discount initially and
regulators in other states, for an estimated $31 million in
all types of nonprofit health current savings to the plan,
care organizations engaged was established to reward the
in any type of major strategic plan for assumption of risks in
decision making, as well as providing “substantial, available
for community leaders and and affordable coverage” to
advocates of the nonprofit individuals not otherwise able to
business model for health care obtain health insurance coverage
financing and delivery. Despite (Schramm 2001).
the unique health care political
climate in Maryland and the Despite this special
singular details of this case, relationship, CareFirst found
the failed CareFirst conversion itself on the brink of insolvency
pinpoints the barriers that stand in the early 1990s. In 1993,
in the way of conversions and the board hired a new chief
the benefits that can derive from executive officer, Bill Jews,
continued status as a nonprofit to save the plan. Under the
health insurer. leadership of the new CEO and
his executive team, CareFirst
This paper presents a detailed sought in 1994 to convert its
outline of the relevant facts.2 health maintenance organization
The lessons of the CareFirst (HMO) subsidiary to a for-profit
case will be highlighted in a company and other components
subsequent article. to a nonprofit mutual insurance
2
company, but the Maryland such speculation was far from
insurance commissioner accurate as events proved.
denied the proposal. CareFirst
subsequently combined with On Nov. 20, 2001, CareFirst
the nonprofit Washington, D.C. formally announced its intent to
BlueCross BlueShield Plan (Group convert to a for-profit company,
Hospitalization and Medical then to be immediately acquired
Services, Inc.) in 1998,3 the same by Wellpoint Health Networks,
year in which the Maryland Inc., a national for-profit
Conversion Act was passed. The BlueCross BlueShield company,
nonprofit Delaware BlueCross for $1.3 billion. Pursuant to
BlueShield Plan was added in the Maryland Conversation
1999 (Schramm 2001). Act, CareFirst submitted its
application to the Maryland
Despite this merger of Insurance Administration (MIA)
nonprofit plans, rumors persisted on Jan.11, 2002, for review
that CareFirst was interested and approval. Under the act,
in converting to for-profit. the Maryland portion of the
The rumors were supported by proceeds of such a conversion,
several actions taken by CareFirst if approved, would go to a
during the period 1999 to 2001, nonprofit Maryland Health Care
namely its withdrawal from Foundation.
participation in programs serving
the elderly, poor, and individual On March 5, 2003, following
at high health risk. These actions a lengthy and turbulent review
angered regulators and some process, with highly visible
legislative leaders, resulting in public hearings, extensive
legislative proposals to modify newspaper coverage, and two
the board’s composition and to legislative interventions along
require CareFirst to justify its tax the way, Maryland Insurance
exemptions. Commissioner Steven Larsen
publicly announced his denial
At the same time, however, of the proposed conversion and
other bills were introduced on sale, releasing a detailed report
the disposition of the proceeds of his findings and conclusions “These actions
resulting from a CareFirst (Larsen 2003). The report was angered regulators
conversion. CareFirst’s board harsh in its criticisms of the
and executives appear to have leadership of CareFirst and its
and some legislative
ignored or downplayed all of consultants. That was only the leaders, resulting in
the other negative signals, beginning. Close on the heels legislative proposals
perhaps seeing the latter bills as
a clear sign that the application
of the denial came lawsuits,
legislation to reform CareFirst,
to modify the
for conversion and sale would and a federal investigation. board’s composition
face relatively smooth sailing. and to require
They may have speculated CareFirst to justify
that Maryland regulators
and legislators viewed a sale
its tax exemptions.”
providing a huge windfall of
cash as too good to pass up. Any
3
The Failed Conversion of CareFirst
BARRIERS TO of discussions, Board Chair Daniel
CONVERSION Altobello claimed, “We were
looking constantly at how this
“...the board failed A number of stumbling blocks would affect all our stakeholders,
to recognize what tripped up the effort to convert and that’s looking after your
mission” (Salganik 2003a).
should have been CareFirst into a for-profit
company: corporate governance Altobello also said in
clear signals ... and executive missteps (policy, testimony that maintaining
that CareFirst’s politics, and public relations), nonprofit status was always on
actions to withdraw a legislature and insurance the table as an option, until
a decision was made to select
from programs commission disinclined to forgo
its long-term investment in Wellpoint as a partner. However,
providing coverage nonprofit health insurance, the commissioner pointed out
to elderly, poor, energetic opposition voiced that Highmark, Inc., a nonprofit
Blues plan in Pennsylvania,
and high-health by nonprofit organizations
and community groups,4 and had been dismissed earlier as a
risk individuals aggressive reporting by the local viable partner option. He also
were being viewed media.5 cited a Tennessee court ruling
as contrary to its that a nonprofit board had a
duty to consider the impact
Failure to Exercise
nonprofit mission.” Due Diligence of its decision to abandon its
The Maryland insurance nonprofit status on subscribers,
commissioner concluded that providers, and the availability
CareFirst had not exercised or accessibility of health care
due diligence in deciding that (Larsen 2003).
it needed to convert and sell,
noting that the board did The MIA was not alone
not recognize and take into in its skepticism. The Abell
consideration the impacts of Foundation, a philanthropic
a conversion and sale on its organization, commissioned
mission, stated in its articles of a study in late 2000 by Carl
incorporation to be “to provide Schramm, a private consultant
coverage at minimum cost and at the time and a former for-
expense.” CareFirst also failed to profit health insurance executive.
address whether the status quo The report, which was publicly
was a viable or preferred option released in November 2001,
(Larsen 2003). The commissioner criticized CareFirst for recent
emphasized that in reviewing for-profit-oriented behaviors. It
thousands of pages of board found no economic or business
minutes and presentations, his reasons why the plan should
department and his consultants be converted and sold, noting
could not find a single reference lack of benefits of similar
to CareFirst’s mission, and that transactions involving other
testimony by the board chair Blues plans, and pointed to
and CEO indicated that they many prosperous Blues plans
saw “little distinction” in for- still operating independently
profit vs. nonprofit ownership and on a nonprofit basis. The
(Larsen 2003). Contending that report concluded that CareFirst
minutes were merely summaries should recommit to its nonprofit
4
mission, with increased and nationally; 3) the generally limit judicial interference and
regulatory oversight and control circuitous argument that to insulate for-profit corporate
over the CareFirst board and CareFirst needed to grow directors from personal liability
management practices (Schramm through mergers or acquisitions from disgruntled stockholders,
2001). to access capital so that it and did not apply to a
could undertake mergers or regulatory proceeding (Larsen
Prior to the decision to acquisitions; and 4) the lack of 2003). Thus, the commissioner
convert and sell, the board failed any presentation by CareFirst appeared to assert that a
to question or express concerns of its capital requirements to nonprofit organization board
over management’s stated Wellpoint, as well as lack of any must meet a higher test than a
intent for CareFirst to become specific commitments of capital for-profit board for being fully
more profit-oriented (Larsen by Wellpoint (Larsen 2003). engaged and independent of
2003). In addition, the board management, and that a state
failed to recognize what should CareFirst aleady had been attorney general or insurance
have been clear signals from spending more capital than commissioner of a state has the
regulators, the legislature, and many other nonprofit and for- authority to apply that higher
the media that CareFirst’s actions profit Blues plans to meet its standard.
to withdraw from programs other capital needs related
providing coverage to elderly, to information technology The commissioner also
poor, and high-health risk infrastructure, e-commerce, found lack of due diligence by
individuals were being viewed as and product development, CareFirst in selecting a buyer
contrary to its nonprofit mission. and would have had sufficient and in setting the price and
capital for at least the next two other terms, stating that the
The board failed to consider to five years (Larsen 2003). One auction conducted by CareFirst
whether and how other of CareFirst’s own consultants between Wellpoint and Trigon, a
nonprofit Blues plans were provided data to the board for-profit Blues plan contiguous
able to succeed financially showing that CareFirst had to CareFirst in Virginia, was
while carrying out their public sufficient capital to meet all its not a real auction. The factors
benefit missions (Larsen 2003). requirements except for mergers considered and emphasized
While the strategic plan was to or acquisitions (Larsen 2003). In shifted throughout the process
convert and sell based on the fact, the MIA and its consultants “depending on which potential
need for substantial capital to found that CareFirst would have buyer was in favor or disfavor
achieve regional dominance and had more capital available if it at the time” (Larsen 2003),
economies of scale, the board had eliminated losses attributed with an apparent primary
failed to prudently question: 1) to bad management decisions motivation of meeting the needs
how CareFirst, already dominant (Larsen 2003). of CareFirst executives in terms
regionally, could become more of both immediate and future
dominant without risking anti- The commissioner compensation and job roles. The
trust violations; 2) whether emphasized that “directors commissioner stressed repeatedly
it could successfully achieve of an organization vested in his report that Trigon had
economies of scale, given its with a public trust must act been unwilling to accept the
past problems in integrating with a higher degree of care bonus payments to CareFirst
operations from the mergers than directors of a general executives, whereas Wellpoint
with the Washington, D.C. and corporation.” He said that had agreed reluctantly to these
Delaware plans and given the the business judgment rule payments because it understood
well-publicized integration (that CareFirst’s experts had from CareFirst that this was a
problems experienced by contended was the litmus test “deal-breaker” (Larsen 2003).
prominent for-profit insurers for the board’s decision-making The commissioner pointed to
involved in mergers regionally processes) was designed only to several key findings to support
5
The Failed Conversion of CareFirst
these conclusions: on the availability and
affordability of health care in
• Wellpoint was advised Maryland (Larsen 2003).
“Perhaps the specifically by CareFirst to
most damaging increase its bid, which initially • CareFirst never received
was lower than Trigon’s, upfront a formal valuation
information to be while Trigon never was asked of itself from its consultant,
released in the to do so. The commissioner only an informal opinion
review process was speculated that CareFirst “not to expect $2 billion.”
word that CareFirst’s wanted a tie on price, even
if it were not the best price,
This meant that in advance
of the bidding process the
executives stood so that it would be easier board could not have any
to reap significant to compare and negotiate meaningful parameters
financial gains the non-price terms and of what was fair and in
conditions of the sale (Larsen the public interest (Larsen
from the proposed 2003). 2003). The commissioner’s
conversion and own consultant, as well
sale.” • Trigon offered the CareFirst as a consultant (Meyer
CEO chairmanship of the 2003) engaged by a
combined board and offered Washington, D.C., volunteer
a total of four seats on its advocacy organization, the
board to CareFirst, providing Washington, D.C. Appleseed
substantially more control Center for Law and Justice,
than Wellpoint was offering found the purchase price to
(Larsen 2003). be below or at the bottom of
an acceptable range.
• Being geographically
contiguous to CareFirst, Conflicts of Interest
Trigon furthered CareFirst’s Perhaps the most damaging
strategic goal of regional information to be released in the
dominance (Larsen 2003). review process was word that
CareFirst’s executives stood to
• CareFirst failed to include reap significant financial gains
and apply important from the proposed conversion
statutory criteria bearing and sale. The public was
on the public interest, while particularly outraged to learn
relying inappropriately on that CareFirst CEO Bill Jews was
nonstatutory factors like reported to be making $2 million
location of headquarters, in salary and bonuses and would
job loss, employee benefits, receive $9.1 million in merger
executive roles and bonuses, incentives and retention bonuses
and individual legislator if the deal went through, and
concerns to make its an additional $18.9 million in
decision. The commissioner severance if he were terminated
found glaringly absent by Wellpoint or left for “good
from CareFirst’s criteria and reasons,” such as a transfer
analyses the impacts of the out of town. One state senator
acquisition by the specific calculated that the $28 million in
bidders on subscribers and payouts to Jews roughly equaled
6
one year’s premiums for 9,000 bonuses were to be payable
Maryland families (Salganik and even if the executive did not
Dresser 2002). Compensation remain, and the commissioner
consultants countered that found that executives already
CareFirst was competing with were to receive more than
both nonprofits and for-profits ample compensation for
for leadership talent and needed continued employment via
to provide alternatives to stock their salaries, various benefits,
options as a nonprofit, and and performance bonuses
that it was common practice to (Larsen 2003). The commissioner
offer incentives and rewards concluded that there was
to executives for successful “substantial and credible
mergers or acquisitions. evidence” that the CEO and
Even so, the compensation other executives were spending
plan in this case seemed to considerable time from the
represent an overwhelming very outset working directly
and disproportionate incentive with CareFirst’s consultants and
to convert – an incentive that with the board’s compensation
was at odds with the nonprofit committee on these bonus and
mission of providing affordable severance issues. Compensation,
health care coverage. in essence, was “driving” the
decision-making process toward
By April 2002, the Maryland a result that would most benefit
legislature had amended the them personally, with the board
Conversion Act, banning the in full support and ignoring
bonus payments and requiring information, objections, and
that any sale be for cash concerns raised by their own
only. CareFirst amended its lawyers about the legality of the
application in January 2003 bonuses (Larsen 2003).
(CareFirst of Maryland, Inc.
2003a) in an effort to comply The commissioner also
with the amendments. Under identified several other major
the amended application, apparent or possible conflicts of
Wellpoint agreed to a cash interest that were not identified,
purchase at an increased price acknowledged, or addressed
of $1.37 billion, allegedly as in any manner by the CareFirst
a result of the elimination
of the bonus payments.
board. On the very same day,
Credit Suisse First Boston (CSFB)
“Compensation,
However, it appears Wellpoint presented to the CareFirst in essence, was
had merely restructured board its after-the-fact formal “driving” the
the merger incentives as valuation of the company as decision-making
“retention bonuses.” Noting well as its fairness opinion of
this, the commissioner ruled the proposed sale to Wellpoint.
process toward a
that “the retention bonuses With CSFB also representing result that would
represent a windfall of cash CareFirst in its negotiations most benefit them
made available to CareFirst
executives only if the merger is
with Wellpoint and to receive
$13 million if the deal were
personally...”
consummated” (Larsen 2003). In consummated and only $750,000
certain instances the retention if it were not, the commissioner
7
The Failed Conversion of CareFirst
saw inherent conflicts of interest also noted that Accenture (Larsen 2003).
that the board apparently did simultaneously had Wellpoint Other Findings
not appreciate or consider. CSFB as a client, with fees from the While noting that his various
countered that in its field of latter growing from $800,000 to consultants (Feldman, Wholey,
business reputation and integrity more than $4 million in 2001. and Town 2003; Delmarva
were paramount, and the The commissioner found that Foundation 2003; Wakely
commissioner’s own consultant the board was delinquent in Consulting Group 2003) had
noted that these practices not even considering whether provided generally mixed and
were typical in the investment Accenture might have conflicts inconclusive findings on whether
banking community and had not and be unable to provide an the proposed conversion
been invalidated in the courts. independent analysis (Larsen and sale would have adverse
Nonetheless, the commissioner 2003). impacts on the availability or
asserted that while it might be affordability of health care in
an appropriate exercise of the A lawyer involved in internal the state, the commissioner
board’s duty of care to rely on discussions and external stressed that, despite assurances
a common industry practice, negotiations on compensation of confidentiality, Wellpoint
it still might be in violation of and other matters also appeared had failed to make available
Maryland statutes (Larson 2003). to have had a conflict of important pricing and
interest in his representation underwriting information that
In addition, he saw a conflict of CareFirst. For example, he would have permitted the
of interest in CSFB also being a had personally represented the consultants and MIA to conduct
significant trader of Wellpoint CEO in the negotiation of his a full impact analysis (Larsen
stock, despite CSFB’s claims that employment agreement and 2003).
there were “Chinese fire walls” compensation with CareFirst
to address this potential concern. in 1998 and 1999; he was paid Lastly, the commissioner
The commissioner concluded for his work on this transaction noted the findings of a
that, at a minimum, the CareFirst by CareFirst, even though his study he requested on the
board should have considered involvement was not authorized effectiveness of conversion
whether these potential conflicts or known by the board, and foundations. While providing
might have had some bearing CareFirst already had a lawyer some specific recommendations
on the fairness opinion, and with another firm advising the on how the Maryland law
whether any additional opinions corporation on compensation might be improved and how
should have been sought from matters. This lawyer “was a a Maryland foundation might
“completely independent significant player behind the best operate if this conversion
experts” (Larsen 2003). scenes, meeting with CareFirst and sale were to proceed,
officers, counsel, investment the consultant performing
In a somewhat similar vein, bankers, and potential merger the study concluded more
the commissioner questioned partners on a routine basis.” The fundamentally that conversion
how Accenture, a CareFirst billing records demonstrated a foundations had limited ability
consultant that had assisted in major focus by the lawyer on to make systematic changes or
developing and implementing analyses of compensation for the improvements in access to health
the health plan’s conversion CEO and other executives and care. That is, the amount of
and sale strategy (identifying on discussions of compensation, money available annually from
Wellpoint as a potential merger with direct participation in a investment of the proceeds of
partner), could independently, meeting between the CareFirst a conversion or sale could not
without conflict, prepare an CEO and the Trigon CEO on the begin to cover the costs of care
objective community impact former’s role under a merger, or coverage for the uninsured
analysis for inclusion in the apparently without any other and underinsured in a state
application. The commissioner CareFirst counsel in attendance (Larsen 2003; LECG LLC 2003).
8
and board committee chairs);
AFTERMATH • establish public control over
the selection of the Maryland
Reacting to the commissioner’s members of the CareFirst “...the decision
decision and report, CareFirst board; ‘made it very
Board Chair Altobello said that
the board did not feel any • create for two years a 17-
clear the current
changes in structure or personnel member legislative oversight environment in
were needed. Maryland Cares!, committee to monitor Maryland is just
a broad-based coalition of CareFirst’s goals, activities,
and performance (Salganik
not conducive to
conversion opponents, called for
the resignation of the CareFirst 2003c). a conversion of
board and management. A CareFirst’”
Wellpoint spokesman was A state nominating
quoted as saying that the committee appointed by the
decision “made it very clear governor, house speaker, and
the current environment in senate president as to appoint
Maryland is just not conducive 10 of the 12 Maryland board
to a conversion of CareFirst” members by the end of 2003,
(Salganik 2003b). with the remaining two to
be replaced in 2004. (The
That quote proved to be Washington, D.C. plan had six
an understatement. While the board seats and the Delaware
Maryland legislature had 90 plan, three.)
days in which it could overturn
the MIA’s decision, only one About one month after this
month later, on April 7, 2003, the legislation, it became public
Maryland Senate and House both knowledge that another national
unanimously passed legislation for-profit Blues company,
to: Anthem, based in Indiana, had
purchased Trigon for $4 billion,
almost triple Wellpoint’s final
• require that CareFirst adopt
offer for CareFirst, even though
a mission that embraced
CareFirst had about 33% more
assisting and supporting
subscribers than Trigon (Salganik
“public and private health
2003d). During this same period,
care initiatives for individuals
outcries were emerging from
without health insurance”; both Delaware and Washington,
D.C. that the Maryland
• ban any conversion efforts legislature and/or insurance
by CareFirst for the next five commissioner had overstepped
years; their bounds and disrupted good
working relationships between
• give the insurance their plans and CareFirst.
commissioner approval CareFirst was reported to have
authority over executive raised no objections with the
compensation terms and legislature, but then lobbied
set annual board member unsuccessfully against its actions
compensation at $12,000 by seeking a gubernatorial veto
($15,000 for the board chair (Dang and Salganik 2003).
9
The Failed Conversion of CareFirst
As soon as the new Maryland [CareFirst officials] are masters at
governor signed the legislation, making enemies and losing the
the BlueCross and BlueShield public relations battle” (Dang
“...‘It didn’t have Association (BCBSA) went 2003b).
to be this way.... to federal court to remove
CareFirst’s license to use the Within three weeks of the
They [CareFirst BlueCross and BlueShield settlement, CareFirst CEO Jews
officials] are masters name and trademark, claiming announced publicly that he still
at making enemies that Maryland had illegally thought he was “the best man
and losing the public taken control over this multi-
jurisdictional plan. Maryland
for the job,” and that all the
public criticism was “based on
relations battle.’” countersued BCBSA, and miscommunications and bad
then CareFirst sued the state, timing.... The legislature has
claiming the reform law was determined that [the conversion]
unconstitutional. was not the right thing to do.
Having heard that message
In early June 2003, a federal clearly, it is now time to embrace
judge accepted a settlement the new mission.... We made an
among Maryland government attempt to make this company
officials, BCBSA, and CareFirst, stronger and viable long term....”
maintaining the license in (Dang 2003c).
exchange for two modifications
in the Maryland legislation: 1) Steven Larsen, who resigned
the five new CareFirst board as commissioner with the change
members who were to be in administration, responded
appointed by December would that he felt that Bill Jews could
work with the remaining seven still lead CareFirst: “The blame
Maryland board members to was not his alone.... He is a
replace those seven by the very capable businessman. He
end of June 2004, with two is not very adept at dealing
nonvoting members also to be with elected officials or with
appointed; and 2) compensation regulators. It is a significant blind
for executives would be required spot that somehow needs to be
to be comparable to that of remedied. It’s not going to be
nonprofit health insurer peers easy” (Dang 2003c).
(Dang 2003a).
Less than two weeks later, on
From newspaper accounts July 8, 2003, the new Maryland
it appears that by this time insurance commissioner, Alfred
Maryland legislative leaders Redmer, Jr., publicly announced
were even more distrustful of that he would be issuing civil
CareFirst for allegedly seeking charges against CareFirst, its
the governor’s veto “behind CEO, executive vice president,
their backs,” working behind and board for seven major
the scenes with BCBSA in its suit, violations (Dang 2003d) related
and then filing its own lawsuit to violation of its mission, breach
to kill the legislation. The Senate of fiduciary responsibilities,
president concluded, “It didn’t misrepresentations,
have to be this way.... They mismanagement, and lack of
10
independent valuations and of undisclosed nature and in
impact studies. The CareFirst process as of this writing, is
board lashed back, accusing reported to involve the FBI,
Maryland legislators and a federal grand jury, and the
regulators of vindictive attacks Maryland attorney general
that threatened its future. One (Salganik 2003e).
board member stated, “We
feel like we’ve been chastised In early December 2003, the
for making a company that CareFirst board announced a
was insolvent solvent.... If the new mission statement, intended
legislative intent was to get rid to “meet the intent of the
of Bill Jews – and that’s what Maryland legislation while also
some of us feel this is all about being sensitive to concerns of
– they didn’t want to attack him regulators in Delaware and
personally so they went after the Washington, D.C. who fear
board. The best thing that ever that CareFirst’s members in
happened to the policy holders their areas would be forced to
of BlueCross BlueShield is Bill subsidize Maryland’s nonprofit
Jews” (Dang 2003e). activities” (CareFirst of Maryland,
Inc. 2003b) The new mission
Another board member statement is as follows:
complained, “If we’re expected
to... lose huge sums of money, The mission of CareFirst
where will the resources BlueCross BlueShield is
come from? Who will pay for to provide health benefit
that?” The new commissioner services of value to customers
responded, “I don’t expect them across the region comprised
to act as a charity.... If there of Maryland, Delaware, and
are board members who don’t the National Capital Area. To
believe that they can have a fulfill this mission, CareFirst
healthy competitive carrier with BlueCross BlueShield commits
revenues that exceed expenses to:
and still have a nonprofit
mission, I would suggest • Offer a broad array of
that’s the very reason why the quality, innovative insurance
legislature has chosen to replace plans and administrative
them.” A state senator echoed services that are affordable
this sentiment: “If they still and accessible to our
don’t understand what they did customers “...‘If we’re
wrong, then maybe that’s why expected to...
we decided the board makeup • Fairly address the needs of lose huge sums of
needs to change” (Dang 2003e). customers in each jurisdiction
in which we operate
money, where will
About one month later the resources come
those civil suits were tabled, as • Conduct business responsibly from? Who will pay
federal investigators subpoenaed
extensive records on the
as a non-profit service plan,
to ensure the plan’s long-
for that?’”
proposed conversion and sale term financial viability and
of CareFirst. The investigation, growth
11
The Failed Conversion of CareFirst
• Collaborate with the health care.
community to advance health CONCLUSION
care effectiveness and quality
“...with the right Some of those interviewed for
this report opined that, had
leadership, CareFirst • Support public and private
efforts to meet needs of the CareFirst Board or CEO
can be an effective persons lacking health volunteered at an early stage
partner in providing insurance to remove the controversial
components from CareFirst’s
more coverage to • Foster health systems compensation policies and from
more people and integration and health care the proposed transaction, the
in developing win- cost containment to benefit
the people in areas we serve,
outcome might have been a
much closer call.
win relationships and
with the provider Those interviewed generally
shared the belief that, with
community and • Promote respect, fairness
and opportunity for our the right leadership, CareFirst
other stakeholder associates. can be an effective partner in
groups...” providing more coverage to
more people and in developing
In the same announcement,
outgoing CareFirst Board Chair win-win relationships with
Altobello stressed what he called the provider community and
the board’s commitment to other stakeholder groups to
“maintaining a high standard improve patient safety, disease
of corporate governance in all management, and other aspects
of its operations in Maryland, of care as well as to improve
Delaware and the National health status. There were varying
Capital Area” and reported that levels of skepticism and optimism
the board had engaged a senior expressed by these interviewees,
partner in a Washington, D.C. however, as to whether the
law firm, who had served on a right leadership would emerge
special task force on corporate to, in effect, “put the for-profit
responsibility of the American genie back in the bottle.” The
Bar Association, to assess and level of skepticism or optimism
advise the CareFirst board on its in this regard depended on how
structure. they saw the make-up of the
future board shaking out and
In early May 2004, Maryland’s on whether they felt that the
general assembly passed CEO and his team should and/or
additional legislation reinforcing would be replaced.
the insurance commissioner’s
oversight of CareFirst, giving Two recent developments
the commissioner approval bear mentioning. Steven Larsen
authority over officer and has accepted the position
executive compensation, as well of president and CEO of the
as over any proposed material Maryland office of a for-profit
change in benefit plans offered, health insurer, whose sole
marketing goals, provider product is Medicaid managed
networks, provider payment care coverage. And at press time,
levels, premium rate changes, Wellpoint and Anthem were
underwriting guidelines, and the appealing the denial of their
availability or affordability of merger bid by the California
12
insurance commissioner. to convert and subsequent were made to interview leaders
NOTES amendments thereto, and the of the Maryland Senate and
insurance commissioner’s full House engaged in the CareFirst
The Alliance for Advancing report denying the conversion. debate and aftermath. The
Nonprofit Health Care is a Also reviewed were reports former board chair of CareFirst
new national group composed prepared by Carl Schramm for involved in the conversion effort,
of a mix of nonprofit health the Abell Foundation and by Daniel Altobello, declined to be
care providers, nonprofit the Milbank Memorial Fund interviewed, stating that “it is
health insurers, and nonprofit for the Maryland speaker of a good time to be silent” and
integrated health care financing the House of Delegates and that his position was “a matter
and delivery organizations, the president of the Maryland of public record.” CareFirst
dedicated to preserving the Senate. In addition, more than declined the author’s request for
unique roles and responsibilities 40 Baltimore Sun newspaper an interview with one or more
of nonprofit health care articles were reviewed about the of its current leaders who were
organizations in the United proposed conversion, its denial, involved in this controversy.
States while improving their and the aftermath. Their views were extracted
performance. The views from the MIA documents and
presented are the author’s and Secondly, I interviewed newspaper quotes.
are not positions taken by the several individuals, who
Alliance. graciously gave of their time 3
Interestingly, in order to gain
and perspectives: Carl Schramm, the support of the Maryland
1
Because the devil is often formerly a consultant who State Medical Society (MedChi)
in the details, this account is prepared a significant report on for this merger, the CareFirst
intentionally much more detailed this proposed conversion; Steven CEO reportedly wrote a letter
than James C. Robinson’s article, Larsen, the former Maryland to MedChi’s CEO stating that he
“For-Profit Non-Conversion and insurance commissioner who no longer had any intentions to
Regulatory Firestorm at CareFirst denied CareFirst’s proposed convert CareFirst to for-profit.
BlueCross BlueShield” (Health conversion and sale; Cal
Affairs, July/August 2004). Pierson, president, and Nancy 4
The Maryland State Medical
Fiedler, senior vice president Society and the Maryland
2
The information for this for communications, of the Hospital Association (MHA)
article was derived from two Maryland Hospital Association; voiced strong opposition to the
sets of sources. First, a variety Michael Preston, executive proposed conversion, joining
of documents were reviewed, director of the Maryland State in and funding a coalition,
almost all of which were readily Medical Society; Dawn Touzin, Maryland Cares!, with almost 40
available from the Maryland community health assets project consumer, labor, and community
Insurance Administration (MIA), director and Nomita Ganguly, groups and with Community
either through downloading staff attorney of Community Catalyst, a Boston-based national
from its website, www. Catalyst, a national advocacy consumer advocacy group with
mdinsurance.state.md.usa, group dedicated to increasing experience in conversion debates
or by online request. The consumer participation in health in other states. MedChi and
MIA documents reviewed care decision making; and Bill MHA could not envision how
included all the reports of Salganik, the principal reporter their historical partnership with
experts/consultants engaged by for the Baltimore Sun on the CareFirst and state policymakers
CareFirst and by MIA, selected proposed CareFirst conversion. could continue if CareFirst not
testimony and depositions Because of time constraints and only converted to for-profit, but
by CareFirst officials and because their views were well was also acquired by a national
opponents to the conversion, documented in the newspaper company. It was conceivable to
CareFirst’s original application articles reviewed, no efforts MHA and the coalition that over
13
time Wellpoint might even try
through Medicare amendments
or other means to eliminate
the all-payer hospital rate
regulatory system in Maryland,
so that Wellpoint could use its
market leverage to “ratchet-
down” its rates paid to hospitals.
Moreover, on substantive
grounds, the coalition felt
strongly that CareFirst had not
made a convincing case that
the conversion and sale were
necessary for its financial well-
being.
5
Throughout the review
process the Baltimore Sun
was particularly thorough in
its coverage of the details of
CareFirst’s application, the
content of expert reports from
both MIA and CareFirst, the
results of public hearings and
depositions, and the results of its
own interviews with key players
within the state and with outside
experts.
14
REFERENCES state.md.usa • 2003e. U.S. Subpoenas
CareFirst. Baltimore Sun
CareFirst of Maryland, Inc. Feldman, R., D. Wholey, and R. August 14: 1A.
2003a. Amendment No. 1 to Town. 2003. The Effect of HMO
Form A: Statement Regarding Conversions to For-Profit Status. Salganik, W.M., and M. Dresser.
the Acquisition of Control of February 4. Available at: www. 2002. Executives Due $33 Million
or a Merger with a Domestic mdinsurance.state.md.usa with CareFirst Sale. Baltimore
Insurer. January 17. Sun March 8: 1A.
Larsen, S.B. 2003. Report
• 2003b. CareFirst Adopts of the Maryland Insurance Schramm, C. J. 2001. Blue Cross
Revised Mission Statement, Administration Regarding Conversion: Policy Considerations
Affirms Commitment to the Proposed Conversion of Arising From a Sale of the
Corporate Governance CareFirst, Inc. to For-Profit Status Maryland Plan. Baltimore, Md.:
December 4. Available at: and Acquisition by Wellpoint Abell Foundation.
www.carefirst.onlinepresskits. Health Networks, Inc. Available
com. at: www.mdinsurance.state. Wakely Consulting Group. 2003.
md.usa Fairness Analysis Impact Survey
Dang, D.T. 2003a. Blues, MD and Impact Report. February 13.
Gain Tentative Deal on CareFirst: LECG, LLC. 2003. Foundation Available at: www.mdinsurance.
Baltimore Sun June 4: 1A. Analysis, Final Report. February state.md.usa
11. Available at:: www.
• 2003b. CareFirst Settlement mdinsurance.state.md.usa
Accepted by Judge. Baltimore
Sun June 7: 1A. Meyer, R.F. 2003. The Valuation
of the DC, Maryland, and
• 2003c. CareFirst’s Chief Delaware Blue Cross Blue
Alters Views, Seeks to Remain Shields, Supplement to Report
at Helm. Baltimore Sun June of March 4, 2003. September 4.
29: 1A. Available at: www.mdinsurance.
state.md.usa
• 2003d. Insurance Chief
Targets CareFirst Executives. Salganik, W.M. 2003a. Insurance
Baltimore Sun July 9: 1A. Chief Bars $1.37 Million Sale of
CareFirst. Baltimore Sun March
• 2003e. CareFirst Board 6: 1A.
Says It Will Fight Impending
Charges. Baltimore Sun July • 2003b. Larsen Says CareFirst
22: 1A. Board Elicits “Very Little”
Confidence. Baltimore Sun
Dang, D.T., and W.M. Salganik. March 11: 1A.
2003. Stealth Efforts to Kill
Reform of CareFirst. Baltimore • 2003c Assembly Welds
Sun June 1: 1C. “Nonprofit” to CareFirst.
Baltimore Sun April 8: 1C.
Delmarva Foundation. 2003. The
Potential Effects of a CareFirst • 2003d. Playing Health Plan
Acquisition by Wellpoint on Poker. Baltimore Sun May 26:
Maryland Stakeholders. Report. 1D.
Available at: www.mdinsurance.
15
Address correspondence to Mr.
McPherson at
3238 Spriggs Request Way,
Mitchellville, MD 20721.
Email: mcphersonbruce@aol.com
*Publisher’s Note: From time
to time, this section features
original papers or reprints of
significant studies.
16