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                                       This article presents in detail

OF A FAILED                            the relevant facts surrounding
                                       CareFirst’s failed attempt to

                                       convert to for-profit status and
                                       be acquired by the for-profit
                                       company, Wellpoint Health

                                       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.

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
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
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
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
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
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)
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
consummated” (Larsen 2003). In     consummated and only $750,000
certain instances the retention    if it were not, the commissioner
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).
                                         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).
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
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
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

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
  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
  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,           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
     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-

       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

REFERENCES                                              • 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               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
                                    11. Available at:: www.
   • 2003b. CareFirst Settlement
   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.
   • 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.
     Address correspondence to Mr.
     McPherson at
     3238 Spriggs Request Way,
     Mitchellville, MD 20721.

     *Publisher’s Note: From time
     to time, this section features
     original papers or reprints of
     significant studies.


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