ANNAPOLIS – Maryland lawmakers concerned about the proposed for-profit conversion of CareFirst BlueCross BlueShield could learn a few lessons from the experience of its California suitor.
WellPoint Health Networks, which has offered $1.3 billion for CareFirst, merged with the non-profit Blue Cross 1993 – a process still being debated today.
In a move that angered many California lawmakers at the time, Blue Cross began dumping much of its business as well as 90 percent of its assets into WellPoint during that year.
WellPoint was created as a for-profit subsidiary of the then-non-profit Blue Cross in 1991.
The move essentially allowed Blue Cross to run as a for profit through WellPoint, said Phillip Isenberg, a former California state lawmaker who was chairman of the Assembly Committee of the Judiciary at the time of the restructuring.
California, like most states, has laws requiring nonprofits that convert to leave their assets behind to another non-profit organization. Even though most of its business was through the for-profit WellPoint, Blue Cross was going to remain nonprofit, which essentially removed its repayment obligation to the state.
“They never intended to leave anything behind,” Isenberg said.
The California corporations commissioner at the time approved the restructuring in January 1993, saying it was legal. That prompted Isenberg to introduce legislation to require board members of a restructured nonprofit to preserve the charitable assets and to keep corporate charitable expenditures at the same level as before the change, according to a report Isenberg authored about nonprofit health insurer conversions. It passed the House but was killed in the Senate.
The publicity and pressure from lawmakers prompted WellPoint to reach a tentative agreement in May 1993 to make $5 million in charitable contributions for each of the next 20 years.
“We muscled them to get them where we wanted,” Isenberg said.
Then, in August 1993, a new corporations commissioner, Gary S. Mendoza, assumed office. Mendoza is scheduled to testify in the Maryland conversion case this week.
After reviewing the terms of WellPoint’s proposed charitable contributions, Mendoza wrote a letter to Blue Cross in May 1994 saying the proposed payment schedule was inadequate, according to the report. The planned $100 million to be paid over 20 years was less than 0.2 percent of the two companies’ value at that time.
Mendoza then refused to approve WellPoint and Blue Cross’ merger, which prompted a new round of negotiations. That resulted in WellPoint finally agreeing to put more than $3 billion in assets into two charitable foundations in April 1995.
“Now they’re claiming they gave the money out of charitable impulses,” Isenberg said. “In reality, they were forced to do it.”
The reason why WellPoint restructured in that manner could’ve been because it was the first Blue Cross plan to try to convert to for profit, said Ken Ferber, WellPoint spokesman.
“I wasn’t around then and neither were a lot of the people who are working here now,” Ferber said. “But this was the first `blue’ conversion, so the process was being established. . . .
“It was a very long process where you weren’t reinventing the wheel, you were creating it.”
Legislators in Maryland are as concerned as those in California were. They have raised doubts about the benefits and motives of the proposed switch.
“I see nothing positive about this conversion,” said Delegate Michael Busch, D-Anne Arundel.
Busch is chairman of the House Economic Matters Committee, which has been hearing the majority of the bills relating to the conversion. Nonprofit health care conversions, he said, are “one of the biggest shell games of the 90s. They take things that don’t belong to them and use it for their own profit.”
Some Maryland lawmakers have said they believe the real reason behind the conversion is the money CareFirst executives stand to gain if it’s approved. That skepticism was reinforced with the release Thursday of the proposed compensation for CareFirst executives, $33.2 million, if the conversion is approved. “What this proves is that the insiders who are negotiating this merger will be taken care of,” said Attorney General J. Joseph Curran Jr. in a recent statement. “As the attorney general, what I am concerned about is whether this is good for Marylanders and our health care system.” Curran is charged with determining if the WellPoint offer is adequate. Similar to California, if the sale goes through in Maryland, the proceeds would be placed into a trust, which could go toward helping the uninsurable. CareFirst President William Jews alone would make more than $9 million from the deal. If he’s fired after the conversion, he could make more than $20 million. His annual salary of more than $2 million has already prompted Delegate Dana Lee Dembrow, D-Montgomery, to introduce a bill to regulate salaries of non- profit health insurance executives. Also, for CareFirst’s conversion to take place, Maryland Insurance Commissioner Steven Larsen must decide if the sale is not in the public interest. In other words, as the law stands, so long as Larsen determined there would be no harm to the public, the sale would have to be approved. But under another bill that has already passed the House, CareFirst would have to prove the conversion would benefit Marylanders, essentially shifting the burden of proof to CareFirst. All of this could come to a head next week at a series of public hearings where CareFirst and WellPoint executives are scheduled to stand before the insurance commissioner to testify about the conversion. Those hearings will be held at the University Center Ballroom at the University of Maryland Baltimore County most of this week.