ANNAPOLIS – CareFirst BlueCross BlueShield continued its fight this week against criticism of its efforts to complete a conversion to a for-profit company by sending a clear message to one critic in particular.
CareFirst Wednesday released its response to a Nov. 7 report by former Missouri insurance commissioner, Jay Angoff, who said that executive benefits and compensation, which could pay out as much as $119 million if the conversion is completed, are excessive and illegal.
Angoff’s report, prepared for the Maryland Insurance Administration to use in evaluating the CareFirst change, questioned whether CareFirst knowingly followed bad advice from financial consultants, violated Maryland law and failed in its fiduciary duties when it made the decision to reward its top executives.
In its response, CareFirst called the report a mean-spirited and unjustified attack on Carefirst’s board of directors.
“Our biggest issue is that we think he portrayed this in a fashion that is unfair to the board of directors,” said CareFirst legal counsel Jay Smith of Piper Rudnick LLP. “We think dialogue seems to be focused on portraying the board as acting inappropriately and second-guessing the process, but they had the benefits of legal advisers and compensation advisers.”
Angoff’s report failed to consider all factors when evaluating whether the compensation was excessive, said Sheldon S. Cohen, former commissioner of the Internal Revenue Service in documents prepared for use in next week’s hearings on the issue.
“Mr. Angoff didn’t have the benefit of any compensation consultants,” Smith said. “The right test in our judgment is a fact-and-circumstance test to see what is reasonable.”
The report also addresses concerns that CareFirst chief executive officer, William L. Jews, was significantly involved with the development and approval of the bonuses. Jews could receive more than $39 million in benefits and compensation if the transaction is completed.
There is no evidence to support that claim, according to CareFirst.
Angoff said he is still reading CareFirst’s documents and will have a response once hearings begin next week.
Some executive benefits violate Maryland law, Angoff reported.
Earlier this year, the General Assembly passed a law to prohibit executives from receiving compensation from the conversion and proposed merger with California health care giant WellPoint Health Networks, Inc.
Because the compensation packages were passed before the 2002 law, it doesn’t apply, CareFirst’s report said.
“We do not contest that the fact that legal issues are to be considered now with the new law,” Smith said. “All parties are going to have to consider what the 2002 law requires and the effects of the law being enacted.”
Compensation consultants for CareFirst said they looked at similar transactions, including WellPoint’s acquisition of BlueCross BlueShield of Georgia, when evaluating compensation packages.
“Hay Group’s opinion that the compensation arrangements in place at CareFirst relating to the acquisition of the company are justifiable, appropriate and commercially reasonable,” said Gene E. Bauer, managing director of Hay Group, in pre-filed testimony submitted in March.
Angoff criticized the group for including for-profit organizations when determining compensation.
“We included for-profits because CareFirst competes with for-profit organizations for talent and product,” said Bauer.
CareFirst’s response comes just before hearings are scheduled to begin Monday by Maryland Insurance Commissioner Steven B. Larsen to determine whether CareFirst can be converted to a for-profit.
CareFirst consultants, as well as Angoff, will testify next week during the scheduled three days of hearings.
Gregory Sorensen, managing director of Banc of America Securities Inc. will testify Monday in support of the $1.3 billion proposal by WellPoint.
Larsen will use the hearings to determine if conversion to a for-profit is beneficial to Maryland residents, if the $1.3 billion that WellPoint is offering to purchase CareFirst is fair and if the compensation package is appropriate. Larsen is expected to make a decision regarding the merger by February.