Blue Cross agrees to buy CareFirst HMO

Blue Cross and Blue Shield of Maryland, the state's largest health insurer, has agreed to acquire the financially beleaguered CareFirst Inc. health-maintenance organization. Terms of the acquisition were not disclosed.

CareFirst, one of the state's largest health-maintenance organizations with 118,000 members, was taken over by the state Insurance Division last Thursday after a examination found that two of the firm's major division had a combined negative net worth of about $8.9 million. This was $11.7 million before state net worth standards.


The two divisions that had their assets frozen were HealthCare Corp. of the Mid-Atlantic and HealthCare Corp. of the Potomac. Both trade as CareFirst.

Virginia insurance regulators followed suit on Friday and seized the company's Virginia affiliate Physicians Health Plan Inc.


The acquisitions of the three divisions by Blue Cross must still be approved by both Maryland and Virginia insurance regulators, according to a press release from CareFirst and Blue Cross.

Insurance Commissioner John A. Donaho said Blue Cross and CareFirst made a presentation to the Insurance Division about the proposal yesterday. "We will be evaluating the proposal," he said.

"We will not only be looking at the effect on CareFirst, but also the effect on Blue Cross and how they will pay for it and how they will manage it," Donaho said.

CareFirst also announced that its board of directors has reinstated David D. Wolf as president and chief executive officer of CareFirst Inc. Wolf had been head of the company since 1985. But on Feb. 15, he was replaced by Warren Stowell, a Florida executive.

In an interview last night, Wolf said he had been replaced because of a difference in strategy. "They were uncomfortable with some transitions," Wolf said. He declined to be more specific about the disagreements.

Wolf downplayed his departure as a reason for the state takeover, but he did point out that Donaho had expressed concerns about the continuation of care in his decision to freeze the assets.

He estimated that the arrangements for the acquisition would be completed by the middle or end of March. While there would be no consolidation of the the two operations in the near future, he said the two companies would try to "maximize administrative efficiencies." He also said that CareFirst will continue to provide its members with health insurance benefits during the transition period.

Even before the takeover by the state, CareFirst and Blue Cross had been discussing a possible acquisition, Wolf said. Besides being the largest health insurer, Blue Cross also operates the state's largest health-maintenance organization, Columbia FreeState Health System, which has more than 175,000 members.


"This acquisition is a natural consolidation off two of Maryland's oldest and best known health care providers," said Carl Sardegna, chairman and chief executive officer of Blue Cross, in a prepared statement.

CareFirst was saddled with heavy debt in 1986 when it was sold to a group of local investors and company executives in a management leveraged buyout that was primarily financed by Maryland National Bank.

CareFirst owes more than $66 million to creditors, including $22 Maryland National Bank. Unpaid interest on that debt has grown to $3 million, regulators said.