Insurer called 'financially sound' The Blues defend themselves despite surplus shortage.


The chairman of Blue Cross and Blue Shield of Maryland says the state's largest health insurer is "financially sound" even though it is one of 11 regional Blue Cross plans with surpluses below regulatory standards.

Carl J. Sardegna, the Blue Cross chief, also said he is confident that the insurer's financial condition will not hamper its proposed takeover of troubled CareFirst Inc., one of Maryland's largest health-maintenance organizations.

However, state Insurance Commissioner John A. Donaho said that if the acquisition is approved, conditions might be attached that would limit how the new, enlarged HMO would operate.

The Maryland Blue Cross organization was highlighted in an article in the Wall Street Journal yesterday as one of 11 Blue Cross plans that could cover less than four weeks of average claims with the surplus available at the end of 1990.

Under the strictest standard, the Maryland plan could cover 2.3 weeks of claims. Under a standard more attuned to its type of operation, the insurer could cover 4.7 weeks of claims.

Surplus is the difference between an insurer's assets and liabilities, using conservative statutory accounting principles. It is similar to net worth or owner equity, but more restrictive because it includes only those assets that can be sold quickly.

Concerns about the the financial health of Blue Cross plans surfaced last fall when Blue Cross and Blue Shield of West Virginia collapsed, leaving behind $50 million in unpaid medical bills. In Maryland, claims against the local Blue Cross operation would be covered by a state guarantee fund in the event of insolvency.

The four-week rule is an informal measurement of the economic strength of a health-care insurer used by insurance regulators and health care analysts. However, other considerations, such as the profitability of the plan and the regulatory climate of a

state are also considered.

The rule is also applied less stringently to plans that do a large portion of their business by administering claims for companies that are self-insuring. In this arrangement, which accounts for about half of Maryland Blue Cross' business, the insurer is not directly liable for claims.

At the end of 1990, Maryland Blue Cross had a surplus of $44.8 million, enough to cover 2.3 weeks of average claims. When its purely administrative business is subtracted, the number of weeks covered by the surplus rises to 4.7.

Maryland Blue Cross has been through tough times in recent years. It had losses in 1987 and 1988. Even though it had a profit of $15.8 million in 1989, the Maryland Insurance Division declared that the organization was "impaired" because it fell below the state requirement of $75,000 in net worth, according to Donaho.

The plan rebounded in 1990 with its best year ever, earning $48.6 million. But because its surplus would still cover less than four weeks of claims, Sardegna said, it is currently on "conditional membership status" with the Blue Cross and Blue ++ Shield Association, the Chicago-based umbrella group for Blue Cross plans.

That conditional status list consists of Blue Cross plans that do not meet one or more of the association's standards, according to Cheryl Van Tilburg, a spokeswoman for the association. Being on the conditional list does not mean that a Blue Cross operation is in danger of losing its membership in the national association.

Despite its conditional status, Sardegna said, the company is in sound financial shape with a liquid investment portfolio of $140 million and only $3 million in long-term debt, in the form of a mortgage on one of its HMO sites. He said the plan also has $20 million more than necessary in its reserves for unpaid claims.

In addition, Sardegna said, Maryland Blue Cross has exceeded the performance it projected in plans it filed with the national organization as part of its conditional status.

The acquisition of CareFirst, which was taken over by the state Feb. 21, will actually help Blue Cross because it will boost the organization's assets. The profits from the CareFirst operation should be able to service any debt or cover any investment that Blue Cross makes, with money to spare, Sardegna said.

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

This was $11.7 million below state net-worth standards. In late February, Blue Cross offered to buy the HMO. Combined with Blue Cross' Columbia-FreeState Health System, it would create an HMO with 300,000 members.

One of the reasons the acquisition of CareFirst would not be a drain on Blue Cross capital is because Blue Cross will be paying off only a portion of CareFirst's debts, Sardegna said. Creditors have already agreed to accept a partial payment, he said.

Also, the value of the assets received will be greater than Blue Cross' investment, even though some of the assets will be intangible, such as good will, he said.

The acquisitions of CareFirst by Blue Cross must still be approved by Maryland and Virginia insurance regulators.

Insurance Commissioner Donaho is less glowing about Maryland Blue Cross' financial health, saying only that "they have improved over the last year." He did say that the possible acquisition of CareFirst apparently will not hurt Blue Cross and said the consolidation could improve HMO operations in the state.

However, he said conditions might be attached concerning the HMO operation. "We are in the final stages of reviewing that," Donaho said about the proposed CareFirst acquisition.

He said he hopes to make a decision on the matter by Monday, when a hearing will be held in Baltimore Circuit Court concerning the seizure of CareFirst.

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