Who Will Fix the Blues?

Has Blue Cross-Blue Shield of Maryland overstated its net worth by as much as $100 million? Has it squandered millions on new, poorly-managed subsidiaries? Has it hidden money-losing ventures from state regulators and even from its own board of directors?

These are now critical questions. The U.S. Senate permanent subcommittee on investigations issued a scathing report in September accusing Maryland's largest health care insurer of doing all of those things and more.


According to the Senate report, Marylanders covered by Blue Cross-Blue Shield have received bad service while their premiums have jumped more than 25 percent a year. The company was at best conservative and at worst "brutal" in decisions to deny benefits to subscribers. Its executives were paid exorbitant salaries and given extravagant perks.

The Senate report has set off a political firestorm. After all, the Blues cover 1.4 million Marylanders. Key committee chairmen in the General Assembly should be screaming for a full investigation.


How about the big question: Is Blue Cross-Blue Shield solvent?

Last summer, the state's insurance commissioner, John A. Donaho, testified in front of the Senate subcommittee that the company was "barely solvent." A consulting firm hired by the Blues predicts that the cyclical industry could plunge into another downturn that could result in company losses of $100 million over the next three years. That would wipe out the Blues. Could it really happen?

All of a sudden there are a lot of very serious questions about Blue Cross-Blue Shield. But who's going to answer them? Whom should we trust to examine the company objectively and give us an honest and accurate evaluation?

Management? Yeah, sure. The company's treasurer admitted to the U.S. Senate subcommittee that Blue Cross-Blue Shield had overvalued its subsidiaries by $80 million in order to avoid presenting an "unacceptable" financial picture.

But we can rely on the company's outside auditors, can't we? After all, they're supposed to be "independent." But the Blues' management has changed auditors whenever it wanted a different opinion. When one firm found the Blues close to insolvency a few years ago, it suspended its audit "as a matter of courtesy."

The board of directors will straighten this all out, right? But they've been asleep for the last six years. They allowed company CEO Carl J. Sardegna to control all the information they've received. The only thing they ever decided on their own was what birthday present to buy him.

Thank goodness we can count on the insurance commissioner -- can't we? Mr. Donaho has played an odd role in this drama. At times he has appeared a feisty hero, relentlessly pursuing the politically powerful Blue Goliath. But he has also flip-flopped. After he criticized the Blues in Washington last summer, he seemed to tell legislators in Annapolis there was nothing to worry about.

Over the years Mr. Donaho has complained that the Blues have repeatedly thwarted his audits and even withheld relevant information. But neither he nor his predecessors ever asked the attorney general step in. The fact is the insurance division is so underfunded and understaffed that it simply lacks the capacity to keep track of Blue Cross-Blue Shield.


But we can still rely on the Maryland legislature, right? Last summer a House of Delegates committee held hearings on Blue Cross-Blue Shield. They took place almost immediately after Mr. Donaho had criticized the Blues in Washington. But he only testified for about 20 minutes. Then a high-priced team of executives and lawyers from Blue Cross-Blue Shield made a four-hour presentation. Members of the committee members seemed overwhelmed by the charts, statistics and financial figures. They asked a few softball questions and accepted the Blues' smooth reassurances.

Two months later the Senate subcommittee in Washington blasted the company. Were the legislators in Annapolis furious? Did they suspect they might have been hoodwinked? Not at all. The chairman of the House of Delegates committee said Mr. Donaho had "shot from the hip and missed the target." Maybe the General Assembly really trusts Blue Cross-Blue Shield's own assessment of itself.

The House committee has scheduled new hearings on a package of regulatory reforms. But what about all these questions? Why count on the insurance commissioner to pursue the Blues aggressively when he never has done so before?

So it's up to the governor. He'll get to the bottom of all this, won't he? And of course he'll do it now. But last year some of his friends on the Blues' board of directors persuaded him to make Mr. Donaho back down on a regulatory dispute with the company.

The same problem keeps coming up: Does anyone in state government really want to know the answers to these questions? Blue Cross-Blue Shield is so big and so important that no one dares to face the prospect that the company might be in trouble. Maybe it's solvent and well-managed. But no one in the system today can give us that assurance with any credibility.

It's time to appoint an outside special counsel with the necessary investigative powers. Maryland took that step once before. But by then it was too late to prevent the savings and loan disaster. If we could get a reliable fix on the problems at Blue Cross-Blue Shield now, we might avoid a similar fiasco. At least the issues would have been examined by someone we can trust.


Tim Baker's column appears on alternate Mondays.