The lawsuit Johns Hopkins Health System filed against the Prudential Insurance Co. of America last month has all the elements of a classic corporate showdown: clashing industry leaders, high-priced attorneys, influential executives, and large sums of money.
Call it "The Dome vs. The Rock."
But the two companies are not just fighting over $50 million in damages and the fate of one local health maintenance organization, as the suit indicates.
The fight, two years in the making, reaches much further than that. It has severed a number of already strained ties and threatens to tarnish the reputations of some of the best-known executives in Maryland. It has dragged in a White House confidant, one of Baltimore's top women executives, a powerful Baltimore banker, a former U.S. attorney, a former Watergate counsel, Maryland's health secretary and other state regulators.
And the battle, which specifically targets the woman who headed Hopkins' HMO, goes well beyond a set of extraordinary personal allegations and the prominent cast of characters.
Hopkins has suffered millions in losses at the subsidiary that handles the Prudential HMO contract. And it faces little prospect of getting a larger share of the $2 billion in annual HMO revenues generated in Maryland.
But what Hopkins and Prudential are really fighting over, say participants on both sides, is a stake in the future of managed care -- the cornerstone of the proposed Clinton health care reform -- and the uncertain fate of one of the nation's preeminent health care institutions.
"This could get really ugly," said one person, who, like most of those interviewed, spoke only on the condition they not be identified.
On the surface, the lawsuit is remarkable enough. Led by its ambitious president, Dr. James A. Block, Hopkins has accused the former president of its HMO, Barbara B. Hill, 41, of several counts of breach of contract and fiduciary duties during the 1991 sale of the Hopkins HMO to Prudential, the nation's largest insurance company. The terms of the contract have led to millions of dollars in losses for Hopkins, the health system claims.
Suit claims cover-up
Specifically, the lawsuit says, Ms. Hill, now one of Prudential's top health care policy-makers, lied repeatedly to Hopkins, her then-employer, as she negotiated on its behalf. She also covered up crucial details of Prudential's offer for the Johns Hopkins Health Plan to give Prudential an edge in the bidding, the suit claims. Among her alleged motives: several hundred thousand dollars in severance payments for her and her husband, a fellow executive at the Hopkins HMO.
Hopkins is seeking $25 million in compensatory and punitive damages each from Prudential and Ms. Hill, according to the lawsuit, filed March 4 in Baltimore Circuit Court.
But perhaps more importantly, it asks the court to return the HMO to Hopkins, and void a 10-year contract that, in part, prevents the Hopkins health system from either starting its own HMO, or allowing its doctors to see patients of other HMOs.
Ms. Hill "did what was best for herself and Prudential, her future employer," the lawsuit states. "The result for Hopkins . . . after the sale was the loss of millions of dollars per year."
In buying the Hopkins plan three years ago, Prudential was looking to expand its network of HMOs and wanted to move heavily into the Baltimore area. And Hopkins, primarily in the business of providing health care, was at a crossroads.
Hopkins had entered the health insurance business almost by accident. Just over 10 years ago, the hospital agreed to take over the East Baltimore Medical Center, a struggling HMO that owed Hopkins about $3 million. At the time it was renamed, the Johns Hopkins Health Plan served several hundred mostly Medicaid patients in the low-income neighborhoods surrounding the Hopkins complex.
To run the business, Hopkins' former president, Dr. Robert M. Heyssel, appointed Ms. Hill, a feisty, sometimes abrasive former social worker. "Barbara is an extremely talented individual," said Rep. Benjamin L. Cardin, a 3rd District Democrat. She is "very creative, a mover. She knows how to get things done."
By 1990, the Hopkins HMO was no longer just a community service. Ms. Hill had built it into a 100,000-member institution with more than $116 million in annual revenue and $2.6 million in profits.
Competition intense
Faced with intense competition for members, the HMO needed to grow to survive. But expanding the operation, and adding the traditional insurance products large employers demanded, would mean increasing the financial risks to the Hopkins health system.
Further, the HMO was a source of friction between the hospital, owned by the Hopkins health system, and the medical school faculty, part of the university.
The theory behind managed care is to hold down medical costs by reducing the amount of unnecessary care given to patients. But reducing costs for an insurer means reducing income for hospitals and doctors. Combine that with the resentment felt by impressively credentialed faculty members who saw the Hopkins name being used by mostly non-Hopkins doctors, and the internal tension magnified.
What Dr. Heyssel wanted, he told The Sun at the time, was "the appropriate buyer that we could have a long-term relationship with." In late 1990, he told Ms. Hill to negotiate the sale of the HMO to one of the two final bidders: Prudential, or the Aetna Life Insurance Co.
That much is undisputed.
But what followed remains sharply contested, and represents the bulk of Hopkins' allegations against Ms. Hill and Prudential.
Severance payments
Hopkins claims that in late 1990 or early 1991, Ms. Hill began talking to Prudential about a job after the sale. The lawsuit says Ms. Hill and Prudential secretly agreed that, under Prudential's bid, Hopkins would be stuck with more than $500,000 in severance and termination payments to Ms. Hill and her executive staff. That included Ms. Hill's husband, Ancelmo E. Lopes, who was then vice president of operations, and now is president of the Prudential Health Care Plan HMO.
Throughout the first few months of 1991, the suit claims, Ms. Hill engaged in a series of deceptions against her employer, Dr. Heyssel, and the Hopkins health system's board of trustees, a group that includes some of Baltimore's most powerful business leaders.
She allegedly concealed the fact that the Prudential bid would have kept Hopkins out of the HMO business for 10 years, whereas Aetna's noncompete period lasted only five years. And she allegedly kept secret the clause that would require the Hopkins HMO physicians to serve exclusively Prudential HMO patients, according to the lawsuit.
Hopkins also claims that Ms. Hill negotiated changes in the way Prudential would pay Hopkins to treat the HMO members, without explaining how damaging those changes would be. The result was large unexpected operating losses for Hopkins, the suit maintains.
Hopkins also alleges that Ms. Hill even helped Prudential draft its final proposal, and secretly passed along the terms of Aetna's bid, one day before Prudential's offer arrived.
Price was $18 million
Based largely on Ms. Hill's skewed comparisons of the two offers, the lawsuit maintains, the Hopkins board agreed to sell to Prudential for $18 million and the deal closed on May 20, 1991, according to an analysis of the sale obtained by The Sun.
Neither Dr. Heyssel nor Ms. Hill would comment for this article.
But in a statement, Ms. Hill said, "This suit seeks to embarrass The Prudential into acceding to Dr. Block's unreasonable demands. Frankly, as a Baltimore native, I am a little embarrassed -- for Hopkins' sake."
Within a year of the sale, Dr. Heyssel announced the end of his nearly 25-year career at Hopkins. His replacement was Dr. Block, an Ohio native with a patrician manner. In interviews with people who have worked with him, he is described by some as a personable visionary and by others as arrogant and stand-offish.
Now 53 years old, the pediatrician had built a national reputation in health care circles for his work in crafting a cooperative agreement among Rochester, N.Y.'s hospitals and employers that controlled rising hospital costs while allowing profits to grow.
Brought to Hopkins from Cleveland, where he was president of the University Hospitals, Dr. Block was a member of then-President-Elect Bill Clinton's health care reform transition team in 1992, and remains an informal adviser to Ira Magaziner, the lead architect of the reform plan.
"He is clearly regarded by the White House as someone who is looking toward changes in the delivery system and has the credibility to do that nationally," said Richard H. Wade, senior vice president of the American Hospital Association.
Dr. Block, in an interview, pointed out that "managed care is a very significant part of what all health care institutions are doing today, and we are participating very successfully with a number of managed care companies."
"The world outside of Hopkins has changed a great deal over the past three years" since the sale, said one Hopkins official. "Many of the assumptions made then no longer are there."
With the concept of managed care dominating the health care debate, Dr. Block took over an institution that was contractually barred from running its own managed care business for the next nine years.
Soon after he arrived, he set in motion more than a year of discussions about the contract with Prudential, according to several people familiar with Dr. Block and the talks.
Center Club lunch
In late 1992, Dr. Block arranged a Center Club lunch with Maryland Health and Mental Hygiene Secretary Nelson J. Sabatini to meet then-Insurance Commissioner John A. Donaho. Dr. Block complained to Mr. Donaho about the 10-year noncompete agreement with Prudential, asking what could be done about it, according to Mr. Sabatini. In addition, the Johns Hopkins Medical Services Corp., the unit formed by the remains of the HMO and its doctors network, was suffering severe losses under its contract with Prudential, Dr. Block told them.
Mr. Donaho "said there are basically two issues here," Mr. Sabatini recalled. The first was whether the arrangement preserved adequate quality of care, which was a Health Department issue. The Insurance Department's only concern, he said, was whether Prudential was living up to the terms of its agreement. Mr. Donaho declined to comment.
But the lunch proved more pivotal than the three men might have imagined.
While at the Center Club, they had an awkward encounter with Ms. Hill. Apparently made suspicious by the gathering, she soon began to catch wind of the growing dispute between Hopkins and Prudential, according to people who know her.
Ms. Hill, concerned about Hopkins' allegations of impropriety over the HMO's sale, prepared an extensive chronology of the events surrounding the sale. She submitted the thick document to Insurance Commissioner Donaho in January 1993, requesting that it be kept confidential, the cover letter shows.
About that same time, Hopkins hired a colleague of Mr. Donaho, former Associate Insurance Commissioner Philip Wickenden, to consult with Hopkins in an effort to stem its losses. And later, after Mr. Donaho was fired in April 1993, Mr. Wickenden hired him to help with the Hopkins consulting job.
Two top regulators
Hopkins now had on its side the two top regulators who oversaw the HMO sale to Prudential in 1991. (Both Hopkins and the state say there was nothing unethical about this relationship.)
One of the ways Mr. Donaho helped Hopkins has particularly riled some involved in the case. Remembering the confidential binder submitted by Ms. Hill, Mr. Donaho obtained a copy from the state insurance agency and gave it to Hopkins, which strengthened its efforts to negotiate with Prudential, according to Prudential and state officials.
The Hopkins-Prudential relationship grew more acrimonious, however, as the talks between the two companies began to grind down early this year.
Dr. Block was insistent that Prudential give up its 10-year noncompete clause, and the 10-year agreement that bound the former Hopkins HMO doctors almost exclusively to Prudential, "both of which are cornerstones of the basis on which Prudential purchased" the HMO, said Dennis Walsh, president of Prudential's Central Group Operations.
"There were extensive discussions between the most senior people at the Hopkins and the most senior people at the Prudential," Mr. Walsh said.
Meeting in February
Those talks led to a February meeting between Prudential Chairman Robert C. Winters, Mr. Walsh said, and Hopkins board Chairman H. Furlong Baldwin, who is also chairman of Mercantile Bankshares Corp. of Baltimore.
A few weeks later, on March 4, Hopkins filed its lawsuit. Along with the Baltimore law firm of Venable, Baetjer & Howard, Hopkins is represented by John M. Doar, a former special counsel in the Watergate impeachment probe.
Prudential rejects the suit in the strongest terms. "The evidence that Barbara Hill behaved honorably in negotiations with Hopkins is both definitive and voluminous," the company said in a statement.
If the case goes to trial, Prudential intends to show that as soon as Ms. Hill began discussing a job with Prudential, "she stepped aside, at her insistence, from the negotiations," said former U.S. Attorney Steven Sachs, now a partner at Washington's Wilmer, Cutler & Pickering, which is representing Prudential.
Most importantly, Mr. Sachs added, "every material aspect of the deal about which Hopkins now complains . . . was the result of hard bargaining between Prudential and Hopkins, after -- I repeat -- after Ms. Hill had stepped aside from the negotiations."
In fact, Hopkins hired three consulting firms as well as the New York law firm of McDermott, Will & Emery to help evaluate and negotiate the sale, according to executives at Prudential and the consulting firms.
'Total bullfeathers'
"This suit, in other words, is total bullfeathers," Mr. Sachs said.
The trial, if it occurs, could decide more than Ms. Hill's and Prudential's guilt or innocence. It could determine whether Hopkins takes control of its future, or suffers seven more financially damaging years on the outskirts of a new national health care system.
"They have allowed themselves to become incredibly isolated and have not positioned themselves to deal with the new emerging world of health care," said Mr. Sabatini, the state health secretary.
In that world, institutions like Hopkins will find it more difficult financially to fulfill their primary mission of providing world-class research and medical care if they are forced to let others dictate the terms. At stake in Maryland alone is a share of the $2 billion in annual HMO revenues and more than a million HMO members. Prudential has 275,000 members in the Baltimore-Washington market.
The lawsuit seeks $25 million in punitive damages, and at least $25 million in compensatory damages, but that only speaks to the amount the contract has and will directly cost the health system. It is not clear what portion of this market Hopkins could capture, nor is it clear how much revenue Hopkins is losing because it is without an HMO. The most recent figures available from Hopkins show that the health system's physician group, the unit that deals with Prudential, posted a $5 million operating loss in 1992.
While the Hopkins School of Medicine is not barred from establishing its own HMO -- and in fact recently hired a managed care expert -- the question is what the hospital side of Hopkins needs.
It has already talked with several hospitals about either an
acquisition or partnership, several people said. The health system has also expanded its network of local doctors, and supported those in the suburbs of Baltimore County with its new Johns Hopkins Suburban Health Center at Green Spring Station, due to open in June.
Several Hopkins faculty members said Dr. Block would not be satisfied without his own HMO for the hospital.
"Jim Block . . . sees Hopkins being the core of its own network," said Mr. Wade, of the American Hospital Association, "and the HMO being a primary piece of that."
The lawsuit, as damning and personal as its charges are, could end up being the only way for Hopkins to create that network. Although many believe that's the intent, Hopkins says the suit speaks for itself. Any attempts to impart other motives to the case are merely efforts to detract from the allegations, says Hopkins General Counsel Joanne Pollak.
"This suit is not predicated on, 'Oh, gee, we gotta get out of this contract. Let's sue em,' " said Ms. Pollak. "It goes to the very heart of whether the contracts were fair at their birth."
"This is unfortunately a business negotiation that we feel was flawed at its inception," Dr. Block added. "There's absolutely no hidden motive, no hidden agenda on our part."