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Del. insurer to join Blues of Md., D.C. Nonprofit CareFirst to gain 200,000 members in affiliation; Deal needs regulators' OK; Expansion expected to boost revenue, ability to compete; Health care


Taking a page from its for-profit competitors, the nonprofit company created by the combination of Maryland and District of Columbia Blue Cross Blue Shield plans said yesterday that it will add the Delaware plan to its portfolio.

Under an agreement ironed out Tuesday night, Blue Cross Blue Shield of Delaware will become an affiliate of CareFirst Inc. -- the nonprofit holding company formed early this year by the combination of Blue Cross Blue Shield of Maryland and Blue Cross Blue Shield of the National Capital Area.

The business combination, with regulatory approval, would add 200,000 new members to CareFirst's existing 2.3 million and increase employment by 500 to about 6,000. The deal would also boost projected annual revenue by $441.5 million, from $3.9 billion to $4.3 billion.

"With Blue Cross Blue Shield of Delaware becoming a CareFirst company, we will be better able to provide services in larger contiguous markets, create new opportunities to grow our business and compete against the large, well-capitalized national and regional managed-care companies entering this marketplace," said William L. Jews, president and chief executive officer of Owings Mills-based CareFirst Inc.

Robert C. Cole Jr., the chief executive officer of Blue Cross Blue Shield of Delaware, said: "To be a vital contender in this hotly competitive marketplace, we must have the same size and economies of scale as the large regional and national insurers. The only way for us to achieve that is to affiliate with another company."

The combination would give CareFirst, the largest Blues plan in the mid-Atlantic region and the seventh-largest nationwide, a potential market of 7.5 million members. Officials hope to complete the deal by the end of March.

CareFirst said it plans to remain a nonprofit, but Jews would not rule out an eventual conversion to a for-profit company. "I'm a living, breathing CEO," he said. "I hope I don't rule anything out."

He said the access to capital that comes with being a for-profit company is only one means of growth. Expansion by joining with other nonprofits is another. "In the foreseeable future, we have no plans to convert the company," Jews said.

A. G. Newmyer III, chairman of the Fair Care Foundation, a national patients' rights group based in Maryland, said he is "100 percent convinced" that Jews plans to convert CareFirst into a for-profit entity.

"Mr. Jews is trying to build enough critical mass so that when he does an initial public offering and abandons nonprofit obligations, he can vastly enrich himself," Newmyer said.

From 128 Blues plans in 1975, mergers and other combinations have reduced the number to about 56. Some converted to for-profit or mutual insurers. Critics contend that as nonprofits, the Blue Cross plans have built up their value as a result of tax breaks; as a result, they argue, the plans' assets should belong to the public in the event of a for-profit conversion.

Newmyer also predicted that the deal would worsen the quality of health care in Delaware. "Every week we see massive numbers of consumer complaints about predatory behavior by the Blue Cross plan," he said.

CareFirst and the Delaware plan cited economies of scale as a major appeal, saying that new members and savings would likely limit rate increases. Officials did not say precisely how much they expect to save, or how many jobs will be eliminated.

The Delaware plan recently cut about 30 jobs, but Cole said those cuts were not made in anticipation of the combination with CareFirst.

Cole also said the transaction "closely paralleled" the combination of the Washington and Maryland Blues plans. That deal, which became final Jan. 16, has produced savings of between $4 million and $5 million this year, CareFirst said. It has also generated between $4 million and $5 million through increased contracts, as membership increased by 103,500.

CareFirst cut its management staff to reduce duplication, but overall employment increased by 162.

In 1997, Blue Cross Blue Shield of Delaware and its subsidiaries posted net income of $6.5 million on revenue of $441.5 million. CareFirst had combined earnings of $63.2 million, on revenue of nearly $3.5 billion.

Jews and Cole said they expected no major obstacles to regulatory approval of the insurance commissioners in Delaware, Washington, Virginia and Maryland.

"Certainly we will look at it in terms of how it affects the Maryland Blues' operations," said Steven B. Larsen, Maryland insurance commissioner. "I don't have any particular concerns at this point. I think it reflects what's happening in the marketplace generally.

"Other than making sure money isn't going to flow out of Maryland to Delaware that would create problems for Maryland subscribers, we'll do whatever the law requires."

Sen. Arthur Dorman, a Prince George's County Democrat who serves as vice chairman of the finance committee and member of the health subcommittee, expects legislative hearings on the deal. "Throughout the country, you're going to have these kinds of mergers," he said. "And you're going to have eventually maybe a handful of Blues companies providing health care coverage."

Jews, a former hospital executive, took over Blue Cross of Maryland in 1993, when it was on the edge of insolvency. He squeezed administrative costs, cut staff and improved financial performance at a time when competition held down premiums.

To continue to be competitive, he said, Blue Cross needed a larger territory and better access to capital. Three years ago, Jews offered a plan to create a for-profit subsidiary, but that was shelved after regulators and legislators raised questions. Then, he turned to the Washington Blues, which had made a similar journey out of financial crisis. Early this year, he described CareFirst's market territory as "from Pennsylvania south."

Under the agreement signed yesterday, Jews would become chief executive officer of the Delaware company. Paul C. King, lTC who was named president and chief operating officer of the Delaware plan in June, would keep those titles.

Cole, who plans to retire at the end of the year, will stay on the Delaware company's board to assist in the transition. CareFirst's board will increase from 18 to 21, with three new members from the Delaware plan.

The merger of the Maryland and District plans drew criticism after 26 executives received $6.5 million in severance pay, benefits and "out-placement service." Larry C. Glasscock, chief executive of the District of Columbia Blue Cross plan, walked away with a $2.8 million severance package after the combination.

But Cole said his compensation package has included no changes in the last five years that would increase his compensation in the event of a merger. He said said he has had normal pay increases, probably less than 5 percent.

Pub Date: 12/24/98

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