Hearing set on deal tying Md., Del. Blues; Health care affiliation would be No. 1 in area; Managed care


Representatives from CareFirst BlueCross BlueShield, the Owings Mills-based health insurer, and its Delaware counterpart hope to convince Maryland regulators next week that policyholders would benefit from an alliance between the two companies.

If approved by Maryland and Delaware regulators, the deal would make CareFirst Inc., the parent of the former Maryland BlueCross BlueShield, the largest not-for-profit managed care company in the mid-Atlantic, with 2.7 million subscribers in Maryland, Delaware and the Washington area.

Maryland Insurance Commissioner Steven B. Larsen has scheduled a hearing on the proposed alliance, first announced in December, for 9: 30 a.m. Tuesday at the insurance commission's office in Baltimore.

The companies say the new relationship would not amount to a merger since each would maintain separate books and executive staffs, while sharing "back room" equipment and operations such as computer information technologies. They call it an "affiliation."

The proposal, however, calls for William L. Jews, president and chief executive officer of CareFirst, to oversee the Delaware affiliate's executive staff.

CareFirst, with 2.5 million members and 1998 net income of $75.7 million, is by far the larger of the two. Its Delaware counterpart has 200,000 members and netted $300,000 last year.

Jeff Valentine, director of communications for CareFirst, said the company believes that the affiliation would help it better compete for regional corporate business and achieve cost savings by trimming redundant operations and jobs in executive, legal, administrative and information technologies.

The company anticipates passing on those savings to policyholders through lower premium increases in the future, he said.

The affiliation, he argued, would also give CareFirst the ability to compete for business with corporations that have regional operations, such as Delaware-based credit-card giant MBNA.

Assistant Insurance Commissioner Dennis Carroll said the commission's chief concern is whether the affiliation would benefit those covered by CareFirst.

"This is an unusual request," said Carroll. "We are not going to approve anything that doesn't benefit Maryland" policyholders, he said. Maryland and Delaware regulators must approve the proposal.

The Delaware insurance commissioner's office held hearings on the issue last month.

Delaware Attorney General M. Jane Brady said at those hearings that while it is understandable that Delaware BlueCross is considering an alliance, given the competitive nature of the health insurance arena, she is concerned about a number of issues.

Among them: whether CareFirst should be allowed to tap the Delaware company's $89 million reserve, whether any outgoing Delaware executives' severances should be shouldered solely by Delaware BlueCross, and how the companies plan to share future costs and revenue.

Paul C. King Jr., Delaware BlueCross chief executive officer and president, testified at the Delaware hearings that affiliating with CareFirst would "strengthen both companies, increase access to capital, provide cost savings through economies of scale" and allow expansion of insurance products.

Valentine said that under the proposal, the companies would maintain separate accounting records, but have the ability to borrow from each other's reserves if needed, as is now the case with its D.C. affiliate.

Shifting sums higher than $500,000 under that affiliation requires approval by regulators.

Valentine said the company hopes that all regulatory approvals can be obtained by the end of the year, and the deal closed early next year.

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