The top executive of Missouri's Blue Cross plan testified yesterday that he had been offered a retention bonus equal to one year's salary if he stayed two years after his company had been bought by WellPoint Health Networks Inc. - much less than WellPoint has offered William L. Jews, chief executive officer of CareFirst BlueCross BlueShield.
WellPoint, which wants to buy Maryland-based CareFirst, has offered a retention bonus equal to three years' salary, plus another bonus, to Jews. Other top CareFirst managers were offered two years' salary, plus bonus.
The testimony about the bonus in Missouri came at a state hearing on CareFirst's plan to convert from a nonprofit to a for-profit operation and be sold to WellPoint for $1.37 billion.
State Insurance Commissioner Steven B. Larsen, who is conducting a series of hearings on the proposed sale, will be taking a more detailed look today at the latest compensation arrangements for CareFirst executives - negotiated last month after a consultant he had hired termed earlier deal-related bonuses illegal.
Also in testimony yesterday, a WellPoint official said the company would likely participate in Maryland's Medicaid program if the CareFirst deal goes through.
CareFirst entirely dropped out of Medicaid in 2001, saying it was losing money. About 100,000 people were forced to find new coverage. The pullout irked legislators, who have since turned a skeptical eye on CareFirst's conversion plan.
The issues of the bonuses and Maryland Medicaid came up during questioning from Larsen. Most of the day was devoted to WellPoint witnesses who testified that Maryland would benefit from their company buying CareFirst.
John A. O'Rourke, the chief executive of Missouri's Blue Cross plan and now the president of WellPoint's central region, said that WellPoint's takeover of his company resulted in no change in customer service, commitment to the community, employment levels or medical standards for issuing policies.
In the year since WellPoint closed the deal, O'Rourke said, membership has increased 9 percent. He said the Missouri plan saved money by switching some services, such as pharmacy management, to WellPoint subsidiaries, and "it made our premium more competitive."
Also, he said, the WellPoint acquisition enabled Missouri to "unlock the value" of its Blue Cross plan by putting $900 million of the purchase price into a health-related foundation.
"We hope that happens in Maryland," he said.
As for the bonus, O'Rourke said he received no bonus that was contingent on the sale of his company - already for-profit and publicly traded - to WellPoint.
Jews was slated to receive a $9.1 million bonus linked to the sale, and would have been eligible for another $30.3 million in severance pay and tax benefits if he left when the deal was completed. Those heavily criticized bonuses were dropped when the deal was reworked last month, but a retention bonus was substituted.
To get $645,750
A 2002 filing by WellPoint with the Securities and Exchange Commission confirms that O'Rourke will receive a year's base salary - or $645,750 - if he stays with WellPoint for two years.
Jews' retention bonus, according to a filing with the Maryland Insurance Administration, would be three times his salary, plus his "target bonus." While his current salary and bonus figures are not public, in 2001 he pocketed $2.7 million - $904,333 in base pay and $1.8 million in incentive bonus. Three year's compensation at that rate would be $8.1 million.
Also, O'Rourke testified that if he is fired (other than for reasons such as embezzlement), he would receive a pro-rated portion of his retention bonus; for example, half after one year. Jews would receive his full retention bonus if fired under the same circumstances.
At hearings last week, Leonard D. Schaeffer, WellPoint's chief executive officer, testified that the retention payments for CareFirst executives were offered in part to persuade them to waive their earlier bonus and severance agreements.
"This is the best outcome we can have in this situation, and I don't think there's anything in it that's egregious," he said. "If this were not a negotiation but a top-down resolution, it might be a little different."
Impact on consumers
One of the issues Larsen will consider in deciding whether to approve the deal is whether any CareFirst executives have benefited personally beyond normal payments. He will also be looking at the impact on consumers; his questions about Medicaid touched on one aspect of that issue.
John P. Monahan, WellPoint's senior vice president for state-sponsored programs, said he believed WellPoint could participate profitably in Maryland Medicaid, since other insurance carriers were able to make money.
"I have looked at the carriers in Maryland, and I think we would be in," Monahan said. "If those carriers can make it, we can make it."
CareFirst said it lost $11 million the last year it participated fully in Medicaid. The state sets the rates it pays HMOs, as well as the benefits, for the program, which serves 400,000 low-income Marylanders.
Monahan said WellPoint has 1.7 Medicaid members in California and several other states.
"We certainly don't want to go into a state where we'll lose money," he said, "but we're OK with a thin margin."
Pressed by Larsen for a definition of "thin," Monahan said, "Some programs have a 1 percent margin."