After a 13-month review encompassing eight public comment sessions with about 250 speakers, 10 subpoenas, 15 days of formal hearings, 247 exhibits and 86,911 pages of documents, Insurance Commissioner Steven B. Larsen is scheduled to announce his decision Thursday on CareFirst BlueCross BlueShield's plan to sell itself to a California insurer.
Virtually no one expects Larsen to approve, as is, the deal on the table: that CareFirst, nonprofit since it was created in 1937, would convert to for-profit operation and be bought by WellPoint Health Networks Inc. for $1.37 billion.
The question, however, is not so much whether Larsen will say yes or no. Rather, it's whether his ruling, which he has indicated will be exhaustive, will have enough wiggle room to allow the deal to be salvaged.
If Larsen approves the deal, it is almost certain to be with a set of conditions attached - a "yes, providing." On the other hand, if Larsen turns the deal down, some say, he could do so in a manner that in effect would be an approval with conditions - a "no, unless" scenario.
"Larsen's got to make it look like he pressed this thing to the wall and protected various constituencies," said Clifford A. Hewitt, vice president for health care services equity research at Legg Mason Wood Walker. "He's got to come back with some deal points."
Conditional approval would likely address issues that have become hot spots in the often contentious debate over CareFirst's future.
While CareFirst and WellPoint investment bankers have defended the $1.37 billion purchase price, Larsen is expected to specify a higher figure. Investment bankers hired by Larsen and by District of Columbia regulators have pegged the value of CareFirst at $1.7 billion to $1.8 billion.
Larsen also is likely to address how much of any sale price should go to Maryland. A "snapshot" in 1998, when CareFirst was created by the combination of the Maryland and District of Columbia Blue Cross plans, indicates that Maryland should get about 60 percent of the money, which is earmarked for a health-related foundation. The adviser to the district regulators, however, noting the Washington plan has been much more profitable since the consolidation, has said Maryland should get only 28 percent.
Other conditions attached to a Larsen approval could include various forms of consumer protections and an order striking retention bonuses for CareFirst executives, which have been criticized by another consultant to Larsen. (A much more lavish set of bonuses was already scrapped.)
Shane Pendergrass, a Howard County delegate who opposes the conversion, said she expects Larsen to turn the deal down, but, "If he doesn't, the price will go up, and he will fix the problems with the bonuses."
Even David M. Funk, the lawyer for CareFirst and WellPoint in the regulatory review, concedes that Larsen imposed a number of conditions when he approved the much less controversial combination Maryland-D.C. combination, including a change in the board structure to have less overlap between the Maryland and D.C. directors.
"Using history as a guide," Funk said, "it would not surprise me if he did impose conditions, but I would hope that he would not." Funk said that his clients have met all legal tests for approval.
An apparent rejection could also leave room for CareFirst and WellPoint to reconstruct the deal so it passes muster.
"He [Larsen] could say, 'It's possible to do a deal that's in the public interest, but this deal doesn't meet the standard.' He would then explain how to meet the standard - a blueprint for future endeavors," said W. Minor Carter, a lobbyist for Maryland Cares!, a coalition of groups opposed to the CareFirst conversion and sale.
And, Carter continued, the difference between approval-with-conditions and rejection-with-roadmap is "more semantics than substance."
In either case, CareFirst and WellPoint would have to decide whether they were willing to do what Larsen said, then show some evidence of compliance.
There could be conditions that are relatively easy to meet - analysts, for instance, expect WellPoint would pay a somewhat higher price, although there's a point at which it would walk away from the deal. There could also be conditions unacceptable to WellPoint or CareFirst. WellPoint typically is wary of restrictions on employment, product offerings or pricing that would limit its ability to compete with other insurers in the market.
In that sense, a "yes, providing" ruling, depending on the conditions attached, could kill the deal. And a "no, unless" decision, if it spells out steps to make the deal acceptable, could allow the sale to proceed more or less on schedule, with regulatory review in Washington and Delaware proceeding while CareFirst and WellPoint work to bring it into compliance with Maryland.
While there may be little legal difference between the two scenarios, said Walter Smith, executive director of the D.C. Appleseed Center, there's a practical political difference. Smith's group is a formal participant in the District of Columbia's regulatory review of CareFirst's deal.
If Larsen calls it approval, no matter how many conditions are attached, Smith said, it invites tougher legislative scrutiny. While lawmakers have a right to review a rejection as well, they've already indicated that if Larsen turns the deal down, they are likely to turn their attention to how to regulate CareFirst in the future.
"Steve Larsen is a politician, too," Smith said, "and he wants to write something that will be politically popular and will carry the day."
Like a judge handling a complex and visible trial, Larsen has given little indication what he will do. "Visibility on the approval is difficult, as Commissioner Larsen has consulted all the interested parties, but has not tipped his hand on how he has been leaning," Eric L. Veiel and Julie Pavlosky, analysts for Deutsche Bank Securities Inc., wrote this month in a research note. The two analysts give the deal a slightly better than 50 percent chance of approval.
Others quote much lower odds. "I don't want to say I'd be shocked, but I'd be surprised," at any form of approval, said Michael E. Busch, speaker of the House of Delegates. "If I was a betting man, I'd say it's about 80-20 against approval."
Larsen did say last week that his report would be "complete and exhaustive" with "a pretty detailed chronology of events and background" - likely 70 to 100 pages.
"Ultimately," he said, "it's going to revolve around the statute." State law directs Larsen to decide, on balance, whether the deal is in the public interest. Issues he is directed to consider include impact on affordability and availability of health insurance, the process followed by the CareFirst board, and whether any CareFirst officials are inappropriately enriched.
If he does turn down the deal, he's expected to cite "as many reasons as possible, so the decision will stand up even if a court would say, 'You were wrong on points one, seven and nine,'" Carter said.
The emphasis Larsen has put on certain lines of questioning during the public hearings, combined with informed speculation by those close to the process, points to several areas of concern. These issues could serve as key reasons for denial, or as the basis for conditions to be met in a provisional approval.
Process. "The process followed by CareFirst to date provides no assurance that the price it has resulted in is fair value," wrote Jay Angoff, one of Larsen's consultants. Angoff criticized the CareFirst board for considering some issues it shouldn't have, such as jobs and compensation for management with the new entity, and for ignoring some it should have considered, such as CareFirst's historic mission as a nonprofit. It was also criticized for refusing to entertain a bid from one suitor and for treating the two remaining bidders unequally.
Larsen and the consultants have also questioned whether there were conflicts of interest for some of the people working on the deal for CareFirst - the investment bankers, who collect a bigger fee if they say the deal is fair than if they say it isn't, and the attorney who did some negotiating for CareFirst who had previously represented Chief Executive Office William L. Jews.
Business case. Although CareFirst argued that it needed to switch to for-profit operation and be sold to a larger company, Larsen's consultants questioned this. CareFirst has plenty of capital unless it wants to make an acquisition, the consultants said - and an acquisition in its market would be likely to violate anti-trust rules.
Larsen also questioned CareFirst officials sharply on business decisions that have limited earnings - such as subsidizing company-owned physician groups - that have nothing to do with conversion or acquisition.
Consumer impact. WellPoint declined to provide the consultants with some internal documents, such as the guidelines on coverage rejections based on medical conditions. WellPoint has argued that these need to be confidential - an insurance version of the Coca-Cola secret formula.
Without them, the consultants said, it was difficult to be certain about the impact of the deal on consumers. Opponents say WellPoint has failed to meet its burden of proof in this area. Funk said CareFirst and WellPoint don't have to show the deal would have a positive impact, only that it wouldn't be negative; and, he said, they've done that.
In addition to issuing a legal order with conditions for CareFirst and WellPoint to meet, Larsen could offer advice to legislators.
If the deal is approved, he could comment on a structure for the health foundation that his consultants found unwieldy. If the deal is rejected, he could offer lawmakers guidance on how to regulate CareFirst in the future.
Whatever Larsen decides, the issue is unlikely to be put to bed. There will be legislative review, and there is potential for court review.
In Kansas, a similar conversion-and-acquisition was rejected by the insurance commissioner a year ago. The Blue Cross plan appealed, and a court threw out the decision. The commissioner appealed, and the state Supreme Court is to hear arguments next month.
If the trial court is upheld, the case will go back to a new insurance commissioner - the previous one has become governor - for a new round of hearings.