Larsen says CareFirst board elicits 'very little confidence'


Maryland Insurance Commissioner Steven B. Larsen told lawmakers yesterday that he has "very little confidence" in the board of CareFirst BlueCross BlueShield, and two key legislative chairmen said they were working on legislation to reform the nonprofit insurer.

Before the legislative briefing, Larsen met yesterday with William L. Jews, CareFirst's chief executive officer. David M. Funk, a lawyer for CareFirst who attended the meeting, said the CEO had stressed that he is "interested in reconciliation at this point."

Larsen termed the meeting "constructive" but declined to discuss its substance.

After meeting with Jews, Larsen briefed about two dozen members of the Senate Finance and House Health and Government Operations committees on his decision last week to reject CareFirst's application to convert to for-profit operation and sell itself to WellPoint Health Networks Inc., a California insurer, for $1.3 billion.

During the briefing, Larsen returned to a central theme of his 200-page report blocking the CareFirst conversion and sale - that the CareFirst board had failed in its duty by approving lavish bonuses for executives and by allowing management to behave more like a for-profit company.

"This board seemed to be owing its duty to enhancing the value of the company, as if it had stockholders," rather than protecting the public interest, he told the legislators. "This board defended what I think everyone thought was indefensible until the very end."

The exact nature of reform legislation is not entirely clear, although Sen. Thomas M. Middleton, chairman of the Finance Committee, and Del. John Adams Hurson, chairman of the Health and Government Operations Committee, said they are working together on a bill that could be introduced this week.

Hurson said after the briefing that provisions under consideration include letting the insurance commissioner set compensation for the CareFirst board, and spelling out certain subcommittees that would have to be chaired after a certain date by members new to the board.

Larsen told the committees that he would like to see CareFirst's nonprofit mission spelled out in statute, which would give regulators more control over the company's behavior. And he said after the briefing that he favored a smaller board that would include "some insurance expertise" and "clear representation from some of the stakeholders" without being dominated by doctor and hospital representatives.

Middleton said although CareFirst had filled that role in the past, there was no interest in making it an "insurer of a last resort," forced to offer policies to those whose medical histories made it impossible for them to get coverage from other insurers. He said legislators recognized that the company needed to be "financially strong," so it couldn't be required to maintain lots of money-losing business.

And Hurson said he did not favor legislation limiting future mergers or acquisitions.

Larsen said at the briefing that his rejection of the CareFirst-WellPoint deal "absolutely" did not mean that a different transaction couldn't be regarded in the public interest.

Hurson also said that he didn't want to craft legislation that would prompt CareFirst to move its headquarters out of Maryland. Although the committee has worked on various drafts, he said, legislators were "still forming" their ideas on what should go into a CareFirst bill.

The chairmen and Larsen agreed that modifying the composition of CareFirst's board is complicated. CareFirst is a holding company that operates Blue Cross and Blue Shield plans in Maryland, Delaware and the District of Columbia, and the insurance commissioners of those three jurisdictions have issued orders in the past calling for proportional board representation. (The current board consists of 12 members from Maryland, six from the District of Columbia and three from Delaware, according to the company.)

Also, the national Blue Cross and Blue Shield Association has a rule against allowing a majority of board members to be determined by anyone outside the insurer, so an attempt to replace the whole board could lead the association to prevent CareFirst from using its cross and shield trademarks. Legislators said the trademark is valuable, so they don't want to run afoul of the association's rules.

Some have called for changes in CareFirst management as well. Del. Patrick L. McDonough, a Baltimore County Republican who is on the health committee, said yesterday that he would be circulating a petition among lawmakers calling for Jews to resign.

And W. Minor Carter, a lobbyist for the Maryland Cares! coalition, which fought the conversion and sale, said yesterday that the board and management should quit.

"We ought to get the people that put the ship on the rocks off the bridge," he said.

But Larsen said at the briefing that he believes it is up to the board to decide how to deal with management.

Funk said that Jews and Larsen had not discussed how long the CEO would remain at CareFirst but that Jews had "focused on what is necessary for the long-term financial viability of the company."

He said the emphasis on reconciliation did not necessarily mean that CareFirst wouldn't seek a court appeal of Larsen's decision. He said no decision has been reached on an appeal, which must come within 30 days of Larsen's order.

CareFirst lobbyist Fran Doherty said she hoped for legislation that CareFirst could support and that would "address the concerns the legislature and commissioner have expressed." She said she had been "heartened" by legislators' comments that any reform legislation would have to protect the financial viability of the insurer.

But she said she could not say what CareFirst's position would be on any particular reform ideas until she is able to study proposed legislation. A CareFirst spokesman said Jews and board members would not be available for comment.

Pegeen Townsend, a lobbyist for the Maryland Hospital Association, which fought the conversion and sale, said her organization supported the thrust of Larsen's comments. "On balance," she said, "we'd agree with Steve that you don't want to throw the baby out with the bath water."

Carter said he would be seeking legislation that provides more "transparency" through additional public reporting and oversight. "There's no accountability now except their own consciences, which don't seem to be bothering them," he said.

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