Pointing to deception, mismanagement and flagrant attempts to profit from the proposed sale of CareFirst BlueCross BlueShield, Maryland Insurance Commissioner Alfred W. Redmer Jr. said yesterday that he will issue civil charges against the company and its top leaders for violating state insurance laws.
Among seven major violations detailed in a 50-page report released by Redmer yesterday were allegations that CareFirst Chief Executive Williams L. Jews willfully misrepresented facts about the proposed sale of the nonprofit to WellPoint Health Networks Inc. of California.
Redmer said he will formally issue orders and civil penalties against the insurer, Jews and other company leaders by the end of next week.
Executive Vice President David D. Wolf and board chairman Daniel J. Altobello will also be charged, according to the report.
The impending charges deliver the latest in a series of blows to Jews and key aides that began in March when then-Insurance Commissioner Steven B. Larsen rejected their plan to sell CareFirst to a for-profit insurer.
The General Assembly subsequently passed a law dictating sweeping reforms at CareFirst, and critics have been demanding the resignation of the company's top leaders.
Should the alleged violations prove true, they could wreck any chances of Jews remaining at the helm of the state's largest health insurer.
"This is fallout from some bad decisions they made. It is not uncommon in the business world for managers who make bad decisions to move on," Del. John Adams Hurson, chairman of the House Health and Government Operations Committee, said yesterday.
Hurson, a Montgomery County Democrat, described the insurance commissioner's charges as an effort "to assess the current management's part in what was a very inappropriate decision for the company."
CareFirst executives declined yesterday to discuss the insurance commissioner's action.
Instead, the company released a statement defending its actions, claiming that Redmer's charges were based entirely on allegations and conclusions reached in a report issued by Larson when he rejected the company's conversion plan.
At that time, Larsen sharply criticized the CareFirst board for ignoring its nonprofit mission and approving what he called an illegal $119.7 million bonus plan for top executives that would have been triggered had the deal been completed.
"In all circumstances, the CareFirst board and its executive management acted appropriately in representing the interests of this company and we look forward to presenting our case at the appropriate time," the company statement said.
"As we have stated repeatedly in the past, CareFirst's leadership sought to position the company for continued success over the long term with the proposed transaction with WellPoint," the statement said.
"While the former commissioner disagreed with our proposal, there is nothing on the record of the public hearings into our transaction to support a contention that any provision of the Maryland insurance laws were willfully violated," it said.
Jews said in an interview last month that despite a drumbeat of criticism, he is the best man to lead the company through troubles as it works to comply with a revised reform law, which locks CareFirst into a nonprofit mission for five years, replaces 12 members of its board and sets new guidelines for executive compensation.
CareFirst has 30 days after Redmer issues the orders and penalties to decide whether to respond. If the company requests a hearing, Redmer or someone from his staff would preside as company advocates challenge his conclusions.
The maximum penalty, based on the time the activities took place, are $5,000 per violation for individuals and $125,000 per violation for the company.
"This is a punitive effort by the insurance commissioner to deal with the findings in [Larsen's] report," said Speaker of the House Michael E. Busch, an Anne Arundel County Democrat. "I don't think the issue here is about money or the fines, the issue is about the direction of the company and who will be leading it into the future."
In the report, Redmer identified seven violations the agency would have to prove against CareFirst in a hearing:
The operation of CareFirst as a for-profit in violation of its nonprofit mission.
The report referred to the company's decision to withdraw its FreeState HMO and exit Medicare, Medicaid and Substantial Available Affordable Coverage, stranding populations of high-risk individuals, the poor and the elderly without insurance. The report included testimony from Altobello, who said, "To me [CareFirst is] not really nonprofit," and a 1999 statement from Jews that the new company was "more profit oriented."
Corporate mismanagement and the waste or transfer of assets.
The report noted that CareFirst subsidized an affiliate with millions of dollars without the permission of the insurance commissioner.
Breach of fiduciary duty by CareFirst directors.
The board failed to consider the risks of a merger to the company's health, the report stated.
Willful misrepresentation by CareFirst officers on the merits of the two firms bidding on the company.
The report accuses Jews and Wolf of manipulating data in order to steer the CareFirst board "in whatever direction would benefit management's own financial goals."
Failure of CareFirst to secure an independent evaluation of the value of the company before agreeing to a purchase price by WellPoint.
Credit Suisse First Boston, which negotiated the proposed transaction, was asked by CareFirst to also issue an opinion verifying the fairness of the deal, the report said.
Jews' willful misrepresentation of an attorney's role in arranging private compensation to Wolf and Jews.
The report said that Jews misled the insurance commissioner about the role an attorney played in negotiating bonuses for CareFirst executives. The report also accuses Jews of misappropriating assets by using company money to pay "large legal fees" to the attorney, who was not representing the company's interest.
Failure of CareFirst to obtain independent community impact and fairness reports on the terms of the proposed transaction with WellPoint.
Redmer said yesterday that no activity identified in Larsen's report would allow the Maryland Insurance Administration "to remove or replace an officer of CareFirst."
His report, however, does offer more support for immediate changes in the company's leadership, critics said.
"This is the continuation of the damning indictment against the executives and the board," said Minor Carter, a lobbyist representing Maryland Cares!, a group that was opposed to CareFirst's conversion plan. "It goes to the core of the credibility of the executive team. If found to be true, this shows misrepresentation of facts under oath. That shows executive malfeasance, which means they should be dismissed."
"This is not a moment for rejoicing," Carter said about the report's finding. "This is a moment of sadness. We have to clean this mess up."