William L. Jews, who was fiercely criticized by legislators when he tried to engineer the sale of CareFirst BlueCross BlueShield, is expected to appear before insurance regulators tomorrow to defend a $17.65 million severance and retirement package that state officials say is excessive for a nonprofit health insurer.
Maryland's insurance commissioner ordered the inquiry after Jews stepped down as chief executive in a 2006 management shake-up, which triggered salary and bonus payments spelled out in his employment contract. It marks the second time that CareFirst has faced questions about whether a payout for Jews was too generous for an insurer whose mission is to put community health care ahead of profits.
Jews' compensation was first scrutinized by regulators when he tried to convert CareFirst into a for-profit company in 2001 and sell it for $1.3 billion -- a deal that could have netted the former executive a $39 million payday. Outrage over the deal's terms scuttled the sale and resulted in 2003 legislation locking in CareFirst's nonprofit status for at least five years.
The new law also replaced most of CareFirst's board and stipulated that executive pay must meet a "fair and reasonable" standard. Tomorrow's hearing before Insurance Commissioner Ralph S. Tyler will mark the first time the new standard has been put to the test. The inquiry centers on CareFirst's actions, but Jews is listed as an "intervenor" in the proceedings and is expected to testify.
If Tyler rules against the company, the insurance administration would seek to reduce Jews' severance package, which is being paid out over a number of years.
"I don't think anybody is worth $18 million -- period," said Del. Shane Pendergrass, a Howard County Democrat who was an author of the reform legislation.
Jews, credited with transforming the nearly insolvent Blues plan after taking the helm in 1993, could not be reached for comment. His attorney, Andrew Jay Graham, declined to comment.
CareFirst said two outside consultants concluded that Jews' proposed payout is reasonable when compared with other not-for-profit Blues plans. The insurer noted that about two-thirds of the payment comprises deferred compensation and retirement benefits Jews earned over more than 13 years as head of the company. It said terms of the contract were scrutinized and approved by CareFirst's reconstituted board, which is packed with state-approved directors charged with reinvigorating the insurer's nonprofit mission.
"We believe he is entitled to the compensation that he's earned," said Jeff Valentine, a spokesman for CareFirst.
Attorneys for the Maryland Insurance Administration counter that Jews' pay deal is fundamentally flawed, beginning with its reliance on net profits as a major basis for calculating his compensation. In pre-hearing briefs, the state contends that CareFirst under Jews became increasingly focused on boosting profits at the expense of its obligation to promote affordable health care in the state. Any pay package that ignores CareFirst's nonprofit objectives should be deemed illegal, the state argues.
"The severance package includes sums that have been calculated under an incentive compensation plan that was based upon, and designed to reward, the willful abandonment of CareFirst's nonprofit mission and the pursuit of a for-profit strategy," the brief says.
But Jews' attorney argued in a competing brief that it would be unconstitutional for the state to rewrite the former executive's employment contract. The deal was struck with CareFirst's board in 1998 -- five years before lawmakers passed legislation establishing the "fair and reasonable" standard.
CareFirst disclosed terms of the deal -- including Jews' pay -- to state regulators annually and was never told of any objections, Graham contends in the brief.
Some health advocates counter that CareFirst never should have struck the deal. They say the nonprofit should be spending more to help those who can't afford health care, rather than paying executives millions in retirement.
"It looks to us like they don't have their priorities straight," said Walter Smith, executive director of D.C. Appleseed Center for Law and Justice, an advocacy group that has been critical of CareFirst.
The criticism comes as CareFirst's new management is striving to rebuild its image as a benevolent health care provider. The insurer won praise from state officials after agreeing this year to help seniors bridge a coverage gap known as the "doughnut hole" in Medicare drug plans. But critics point out that the program's $7 million-a-year cost seems small next to Jews' nearly $18 million retirement fund.
"With [$7 million] they are helping thousands of people who are low-income, ill and need help, and with $17 million we could be giving one person a great retirement and pay package to buy a new car and take trips and have a great time," said Pendergrass, the Howard County delegate.
But in legal briefs, CareFirst warns that going back on the deal could jeopardize its ability to attract the kind of high-quality executives it needs to fulfill its nonprofit mission. Future job prospects might balk at taking a top post knowing that state regulators may second-guess their pay years later.
"There is no reason why a skilled executive would choose to work for CareFirst if he or she must accept the risk of being stripped of his or her ... long-term benefits," the company says.