Blue Cross and Blue Shield of Ohio called off its controversial deal with Columbia/HCA Healthcare Corp. last week, ending a yearlong battle that imperiled the insurer's viability.
The transaction was heralded by the insurer as an innovative attempt at vertical integration, but it incited public outrage and galvanized support for stronger oversight of not-for-profit healthcare conversions.
It was abandoned under a settlement with the Ohio Department of Insurance, which has put the Cleveland-based insurer under its supervision until at least April 18.
Terms of the settlement include the removal of Ohio Blues Chief Executive Officer John Burry Jr., Corporate Secretary and General Counsel Jerome Rogers and the insurer's outside legal counsel, Kenneth Seminatore and his Cleveland firm.
The settlement was meant to end an internal power struggle and focus the plan on its operations. Once the state's largest insurer, the plan lost $95 million in 1996 and saw its reserves slip below state requirements.
But even the settlement drew criticism from consumer advocates, who pointed out that Burry and Rogers will walk away with payouts estimated at $14.4 million and $5.6 million, respectively, in benefits, deferred compensation and pensions.
"It's the plundering of working people's hard-earned money," said Diane Lardie, executive director of the Northeast Ohio Coalition for National Healthcare.
Insurance Department Director Harold T. Duryee said the state had no control over the retirement payments.
The department also drew criticism for allowing President and Chief Operating Officer Kent Clapp to take charge, at least temporarily. Clapp had approved the Columbia transaction and would have become CEO of the subsidiary that would acquire the insurer's assets.
Byron Krantz, a Cleveland lawyer who sued to stop the deal on behalf of policyholders, said he would go to court to recover at least $25 million spent on the failed effort to sell the Blues to Columbia, including more than $3 million paid to trustees who retired after approving the deal.
When it unveiled the proposed sale to Columbia a year ago, the Ohio Blues said the resulting operation would improve care and control costs by vertically integrating hospitals, doctors and insurers.
Critics called it a giveaway, since Columbia's $299.5 million purchase price would go to shore up the insurer's reserves.
Revelations that Burry, Rogers and Seminatore had negotiated $18 million in noncompete and consulting agreements for themselves as part of the sale also stoked public anger.
Ohio Attorney General Betty Montgomery filed suit to protect the insurer's assets, and the the national Blue Cross and Blue Shield Association sought to oust the plan from its system.
Under Burry's command, the Ohio Blues forged ahead despite the outcry, putting its public relations and legal firms to work at full steam. Columbia, for its part, remained largely in the shadows.
The Ohio Blues ran television and newspaper ads, mailed glossy brochures to senior citizens and sent elaborate proxy materials to policyholders. In all, it reported spending $25 million related to the deal in 1996.
But the negative media attention prevailed, and the Ohio Blues became a rallying point for advocates of oversight of not-for-profit conversions.
At least 19 states have passed or are considering legislation that would require state approval and public disclosure of not-for-profit healthcare conversions. Congress is considering legislation to require federal oversight in the absence of a state review.
Outrage over the Ohio Blues is credited with expediting legislation in Ohio. Last week, the state House passed, by a 90-5 vote, a bill to require not-for-profit hospitals and insurers to give public notice and seek the state attorney general's approval before selling assets to a for-profit.
Columbia and for-profit Quorum Health Resources hired some 15 lobbyists in Columbus and battled to amend the bill to include not-for-profit mergers. Despite those efforts, the amendment was defeated 73-21.
The bill has yet to pass the Senate and reach the desk of Gov. George Voinovich, who has not said whether he'll sign it.
Meanwhile, the Ohio Blues is struggling to regain its financial footing.
Clapp said the the insurer has begun implenting a business plan that will be announced this week. He said it includes dramatically cutting legal and consulting services, increasing reserves and expanding its senior and consumer advisory councils.
But other problems have cropped up.
A.M. Best Co. put the Ohio Blues' life insurance arm under review with negative implications, citing the insurer's negative results and low reserves.
In Toledo, lawyers representing Blues policyholders requested a temporary restraining order to place the payouts to Burry and Rogers in escrow until the insurer pays customers for misleading them and making them overpay for discounted medical services.
"What we want to do is make sure Blue Cross is able to pay its creditors," said Mike Unger, one of the lawyers who filed the motion.
Meanwhile, Anthem Blue Cross and Blue Shield and other insurers are angling for the Cleveland plan's 1.5 million customers, anticipating that a court will deny the plan's request to remain in the Blues system.
The national Blue Cross and Blue Shield Association is attempting to strip the Cleveland plan of its Blues licensing agreement and said it intends to transfer that agreement to Anthem. Last week, the state attorney general's office and the insurance department said they would try to help the plan keep its Blues license, but the association said it wouldn't back down.
If the Cleveland plan's request is denied and the national association's actions hold up, Anthem would be the only Blues plan serving Ohio. Anthem already has 400,000 enrollees in the Cleveland market.
"I think we have some work to do in terms of the image of the Blues marks in some of those (northern Ohio) markets," said Don Mackos, chief operating officer for Anthem's Midwest operations, based in Cincinnati. "I think that's going to keep the creative people busy over the next several months."