In yet another blow to CareFirst's already hotly contested conversion plans, a consumer healthcare advocacy group has accused the massive health insurer of using charitable assets to grossly overpay its executives.
Since Owings Mill, Md.-based CareFirst announced its plans last November to merge with for-profit WellPoint Health Networks, state legislators, regulators, healthcare experts and business leaders have lined up one potential roadblock after another-to the point where some believe the deal will not go through.
Now, the Washington-based Fair Care Foundation is petitioning the attorneys general of Maryland and the District of Columbia to investigate what it calls "exorbitant and improper" executive compensation packages approved by CareFirst in the months leading up to the company's announcement of the $1.3 billion deal.
In particular, CareFirst's president and chief executive officer, William Jews, stands to receive $18.6 million if he quits or is fired after the company changes ownership.
"We can find no example in the history of the world where the head of a charitable nonprofit took that kind of money from the public," said Fair Care Chairman A. G. Newmyer III, who filed the petition earlier this month. "I believe the CareFirst board has been taking ethics lessons from Enron."
Jews' compensation would top the $14 million severance package paid to Richard Shirk, former CEO of Blue Cross and Blue Shield of Georgia, when his company was acquired by WellPoint in March 2001.
CareFirst-the parent of the Delaware, D.C. and Maryland Blues plans-has operated as a charitable not-for-profit since 1937. The 3.2 million-member insurer, however, has said its merger with Thousand Oaks, Calif.-based WellPoint is necessary to remain financially strong in a competitive industry now dominated by stock-driven giants like Aetna and Cigna Corp.
Opponents, though, have argued that the deal would result in higher premiums, fewer services and the elimination of a critical safety net for the region's low-income residents. Others have been even more critical, accusing CareFirst executives of personally profiting from the sale of a public asset they don't own.
Regulators and consumer groups, for instance, were appalled when CareFirst approved a bonus package that would have given $33.2 million to company executives-including $9.1 million to Jews alone-if the merger was completed. As a result, Maryland passed legislation in April outlawing the bonuses.
But that's just the tip of the iceberg, Fair Care alleges. The "more obscene" amounts are in the compensation contracts that aren't contingent on a deal with WellPoint, said Richard Hubbard, an attorney with the Washington-based law firm Arnold & Porter and counsel for Fair Care.
"Maryland officials have forbade CareFirst executives from receiving X percentage of whatever the merger is valued at. We think they should apply the same scrutiny to other provisions in these executive contracts," Hubbard said.
Fair Care is especially concerned about the unusual conditions that trigger the payments. For example, Jews' contract entitles him to $18.6 million only if he quits with "good reason." A provision in the contract, however, lists as a good reason the case in which, after CareFirst changes hands, Jews does not remain CEO of the "most senior resulting entity." In fact, under CareFirst's agreement with WellPoint, Jews would become head of WellPoint's new Southeast operations, while Leonard Schaeffer would remain CEO.
"Thus, as a practical matter, in the event of such an acquisition, (Jews) could simply choose to resign and receive the huge multimillion-dollar payments," the petition states.
Fair Care also raised concerns about loopholes in CareFirst's executive retirement plan.
Under the plan, individuals who have been with the company for 15 years are entitled to a lump-sum payment of 500% of their average salary and bonus. Jews, however, is credited with 15 years of service even though he did not join CareFirst until April 1993. What's more, his contract-unlike most retirement agreements-states that his benefits will not be reduced if he retires early. Jews, who is 50, would stand to receive $7.56 million if he retired on April 1, 2003.
Jamie St. Onge, spokeswoman for the Maryland attorney general's office, said officials there had not yet reviewed the petition. D.C. officials did not return phone calls seeking comment.
For its part, CareFirst says its executive compensation is determined by an independent consultant and is "on par" with that of other health insurers.
"As with any major employer, a competitive compensation package assures that the company can attract and retain talented leaders, which, in turn, ensures that the value of the asset is maintained and grows for the future benefit of the public," CareFirst said in a written response to the petition. "The reference that charitable assets would be used to pay executives is clearly wrong. These payments, if and when applicable, are part of normal operating expenses and, in fact, CareFirst's administrative costs rank among the lowest in the industry."
Still, executive compensation at not-for-profits has become an issue of heated debate.
Doctors and consumer groups blasted Excellus last month after the Rochester, N.Y.-based Blues plan gave CEO Howard Berman a 31% pay raise, boosting his annual salary to $1.23 million. Top executives at Univera Healthcare, a financially strapped HMO that merged with Excellus last October, got even larger raises.
Lawrence Van Horn, associate professor of economics and management at the University of Rochester (N.Y.), says that while executives at not-for-profits should generally be paid less than their for-profit counterparts, their compensation packages nonetheless should be commensurate with their responsibilities.
"Running a multibillion-dollar company with millions of members is a major-league business, whether it's for-profit or not," Van Horn said. "Even if you're nonprofit, you need leaders of the highest caliber who know what they're doing, and you have to be competitive to secure that kind of management talent."
But Dawn Touzin of the Boston-based advocacy group Community Catalyst disagrees, calling such large payments "totally out of balance" at a time when healthcare premiums are rising at double-digit rates.
"There are several health plans out there that aren't offering such hefty compensation packages and are still run by very good people and are still doing well financially," Touzin said. "That level of compensation is just not appropriate for a company with a charitable mission."