In a scathing criticism of CareFirst Blue Cross and Blue Shield, the Maryland insurance commissioner rejected the proposed sale of the Owings Mills, Md. health plan to WellPoint Health Systems, saying the deal was designed to profit CareFirst executives.
The decision announced last week by Steven Larsen creates a significant obstacle to the $1.37 billion transaction, which would convert the Washington area's largest health plan to for-profit status. The plan has 3.2 million enrollees.
The Maryland General Assembly has 90 days to review the commissioner's decision and decide whether to overturn it. CareFirst and WellPoint Health Networks, Thousand Oaks, Calif., also have 30 days to appeal. Regulators in Delaware and the District of Columbia also are reviewing the transaction.
In a written statement, CareFirst said it was "shocked and disappointed." The company said its "full board and its strategic planning committee fully, fairly and independently evaluated the need to convert, and the selection of WellPoint."
The rejection reflects a trend of state regulatory actions that challenge the use of assets and quality of board oversight at not-for-profit healthcare companies. Following the decision, consumer groups called for the resignation of CareFirst Chief Executive Officer William Jews and the company's board.
"Now that the CareFirst board's breaches of fiduciary duty are fully on the record, policymakers in Maryland and Washington should demand the resignations of the board and senior management," Terry Newmyer, chairman of the Fair Care Foundation, a healthcare advocacy group, said last week
Larsen said he followed Maryland law, which says not-for-profit conversions must benefit the public. A main point of controversy throughout the 14 months of testimony and research by Larsen's office was a $119 million severance package for CareFirst executives, which Larsen called "a ransom that a bidder would have to pay" for the rights to buy CareFirst.
After its legality was questioned, the package was dropped in January and replaced with retention bonuses for some executives worth $763,000 to $4.7 million each.
The conduct of the health plan's board raised eyebrows when it was revealed that the lawyer who represented Jews during his hiring process later represented the company in negotiations with WellPoint. The sale price also was called into question.
A study released last week by the D.C. Appleseed Center for Law and Justice, Washington, put CareFirst's actual value at $2.27 billion, even higher than previous evaluations of $1.45 billion and $1.75 billion. In testimony last August, the president and CEO of Anthem, Indianapolis, testified that CareFirst officials discouraged his company from raising its $1.3 billion bid.
Larsen also was troubled by WellPoint's reputation as a health plan. In hearings, the company said its tough negotiating stand with providers was needed to control prices, but Larsen said it was unclear whether those tough stands resulted in savings to enrollees or fatter profits.
Nancy Fiedler, spokeswoman for the Maryland Hospital Association, which opposed the sale, said it was never made clear during the course of the deliberations how WellPoint's takeover of CareFirst would be good for the public. "We felt the sale to an insurer 3,000 miles away was not to the benefit of Maryland," she said.