Maryland Insurance Commissioner Steven B. Larsen told state lawmakers yesterday he has "very little confidence" in the board of the region's largest health insurer and recommended that the General Assembly pass legislation to oust the board's current members.
Following up on a scathing report he issued last week rejecting the sale of CareFirst BlueCross BlueShield, Larsen urged House and Senate leaders to move quickly in reshaping the nonprofit board that approved the flawed deal.
"Management in any company can make mistakes . . . but the buck stops with the board," Larsen said. "This board defended what I think was indefensible right up until the bitter end."
At the same time, he cautioned legislators against going too far in returning the company to its original mission: providing affordable insurance for all. In today's competitive health care industry, he said, CareFirst "cannot be all things to all people."
In rejecting the sale of CareFirst to WellPoint Health Networks for $1.37 billion, Larson rebuked the CareFirst board and said its members had shirked their fiduciary responsibilities to 3.2 million subscribers in Maryland, Virginia, the District and Delaware.
Larsen concluded that the board gave a competitive edge to WellPoint over another bidder. The resulting deal undervalued the company, violated state law and was driven primarily by a bonus incentive plan that would have put as much as $119 million into the pockets of a few executives, he said.
Yesterday, Larsen brushed off assertions by CareFirst that board restructuring could leave the company with no institutional memory. But he warned lawmakers that they could go too far in their attempts to punish CareFirst.
Despite its flaws, CareFirst's management team made several good financial decisions that took the company from the brink of bankruptcy to a "viable and strong" corporation, Larsen said. Forcing the insurer to return to a mission that might include participation in such unprofitable programs as Medicaid and Medicare would weaken the company, he told lawmakers and added, "You could end up back where the company was years ago."
CareFirst is considering appealing Larsen's decision. The company continued to defend its board yesterday.
Fran Doherty, vice president of government affairs, said that she disagreed with the insurance commissioner's assessment. But Doherty said she was "heartened" by Larsen's warnings to lawmakers that they must not harm the company's viability.
"It's his goal and the goal of many in this legislature to make sure that in the end we have a strong not-for-profit," she said, adding that she would reserve judgment on Larsen's proposal for restructuring the board.
Though the deal to sell CareFirst to WellPoint is dead for now, lawmakers are worried that another for-profit suitor could come along with an offer and are considering a host of changes to prevent a repeat of the WellPoint deal.
A draft bill would oust all 21 of the nonprofit board's members by Sept. 30, 2006. The terms of 11 members -- a majority -- would end prematurely in the fall.
The bill would shrink the board's membership to 15, seven of whom would be appointed by the governor and eight of whom would be chosen by the board based on specific criteria. Those eight would have to have experience in accounting, information technology and finance. All would have to demonstrate a commitment to a nonprofit corporate structure that "seeks to provide individuals and businesses with the most affordable and accessible health insurance possible."
The draft bill also would give the insurance commissioner the leverage to deny compensation packages given to board members or company executives if the packages were not "reasonable" when compared with those given by similar companies.
Other provisions address the firm's customer base. One would mandate that the company sell insurance to any individuals or small businesses wanting it during an open enrollment period. Another provision seeks to prevent CareFirst from dumping high-risk subscribers.
Minor Carter, a lobbyist for a group of hospitals, doctors and subscribers who opposed the CareFirst sale, said the bill is a step in the right direction. "The board lost sight of its responsibilities," he said. "We want to make sure that doesn't happen again."
Leading lawmakers said they plan to tread carefully.
"This is a $6 billion company with more than 3 million subscribers," said Del. John A. Hurson, a Montgomery County Democrat who chairs the House Health and Government Operations Committee. "You've got to be very careful, and we're going to be."