[Congressional Record Volume 144, Number 118 (Wednesday, September 9, 1998)]
[Extensions of Remarks]
[Pages E1658-E1660]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                 MERGERS, ACQUISITIONS AND CONVERSIONS

                                 ______
                                 

                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                      Wednesday, September 9, 1998

  Mr. STARK. Mr. Speaker, attached are two important articles that 
spotlight a significant problem with the rampant mergers, acquisitions, 
and conversions going on throughout our health care system today.
  Recently, the two Blue Cross plans in Washington and Maryland 
combined into one plan. There was, at the time, and continues to be, 
great concern within the consumer community--lead by A.G. Newmyer of 
the Fair Care Foundation--with this merger. He makes a strong case that 
the eventual goal of this merger was not to provide better quality 
health care to the plans' members--as both health plans proclaim. 
Instead, it was to line the pockets of health plan executives and pave 
the way to convert the bigger, stronger plan into a for-profit entity. 
Under both of these scenarios the community loses.
  The attached articles outline Mr. Newmyer's perspective on this 
merger quite well and I encourage everyone to read them.

                 [From the Daily Record, Aug. 10, 1998]

                   Did Blues Execs Pad Their Pockets?

                           (By Bob Keaveney)

       On May 23, 1997 at 12:30 p.m., over lunch at a Washington-
     area restaurant, A.G. Newmyer III says his friend, at the 
     time a director of Blue Cross Blue Shield of the National 
     Capital Area, made a shocking admission.
       Newmyer says the director, whom he will not name, told him 
     that Larry Glasscock, then-president of the D.C. Blues, would 
     leave the company after its combination with Maryland's Blue 
     Cross plan was complete.
       Newmyer said he was complaining to his friend about the way 
     the D.C. Blues treats its members generally, and about 
     Glasscock specifically, when the director ``smiled and said, 
     `After the merger, he'll be gone.'''
       Last March, two months after the deal was complete, 
     Glasscock did leave for a job in Indianapolis, taking with 
     him nearly $3 million in severance. Several other members of 
     the D.C. Blues' senior management team left, too, taking with 
     them another $3.7 million combined.
       Newmyer's story, if corroborated, would supply the smoking 
     gun he said he needs to prove his contention that the Blues' 
     year-long effort to gain regulatory approval for its merger 
     was a sham from the beginning.
       That's because Glasscock told regulators that he had no 
     immediate plans to leave, even though Glasscock's employment 
     contract permitted him to do so--taking the severance pay 
     with him--should the merger be consummated.
       The insurance commissioners of Maryland and the District 
     each have said they would not have approved the merger had it 
     appeared to be a deal designed to allow executives to profit 
     personally.
       The story also would support Newmyer's view of the merger 
     as a cynical power grab, orchestrated by a handful of top 
     executives harboring a quiet agenda to one day convert the 
     new, combined Blues into a for-profit health insurance 
     powerhouse.
       But there is no evidence that the meeting ever took place, 
     much less any proof that the anonymous director ever made 
     such a foolhardy utterance.
       And Newmyer is an admitted mortal enemy of Blue Cross plans 
     locally and nationally.
       A loud and frequent critic of what he views as shabby 
     treatment of policy holders, he is chairman of the Fair Care 
     Foundation, a Washington-based Blues' watchdog group 
     correctly suing the Blues in the District of Columbia in a 
     long-shot bid to force them to unmerge.
       Newmyer says he won't reveal his lunch companion's identity 
     because Fair Care has sued him for breach of fiduciary 
     responsibility, ``and I don't want to torment him further, 
     personally.''
       Still, Newmyer, a Northern Virginia businessman, isn't the 
     only one who finds the circumstances surrounding the Blues 
     deal curious.
       Some eight months after its closing, consumer groups and 
     Blue Cross-watchers in other parts of the country are eying 
     the deal here with skepticism.
       And there are several peculiarities to the deal, which may 
     lend credence to their view.


                                The deal

       All sorts of level-headed business reasons exist that a 
     merger made sense between Owings Mills-based Blue Cross Blue 
     Shield of Maryland and Washington-based Blue Cross Blue 
     Shield of the National Capital Area.
       At the time of the deal's closing, the D.C. Blues had 
     760,000 members in the District and its highly mobile suburbs 
     in Maryland and Northern Virginia. The Maryland Blues had 1.5 
     million members in and around Baltimore.
       The companies figured that by combining, each would expand 
     its network of providers, allowing members living in 
     Montgomery County (D.C. Blues'-territory) but working in the 
     Maryland Blues' Howard County, to see a doctor in either 
     place.
       And by getting bigger--the combined Blues would have more 
     than 2.2 million members and $3 billion in revenue--officials 
     said the company could compete better against its heavily 
     muscled for-profit peers, offer more products and enhance its 
     customer service.
       ``Affiliating our two contiguous Blue Cross Blue Shield 
     plans is a logical business decision that will allow us to 
     offer our members the most comprehensive health care services 
     available and operate more efficiently over time,'' said 
     William Jews, president of the Maryland Blues, in a statement 
     in January.
       Under terms of the deal, a new holding company would be 
     formed, called CareFirst, based in Owings Mills. CareFirst 
     would operate both Blues' plans as subsidiary companies.
       Jews would become president and CEO of CareFirst, as well 
     as CEO of both Blues. Glasscock would be chief operating 
     officer of CareFirst and both Blues, as well as president of 
     both Blues.
       But as it turned out, that organizational structure lasted 
     only a few weeks.


                               Quiet exit

       On March 27, Indianapolis-based Anthem Inc., an owner of 
     for-profit Blue Cross plans in four states, said that 
     Glasscock would join the company in a new position, senior 
     executive vice president and COO.
       Anthem, however, did not make that announcement to the 
     Baltimore or Washington press, and it wasn't known here until 
     May 19, when several newspapers, including The Daily Record, 
     discovered the departure and reported it.
       Then and now, Blues officials have insisted that the $6.5 
     million in severance payments made to Glasscock and 25 other 
     departing executives was proper, legal and in line with what 
     high-ranking executives at other, similarly sized Blues plans 
     have received upon departure.
       Glasscock repeatedly has refused to speak to the Baltimore 
     media since his departure and declined, again, to comment for 
     this story.
       ``He only wants to talk about his future with this 
     company,'' said Patty Coyle, an Anthem spokeswoman.
       Others have criticized his golden parachute as a typical 
     example of what happens when state regulators don't monitor 
     the assets of Blues plans--assets built up, in part, by tax 
     breaks granted the Blues because of nonprofit status.
       Indeed, the circumstances surrounding Glasscock's departure 
     are at the root of one of the fundamental charges levied 
     against the Maryland and D.C. Blues by Fair Care.


                            Golden parachute

       The organization claims that officials not only knew 
     Glasscock would leave after the merger, but that the merger 
     was contingent upon his agreement to go.
       After Glasscock's departure, Jews took over his former 
     jobs, becoming president and CEO of CareFirst and both Blue 
     Cross plans.
       ``Bill Jews gave Larry Glasscock a $3 million `tip' to get 
     out of town,'' Newmyer said.
       There is no hard evidence of that, and the Blues deny it 
     vehemently.
       Dwane House, a director of the D.C. Blues until the merger 
     was completed and a high-ranking executive at Anthem until 
     retiring in recent months, said Newmyer's assertion is false.
       ``To the best of my knowledge, he hadn't made a decision to 
     leave'' until after the merger was final, House said from his 
     South Carolina home.
       But in support of their contention, merger opponents point 
     to changes that were made to Glasscock's contract with the 
     D.C. Blues in the days leading up to the merger--changes that 
     ensured Glasscock's golden parachute would safely open after 
     the deal closed.

[[Page E1659]]

       The golden parachute clause in Glasscock's contract allowed 
     him to collect the severance payment should he ever find 
     himself in a job lower than the top position at the D.C. 
     Blues, or any company controlling the D.C. Blues.
       The so-called change-in-control clause was altered 
     slightly--but critically--in 1997, while the D.C. and 
     Maryland Blues were seeking regulatory approval for their 
     merger.
       To exercise the clause, two things had to happen: The 
     change in control needed to take place leaving Glasscock as 
     the less-than-senior official, and he needed to be 
     terminated, according to a consultant's analysis of the 
     contract prior to the merger.
       Although the Blues have maintained that Glasscock resigned 
     his position--and was not fired--Blues spokeswoman Linda 
     Wilfong said he was able to satisfy the latter requirement, 
     because his contract allowed him to terminate himself.


                        Question of self-dealing

       For merger opponents, the objectionable contract change 
     made it clear that accepting a position as the less-than-
     senior official in the new merged Blues was not a forfeiture 
     of Glasscock's right to exercise the change-in-control 
     clause.
       The provision was added last year, as the companies were 
     jockeying for regulatory approval of the merger.
       Many executive compensation packages include change-of-
     control provisions not unlike Glasscock's--and this one, in 
     fact, did not alarm Sibson & Co., the New Jersey-based 
     analyst hired to review the contract.
       Maryland Insurance Commissioner Steven Larsen said he asked 
     for the independent analysis, because he wanted to be sure 
     that the changes made to Glassocck's contract in 1997 would 
     not entitle him to additional severance pay.
       He said he was satisfied with the Sibson report's 
     conclusion.
       But the Glasscock change took the unusual step of making it 
     clear that he could exercise his change-in-control clause, 
     even though he was helping to engineer the change in control.
       In other words, by allowing Glasscock to demote himself 
     through his work in brokering the merger, the change gave him 
     cause to effectively fire himself after the merger was 
     complete, allowing him to collect a $2.8 million severance.
       ``When you say, `What did they do? What happened?' They 
     caused that to happen,'' Newmyer said. ``He [Jews] had to get 
     his hand on the [Blues'] assets, and to do that, he had to 
     get Larry Glasscock out of the way.''


                               No comment

       Both Jews and John Piccioto, the Blues' in-house counsel, 
     declined interview requests to explain why the Blues thought 
     it necessary to alter Glasscock's change-in-control clause, 
     when they say they saw no reason to believe he would be 
     leaving after the merger.
       ``I think what you're trying to get at is a little too 
     close to the litigation,'' said Wilfong.
       At least one regulatory who reviewed the proposed merger, 
     Dana Sheppard of the District's Office of Corporation 
     Counsel, raised objections to Glasscock's golden parachute on 
     Nov. 24, 1997, two months before the merger closed.
       ``Mr. Glasscock, as the senior official at [the D.C. 
     Blues], deserves the closest scrutiny, because he entered 
     into the proposed business combination agreement with [the 
     Maryland Blues] knowing that he would not retain his current 
     position in the controlling organization,'' Sheppard wrote in 
     his proposed conditions to the merger's approval.
       ``Accordingly, he has positioned himself, intentionally or 
     unintentionally, to leave [the D.C. Blues] with substantial 
     charitable assets.''
       Given that, Sheppard recommended that the District's 
     insurance commissioner, Patrick Kelly, block the merger 
     unless Glasscock and other executives with change-of-control 
     provisions in their contracts ``take appropriate action to 
     immediately render the provision null and void.''
       On Dec. 23, Kelly approved the merger with a series of 
     conditions--but none required Glasscock to give up the golden 
     parachute.


                               Overdrive

       What happened in the 29 days between Nov. 24 and Dec. 23 to 
     cause Kelly to reject the suggestion of one of the District's 
     own lawyers advising him on the matter?
       Newmyer thinks he knows exactly what happened.
       ``I am 99.9 percent convinced that because Dana Sheppard 
     had raised an issue that truly went at the heart of this 
     matter . . . the lobbyists from Blue Cross went into 
     overdrive,'' he said.
       He believes Blues' lawyers met with Kelly in the days prior 
     to his approval of the merger to convince him to drop 
     Sheppard's suggestion to cut Glasscock's golden parachute.
       Kelly did not return a call seeking comment. Sheppard 
     declined to speak for the record, citing Fair Care's pending 
     litigation.
       Bob Hunter, director of insurance for the Consumer 
     Federation of America (CFA) and the former Texas insurance 
     commissioner, said he believes there was an inappropriate 
     meeting.
       ``Blue Cross got to look at the proposed order and propose 
     changes [when others did not],'' Hunter said. ``A public 
     process shouldn't happen that way. . . . The District of 
     Columbia should have reorganized the hearing, and as parties, 
     we should have been invited.''
       The CFA is supporting Fair Care's suit.


                            Secret meetings?

       Tim Law, an attorney with the Philadelphia law firm 
     handling Fair Care's case, said the group did not know that 
     Sheppard's proposed conditions existed until after the merger 
     was complete. They never received them.
       ``That's one of the weird things,'' Law said. ``It gets put 
     in the record, but it doesn't get served to everyone. So 
     sometimes, we didn't know about things. Important things, 
     like that.''
       Wilfong refused to answer any questions related to 
     allegations of secret ex-parte meetings between regulators 
     and Blues' officials, which are at the heart of Fair Care's 
     lawsuit.
       The case now is awaiting a decision on an appeal of a 
     District of Columbia judge's ruling that the group does not 
     have standing to sue.
       In addition to the alleged meeting between Kelly and Blues' 
     lawyers Nov. 24 and Dec. 23, Fair Care contends that Kelly 
     and Maryland Insurance Commissioner Larsen, in separate Jan. 
     16 letters, changed their own approvals of the merger after 
     having private meetings with Blues' lawyers.
       Kelly and Larsen approved the merger on Dec. 23.
       Among other things, the group is angry that both 
     commissioners agreed to make it clear that portions of 
     executive contracts dealing with severance payments 
     negotiated prior to 1997 were not subject to their approval, 
     as both orders had required.
       Larsen acknowledges there was a meeting with Blues lawyers 
     prior to the Jan. 16 letter, and that he issued the letter at 
     the Blues' request.
       But he insists that there was nothing inappropriate about 
     the meeting or the letter. The purpose of both, he said, was 
     to clarify his order--not to change it.
       ``That meeting was about as routine as you could have in 
     the context of a very significant order being issued,'' he 
     said.
       ``I don't know what else to say, other than to not be able 
     to have that meeting is absolutely absurd. I have a 
     responsibility to the entities I regulate to explain the 
     meanings of the orders I issue,'' he added.


                              Charitable?

       Along with questions about Glasscock's contract, an ongoing 
     debate questions whether Blue Cross plans, both locally and 
     in other parts of the country, are, in fact, charitable 
     organizations.
       Certainly, at first glance, it would appear that they are 
     not. Although nonprofit, they act as insurance companies. 
     They charge premiums like any insurer and expect to be in the 
     black at year's end.
       The local Blues long has insisted that it is not a charity, 
     and made that position clear last year to the insurance 
     commissioners.
       ``I know what the criteria for a charity are,'' Larsen 
     said. ``Blue Cross is not a charity in my view. . . . Blue 
     Cross is'' an insurance company.''
       Maryland Attorney General J. Joseph Curran disagrees. His 
     office long has held that Blue Cross of Maryland is indeed a 
     charitable organization and always has been.
       This is not just an academic debate among lawyers, however.
       Nationwide, as nonprofit Blues plans have converted 
     themselves into for-profit companies, the answer to the 
     charity question has been crucial to deciding whether the 
     Blues must set aside a portion of assets in public trust, to 
     be used for charitable health purposes.
       Just last month, a group of small charities in Georgia 
     settled a lawsuit with that state's Blues in which the now 
     for-profit company agreed to set aside $64 million in trust.
       In California in 1994, California's Blues was forced by the 
     state attorney general to set aside $3.2 billion in two 
     trusts, said Frank McLoughlin, staff attorney for Community 
     Catalyst, a Boston-based consumer group that monitors 
     nonprofit to for-profit conversions.
       ``There's a difference between a charity--like a soup 
     kitchen. . . . and a charitable organization,'' said 
     McLoughlin.
       ``A lot of Blue Cross officials think that because they 
     look like a regular health insurance company and because they 
     act like a regular health insurance company, they're no 
     longer bound by legal doctrine.''


                           Change in identity

       The Maryland Blues has tried twice--in 1994 and 1995--to 
     convert to for-profit status, but has been thwarted both 
     times. it has made no secret that it may try again.
       Locally, the Blues has suffered two setbacks in its attempt 
     to distance itself from that doctrine in the last year.
       Last fall, the D.C. Blues tried unsuccessfully to drop its 
     federal charter--which established the company in 1934 as a 
     ``charitable and benevolent organization''--in favor of a 
     charter with the District, where the law is vague on the 
     question.
       Under a D.C. charter, the Washington Blues would no longer 
     have been identified as a ``charitable and benevolent'' 
     organization.
       Consumer groups that lobbied Congress to block the charter 
     switch, said the language defines its tax-exempt, nonprofit 
     status, as well as its obligation to serve the public.
       ``To change their identity in the context of what's going 
     on around the country is a harbinger of things to come in the 
     for-profit sector,'' said Julie Silas, staff attorney with 
     Consumer's Union, which first drew attention to the issue.

[[Page E1660]]

       And during the 1998 General Assembly session, lobbyists 
     from the Maryland Blues tried to attach an amendment to a 
     bill making it harder for nonprofit health care entities to 
     convert to for-profit.
       Curran said the amendment would have made it easier for the 
     Blues to convert without a public set-aside.
       The rider seemed innocuous enough. It merely stated that 
     the Blues exist to serve policy holders, not the general 
     public.
       But when lawmakers sponsoring the bill learned that such 
     arguments have been made in other states to attempt to 
     establish Blues' plans as non-charitable, they were furious.
       ``It's sad and embarrassing,'' said Del. Dan Morhaim, D-
     Balto. City, one of the sponsors for the legislation, at the 
     time. ``Its a slap in the face of Maryland taxpayers.''


     
                                  ____
               [From the Washington Post, Aug. 18, 1998]

              $2.9 Million Helps to Leave the Blues Behind

                        (By David S. Hilzenrath)


       For occupants of the executive suite, parting may be sweet 
     sorrow, or it may be just plain sweet.
       When Larry C. Glasscock left Blue Cross and Blue Shield of 
     the National Capital Area in April to take a job at another 
     health insurer, the former chief executive took with him 
     severance benefits of $2.9 million.
       That was more than six times the salary provided in 
     Glasscock's February 1997 employment contract at the 
     nonprofit company.
       A.G. Newmyer III, chairman of Fair Care, a patient advocacy 
     group that has battled Blue Cross, called the package ``a 
     disgraceful diversion of charitable assets. . .to the pockets 
     of one executive.''
       Glasscock didn't return telephone calls seeking a comment, 
     but a spokesman for his new employer, Anthem Inc., quoted him 
     as saying: ``I don't want to talk about that--that's ancient 
     history, it's in the past.''
       Maryland Insurance Commissioner Steven B. Larsen said the 
     package is consistent with industry norms. ``There's no 
     question that $3 million is a significant amount of money, 
     but. . .that must be understood in the context of a situation 
     where you have a CEO who is running a billion-dollar 
     operation, and. . .this is the type of benefit package that 
     people of that caliber receive.''
       Glasscock's deal reflects the perquisites of executive 
     power, even in the nonprofit sector. His employment contract 
     at the D.C. company permitted him to collect his severance 
     benefits if he left voluntarily after a ``change in 
     control,'' such as the merger he negotiated with Blue Cross 
     and Blue Shield of Maryland.
       When the two Blues combined in January to form CareFirst 
     Inc., the top job went to William L. Jews, who had run the 
     Maryland company, and Glasscock became chief operating 
     officer. A few months later Glasscock moved to a comparable 
     job at Anthem Inc., a Blue Cross insurer in Indiana.
       Early last year, even as the two companies were preparing 
     to merge their operations, Glasscock signed a new contract 
     that improved his severance benefits, at least modestly. For 
     example, it provided coverage for travel expenses that 
     Glasscock might incur while looking for a new job, according 
     to a description filed with the Maryland Insurance 
     Administration.
       The 1995 version of the contract restricted Glasscock's 
     ability to join a competing company. The Febraury 1997 
     version of the contract, signed several weeks after the 
     companies announced their intent to combine, relaxed that 
     restriction somewhat, according to an analysis filed with 
     Maryland regulators.
       The 1997 version also provided coverage for travel expenses 
     that Glasscock might incur while looking for a new job.
       In addition, the updated contract restructured Glasscock's 
     severance package in a way that could have helped him avoid a 
     deep excise tax on golden parachutes. The tax would have 
     applied only if the the company issued stock to the public 
     before Glasscock left.
       According to an analysis prepared in January by consultants 
     to the D.C. company, Glasscock's 1997 contract entitled him 
     to severance benefits of $2,874,357 plus any bonuses coming 
     to him under an incentive plan. The total included $125,000 
     for serving as a consultant to the company for a year after 
     leaving and $1,677, 638 for promising not to compete with it 
     directly.
       That set off alarm bells last year in the D.C. Corporation 
     Counsel's Office, which recommended that the ``change of 
     control'' benefits be eliminated before the merger received 
     approval. Glasscock ``has positioned himself, intentionally 
     or unintentionally, to leave . . . with substantial 
     charitable assets,'' possibly in violation of law, 
     Corporation Counsel John M. Ferren wrote.
       But insurance regulators in the District and Maryland 
     decided that the benefits should not stop the deal because 
     they were part of Glasscock's employment contract before the 
     merger was negotiated. The overall cost of the package to 
     Blue Cross remained unchanged from 1995, according to Sibson 
     & Co., a consultant to Blue Cross that prepared a report for 
     D.C. and Maryland regulators.
       The actual payment totaled $2,890,561, Blue cross informed 
     Larsen.

     

                          ____________________