Document 589 : Docket No. 99-14 : Hearing Decision : Bureau of Insurance

STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE
34 STATE HOUSE STATION
AUGUSTA, MAINE 04333-0034

In Re: Application of Associated Hospital Service of Maine,	)
d/b/a Blue Cross and Blue Shield of Maine, To Convert to a	)
Stock Insurer and Voluntarily Liquidate and Dissolve	)
	)
	)	CONSUMERS FOR
	)	AFFORDABLE HEALTH
And	)	CARE’S SUMMARY OF
	)	TESTIMONY OF
	)	EXPERT WITNESSES
	)
Application of Anthem Health Plan of Maine, Inc., To Acquire	)
the Assets of Associated Hospital Service of Maine,	)
d/b/a Blue Cross and Blue Shield of Maine, and Related	)
Transactions	)
	)
Consolidated Docket No. INS 99-14	)

In its Designation of Witnesses, Consumers for Affordable Health Care ("CAHC") designated three witnesses: Robert Strong, Lawrence Orlowski and Norbert Goldfield. At this time, CAHC does not anticipate calling Mr. Orlowski as a witness.

Now comes CAHC, through its attorneys, and files a Summary of Testimony of Expert Witnesses:

Summary of Anticipated Testimony of
Dr. Robert Strong, CFA
Submitted on March 24, 2000

Based in his review and analysis of the reports prepared by Houlihan, Lokey, Howard and Zukin (HLHZ), by Salomon, Smith, B

The overall weighted average cost of capital (WACC) applied by HLHZ is significantly higher than that applied by SSB. In fact, on a percentage basis, the HLHZ WACC (18%) is almost 57% higher than the SSB WACC (11.5%). The immediate and direct effect of this is to drive the valuation down significantly. HLHZ failed to adequately justify various individual components of the WACC. These variations all point to assumed higher risk and lead HLHZ to determine a much higher discount rate than SSB. Those individual components are:
1. HLHZ’s Beta (levered) (1.23) is almost 31% higher than SSB’s (.94).
2. The equity rate used by HLHZ is uncommonly high at 20.5%. HLHZ’s rate is almost 63% higher than that used by SSB (12.6%). In regulated industries like the electric utility industry the equity rate is about 11 – 12%. Such a high equity rate overstates the risk involved here – especially taken in light of the financial projections prepared by Blue Cross and Blue Shield of Maine.
3. The debt/capital ratio used by HLHZ (16.5%) is almost double that used by SSB (8.3%). The reason for this is unexplained.
4. HLHZ further discounts value by imposing a risk premium for size.
Blue Cross and Blue Shield of Maine’s investment portfolio should be valued independently of the rest of the enterprise. Any methodology that assigns multiples to the firm in an across-the-board fashion will likely understate the actual value of the firm’s assets.
Assumptions regarding current and future marketshare are not provided. The definition of marketshare employed by HLHZ understates the actual marketshare enjoyed by Blue Cross and Blue Shield of Maine. In so doing, the valuation is misleading in two important ways. First, it does not accurately reflect the marketsare at the time the value was determined as of July 13, 1999. Morevoer, it does not give an accurate basis from which to project forward the value at the time of closing. Substantial changes in projected Blue Cross and Blue Shield of Maine marketshare warrant an increase in the July 1999 valuation that was prepared in a very different set of market conditions.
HLHZ does not adequately explain the high level of Blue Cross and Blue Shield of Maine business risk that their analysis implies.
Given that Machigonne is forecast as a money loser, it should be valued according to its liquidation value rather than as a going concern.
The time periods upon which the valuation is based are years ended December 31, 1999 through December 31, 2001. The valuation did not take into consideration years prior to 1999. Picking one year upon which to base the underlying value of the company which has done business in Maine for 60 years skews its actual value.

Summary of Anticipated Testimony of
Norbert Goldfield, M.D.
Submitted on March 24, 2000

CAHC anticipates that Dr. Goldfield will offer prefiled testimony regarding quality assurance and improvement programs employed by Blue Cross and Blue Shield of Maine and Anthem Insurance Companies, Inc. The topics his testimony will most likely cover include utilization review criteria, clinical peer review process and procedures, case management policies and procedures, complaint ratios, and exclusionary coverage policies. Dr. Goldfield will likely review the health and public policy issues of concern arising from various practices and policies.

Dr. Goldfield may also testify to issues raised by the certificate of authority filing.

At this time CAHC cannot provide a more detailed summary because of pending Discovery requests. CAHC will provide a more detailed summary on March 27, 2000.

Dated: March 24, 2000

Joseph P. Ditre, Esq.

Dale Lavi, Esq.

Consumer Health Law Program

A Program of CAHC Foundation

One Weston Court, Level One

P.O. Box 2490

Augusta, ME 04338-2490

Ph: (207) 622-7083/ Fx:622-7077

Email: jditre@mainecahc.org

Patrick Ende, Esq.

Maine Equal Justice Partners

65 State Street, 2^nd floor

P.O. Box 5347

Augusta, ME

Ph: (207) 626-7058/Fx:621-8148

Email: pende@mejp.org

Counsel for CAHC

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on March 24, 2000, a copy of the above was served by electronic mail and United States mail, first class postage prepaid, on each of the persons listed below.

Robert S. Frank, Esq. James B. Zimpritch, Esq.

Harvey & Frank Catherine R. Connors, Esq.

Two City Center Pierce Atwood

P.O. Box 126 One Monument Square

Portland, Maine 04112 Portland, Maine 04101

(Blue Cross/Blue Shield of Maine) (Anthem Insurance Companies, Inc.)

Judith Chamberlain, Esq. Michele M. Garvin, Esq.

State of Maine Ropes & Gray

Department of the Attorney General One International Place

6 State House Station Boston, Massachusetts 02110-2624

Augusta, Maine 04333-0006 (Central Maine Healthcare Corp.)

William H. Laubenstein, Esq. Donald E. Quigley, Esq.

State of Maine Maine Health

Department of the Attorney General 465 Congress Street, Ste. 600

6 State House Station Portland, ME 04101-3537

Augusta, Maine 04333-0006

John Dieffenbacher-Krall

Executive Director

Maine People’s Alliance

192 State Street

Portland, Maine 04101

Andrew B. MacLean, Esq. Bonnie Post

Maine Medical Association Executive Director or the Maine

Frank O. Stred Building Ambulatory Care Coalition

P.O. Box 190 P.O. Box 390

Manchester, Maine 04351 Manchester, Maine 04351

(Thomas D. Hayward, M.D., (Sacopee Valley Health Center,

Maroulla S. Gleaton, M.D., Regional Medical Center at Lubec,

And the Maine Medical Association) Eastport Health Care, Inc., and the

Maine Ambulatory Care Coalition)

Kellie Miller Sandra Parker

Maine Osteopathic Association Maine Hospital Association

RR 2, Box 1920 150 Capitol Street

Manchester, Maine 04351 Augusta, ME 04330