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> Document 610 : INS 99-14 : Hearing Decision
STATE OF MAINE DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION BUREAU OF INSURANCE
CENTRAL MAINE HEALTHCARE CORPORATION'S PREFILED TESTIMONY OF PETER E. CHALKE
Pursuant to the Superintendent's Procedural Order of November 4, 1999, Central Maine Healthcare Corporation ("CMHC"), an intervenor as of right by order dated November 12, 1999, hereby submits the Prefiled Testimony of its Witness, Peter E. Chalke. P R O C E E D I N G S Q. (By Mr. Kane) Would you please state your name. A. My name is Peter Chalke. Q. Who is your employer? A. Central Maine Healthcare Corporation. Q. Please give us a general description of your education and employment experience to this date. A. I have an undergraduate degree in economics from Ithaca College in Ithaca, New York, and I have a graduate degree in health care administration from George Washington University in Washington, D C. My first hospital management job after graduating from George Washington University in 1974 was as an administrative assistant at the Holyoke Hospital in Holyoke, Massachusetts. I had promotions at that institution over about an eight-year period and left there in 1982 from the position of assistant administrator responsible for a variety of clinical and non-clinical departments within the institution. In January 1983 I came to Central Maine Medical Center as vice president for ancillary services, became a senior vice president in 1986, and in 1988 became executive vice president, chief operating officer of the Medical Center. In 1995 my role was expanded to executive vice president /chief operating officer of Central Maine Healthcare Corporation as well as the medical center. On January 1, 2000, I was appointed president and CEO of Central Maine Medical Center and retained the position of chief operating officer of Central Maine Healthcare. Q. So you are still an employee of Central Maine Healthcare? A. Yes, I am. Q. What is your position again at Central Maine Healthcare? A. Executive vice president, chief operating officer. Q. Do you hold any positions at any other affiliated entities? A. Essentially I am the executive vice president and chief operating officer of all entities under the Central Maine Healthcare parent corporation. Q. Please describe for us your duties as executive vice president and chief operating officer for Central Maine Healthcare. A. My major duties are to oversee the day-to-day operations of all of the corporations which include planning, financial review, analyses, organizing, developing programs and overseeing general operations. Q. What are the corporate purposes of Central Maine Healthcare? A. Central Maine Healthcare is a corporation that provides continuous planning, organization, direction, fund raising and the control of the development and management of a health care delivery system comprised of Central Maine Medical Center and its affiliates which provides health care service for the residents of Lewiston, Auburn and immediately surrounding areas as well as the residents of the greater Central Maine region. Q. Does it deliver those services through entities of which it is the sole member? A. Yes, it does. Q. What is Central Maine Partners? A. Central Maine Partners is a licensed HMO providing health care benefits to approximately 10,000 enrollees in the greater Androscoggin and Oxford county areas. In addition it has applied for a service area expansion to provide health care benefits in Penobscot, Hancock and Waldo counties and intends to submit additional service area expansion requests for the four northern counties of Aroostook, Piscataquis, Somerset and Washington as well as Franklin County. Q. Mr. Chalke, do you currently have any responsibilities with respect to Central Maine Partners Health Plan? A. I am the Central Maine Healthcare senior administrative person responsible for coordination with Blue Cross Blue Shield of Maine, our partner in the plan. Q. When was Central Maine Partners Health Plan formed? A. It was organized in 1996 and it was licensed as an HMO in August 1997. Q. What is Central Maine Healthcare's relationship to Central Maine Partners Health Plan? A. Central Maine Healthcare owns 50 percent of the stock of Central Maine Partners and has the right to appoint 50 percent of the members of the Board of Directors of the plan. Q. Mr. Chalke, have you personally been involved with Central Maine Partners since its inception? A. Yes, I have. Q. Who owns the remaining 50 percent of the stock in Central Maine Partners? A. Blue Cross Blue Shield of Maine. Q. Were you involved in the original discussions with Blue Cross regarding the formation of Central Maine Partners? A. Yes, I was. Q. Were you a principal representative of Central Maine Healthcare involved in those discussions? A. Yes. Q. At one point in time, Mr. Chalke, were you the interim chief executive officer of Central Maine Partners? A. Yes, I was. Q. Were you involved in the proceedings which resulted in licensure for Central Maine Partners? A. Yes, I was. Q. Did you attend all of those hearings? A. Yes, I did. Q. Would you summarize for the Bureau, Mr. Chalke, the scope of your testimony here today? A. One of the assets to be transferred from Blue Cross Blue Shield of Maine to Anthem Insurance Company is the Central Maine Partners Health Plan stock owned by Blue Cross Blue Shield of Maine. The transfer of ownership and control of Blue Cross Blue Shield of Maine to Anthem, if approved, gives Central Maine Healthcare the right to purchase Blue Cross Blue Shield of Maine's stock in Central Maine Partners. I am here to present testimony on Central Maine Healthcare's decision to exercise this right, and to further testify as to why this is in the best interest of Central Maine Partners Health Plan enrollees and the residents of the region we serve. I am here to expressly testify in opposition to the transfer of Central Maine Partners Health Plan stock from Blue Cross Blue Shield of Maine to Anthem. Central Maine Healthcare requests that Central Maine Partners' stock held by Blue Cross Blue Shield of Maine be transferred immediately and directly to Central Maine Healthcare should the Bureau approve the sale of Blue Cross Blue Shield Maine to Anthem and that this transfer to Central Maine Healthcare be approved as part of this proceeding. Q. Mr. Chalke, do you wish to offer any testimony with respect to the larger transaction involving the sale of Blue Cross and Blue Shield of Maine to Anthem? A. No, I do not. Q. Do you have any opinion on whether that transaction should or should not be approved? A. No, I do not. Our sole focus is on the ownership of Central Maine Partners. Q. You mentioned that the transfer of ownership of Blue Cross and Blue Shield of Maine to Anthem permits Central Maine Healthcare to purchase Blue Cross' interest in Central Maine Partners. What document governs that right? A. A shareholder agreement. Q. Was the shareholder agreement presented to this Bureau for approval in 1997? A. Yes, it was approved in 1997 and it is currently on file. Q. Does the shareholder agreement specify the terms and conditions with respect to the buy-out including a price? A. Yes, it does. Q. What other role does Blue Cross Blue Shield of Maine play in the operation of the plan? A. Blue Cross Blue Shield of Maine currently provides all of the administrative support services for Central Maine Partners through a management agreement, and provides access to certain provider networks through a network access agreement. Q. Have these documents been presented to and approved by the Bureau? A. Yes, they too are on file with the Bureau. Q. Please describe for us the impact of the transfer of stock on the management agreement and network access agreement? A. We expect to give notice of termination of the management agreement no later than July 1, 2000. Under the termination provisions Blue Cross Blue Shield of Maine is required to continue to provide management support to Central Maine Partners through December 31, 2000, and to provide access to its provider network to fill the gaps in the Central Maine Partners network for one year after the change of ownership. Q. Has Central Maine Healthcare communicated to Blue Cross Blue Shield of Maine its decision to buy out Blue Cross's interest in Central Maine Partners? A. Yes, we have. Q. Please tell us how that decision has been communicated. A. That decision was communicated in writing to Keith Vangeisen, president of Blue Cross Blue Shield of Maine. Q. When was that decision communicated? A. We sent a letter on March 13 and have formally communicated it on March 27. Q. Were you the individual who communicated that decision? A. Yes, I was with respect to the March 13 letter. Our president, Mr. Young, sent the letter on March 27. Q. Have you been involved in all of the discussions and deliberations leading up to that decision? A. Yes, I have been. Q. Can you tell us please why Central Maine Healthcare has elected to buy out Blue Cross Blue Shield's interest in Central Maine Partners? A. To understand our decision we need to go back to 1996 and 1997 and revisit Central Maine Healthcare's goals in entering into the joint venture with Blue Cross Blue Shield of Maine. In 1996 Central Maine Healthcare was noticing a proliferation of out-of-state managed care firms entering the market. Our concern was that these firms would be dictating how medical care was practiced in our community from places outside the state. Our hospital and our physicians wanted to have more control in terms of how Maine physicians took care of Maine residents. To achieve this goal we believed we would need to develop our own provider owned managed care company to insure the citizens of our region. Recognizing that Central Maine Healthcare and our physicians were providers, we then sought a partner who could economically and efficiently provide the administrative services necessary to grow and maintain the plan. So ultimately our goal was to provide quality service through the empowerment of local providers to make decisions in terms of how medical care would be practiced. We also strongly believed that Maine employers deserved a local managed care plan specifically dedicated to serving their needs. Q. At the time of filing for approval of Central Maine Partners in 1996, did Central Maine Healthcare believe Blue Cross was the appropriate partner? A. We did believe Blue Cross was the appropriate partner. We had had several meetings with representatives from Blue Cross. We recognized that they were a Maine-based company with over 60 years of experience in serving Maine residents and to us they were the logical partner to launch this venture with. Q. Did you consider Central Maine Partners a very important service initiative for Central Maine Healthcare in 1996? A. Central Maine Partners was a key initiative for Central Maine Healthcare. Q. Do you still consider it so? A. Yes, we do. Q. Describe your feeling about Central Maine Partners in 1996. A. We were very excited about launching Central Maine Partners Health Plan in partnership with Blue Cross. We believed that we were bringing significant value to the relationship. We had a provider network throughout Central Maine, we had physicians that were committed to medical management. We thought we provided a tremendous amount of infrastructure and resources that we could couple with Blue Cross's experience on the administrative side, and we were very optimistic this plan would be an overwhelming success in the marketplace. Q. From the vantage point of the year 2000 does Central Maine Healthcare still have these advantages in the delivery of a provider based plan? A. Not only do we still have these advantages, we believe that over the last three years we improved our capabilities on the provider side. Our medical management capabilities are even more sophisticated today than they were then, and we are absolutely committed to supporting and actively participating in the development of managed care in our region. As part of our work under the network access agreement we have been successful in forging relationships with Franklin Medical Center, Eastern Maine Medical Center and their physicians which can only further expand and strengthen Central Maine Partners. Q. To this date, Mr. Chalke, has Central Maine Partners grown according to plan? A. Yes, we are currently at approximately 10,000 members which is on track with our marketing plan as originally submitted. Q. Has Central Maine Partners been profitable? A. Yes, it has. Q. Is that the norm for health plans in the state of Maine at this time? A. As far as I know, in 1998 and 1999 Central Maine Partners Health Plan was the only profitable HMO in the state of Maine. Q. Given all of these successes, Mr. Chalke, why has Central Maine Healthcare elected to buy out Blue Cross Blue Shield's interest? A. Despite our successes in the marketplace, our vision for Central Maine Partners Health Plan has never been fulfilled. Our concept was to have an innovative health plan that responded to customers' needs, responded to providers' needs and created a unique managed care plan for the residents of Maine. Our workings with Blue Cross have been somewhat frustrating because the plan took on some of the characteristics of a normal run-of-the-mill insurance company. The innovation was lost and the excitement was lost. We believe that with the commitment of our providers and the support of the 10,000 members already in the plan that we can continue to move forward and develop a more meaningful health plan for our customers. Q. Do you have a view as to why those goals have not been achieved in partnership with Blue Cross? A. I do. Q. What is that view? A. As I previously stated, Central Maine Partners looks more like HMO Maine and is very similar to all the other HMOs that currently exist in the state. We had a vision for something different, a plan that would respond better to employers' and employees' needs than the plan we currently have. In addition, Blue Cross has not, we believe, fulfilled its obligations to the plan. As an example, one of the foundations of our plan that we talked about three years ago was that we were going to have physician stock ownership. We believe that physician ownership of Central Maine Partners is symbolic of the plan’s commitment to involve physicians more directly in the success or failure of the plan. Although Central Maine Healthcare was fully prepared to sell a portion of its ownership to our physicians, it is our belief that Blue Cross has dragged their feet since the summer of 1999 and to this day we don't have any physician ownership of our plan. We believe that the marketing aspects of the plan were confusing at best and that Blue Cross was always torn between selling Central Maine Partners versus selling their own product portfolio. On occasion we were made aware that Central Maine Partners was not even offered to local employers. Turning to expansion of service area, we have had interest, as we stated, from the Franklin PHO and Eastern Maine Healthcare, and have been working on those expansions. To get Blue Cross to provide the necessary administrative detail to file an application on the Eastern Maine expansion was nothing short of frustrating. We have experienced delay. Blue Cross is now unwilling to file the Franklin application or to commit the financial resources on either expansion. Q. Does Central Maine Healthcare have the financial resources? A. Yes, we do. Q. Is the Central Maine Healthcare board comprised in part of representatives of local employers? A. Yes, it is. Q. So is it fair to say, Mr. Chalke, that on a day-to-day basis you are hearing from local employers and employees what their concerns are regarding the provision of health care? A. Yes, we are. Q. Since Central Maine Healthcare is intimately related with a major medical center, is one of its principal missions focused on the health status of area residents? A. A very important aspect of what we do is improving the health status of our residents. Q. How does that concern relate to Central Maine Healthcare's vision for Central Maine Partners? A. Our experience with insurance and managed care companies in the state is that all too frequently an insurer would write a policy and as experience deteriorates the next year they would price the account so they were not the insurer of choice. As a result many companies were being passed off from one insurer to another and the health status of that population has not been adequately addressed. As a health care provider we believe it is our duty and responsibility to get beyond just the insurance aspect and begin to work with employers on how we can, in fact, improve the health of their employees. At Central Maine Medical Center we have many programs in place. We have a "Healthy Business" strategy that actually sends trained individuals into employers to assess the work force, to help them with various prevention programs and to ultimately improve the health of the employee base. Our intention is to include these kinds of services as an integral part of our health plan. Q. Mr. Chalke, was it part of the original vision that the provider and the payor, in partnership, would place the patients' interests first? A. That was the vision and that was the fundamental reason why we got into Central Maine Partners Health Plan. There were times, however, that our partner, Blue Cross Blue Shield, resisted these efforts. Q. You mentioned physician ownership as one area where you feel Blue Cross has not been fully cooperative. Can you briefly explain why? A. The issue from Central Maine Healthcare's perspective was that we were prepared to sell a portion of our stock in Central Maine Partners to our physicians so that Central Maine Partners would be perceived as a real joint venture among physicians, hospitals and Blue Cross as the insurer. That was a commitment that we made to our doctors when the plan was started; and despite our continuous efforts to make that happen, we have gotten very little cooperation from Blue Cross in terms of signing off on the documents that they need to sign off on to effectuate that transfer. Q. Have there been initiatives proposed regarding delegated medical management where Blue Cross also has not been fully cooperative? A. I would say in the beginning of the plan it was a very frustrating experience because we were not getting the data sets that we really needed to effectively manage the patients under our care. I will say that that has improved to a degree, but there still is an ongoing frustration with respect to the information that Blue Cross provides. However, we never moved forward with our initial vision of delegating medical management to the provider partner. Q. Finally, you mentioned intention to expand the service area. How has Blue Cross responded to that decision? A. The expansion into Franklin County and into the three counties in the Bangor area has been something that Central Maine Healthcare has pretty much done on our own. We did not receive adequate support from Blue Cross. Blue Cross was unwilling to assist with provider contracting in these areas, and it was necessary to hire an outside actuary to develop the provider financial arrangements. Blue Cross delayed expansion efforts and has not been timely with the information they needed to provide. As a result we still do not have the expansion applications complete and we have been working on them for well over a year. Q. Why do you believe Blue Cross has been reluctant regarding service area expansion? A. It could have something to do with their energy over the last year and a half being spent on seeking a purchaser, so that Central Maine Partners was not a high priority of theirs, or they may consider an expanded plan a threat to their statewide strategy for their existing HMO Maine and indemnity products or with their new owner Anthem. Q. Mr. Chalke, through all of the events of the past three years how would you describe Central Maine Partners' relationship with its providers? A. We have excellent relationships with our providers. Q. Are the providers still committed to participating in Central Maine Partners and advancing its vision? A. They are very committed, so long as we extricate ourselves from the current relationship with Blue Cross because they have been frustrated with the administrative side of the plan. Q. Is that side of the plan the responsibility of Blue Cross under the management agreement? A. Yes, it is. Q. Mr. Chalke, I'm going to ask you to turn your attention now to the process leading up to Central Maine Healthcare's decision to exercise its buy-out right. First, did Central Maine Healthcare consider other options? A. Yes, we did. Q. What options did Central Maine Healthcare consider? A. The options we considered included, first, maintaining the plan just the way it is and substituting Anthem as our partner. In addition, we looked at the option of selling our shares to Blue Cross Blue Shield of Maine/Anthem. Q. Let's briefly discuss the first of those options. Why did Central Maine Healthcare decide not to continue the plan with Anthem as its partner? A. Couple of reasons. First of all, as I already indicated, we were not satisfied with the current relationship and the support that Blue Cross Blue Shield was providing to the plan. Looking forward and seeing Blue Cross transfer its ownership to Anthem, we became even more concerned because we have very little information and knowledge as to what Anthem could provide in this relationship. They are a new entry into the state of Maine. We have had only one meeting with Anthem representatives, and that was not particularly revealing. It was our belief that a national insurance company like Anthem would actually have very little interest in growing a relatively small 10,000 member plan in Central Maine. Q. In your efforts to find ways to fix the problems within the general parameters of the existing partnership, did Anthem defer to current Blue Cross leadership? A. Yes, they did. We were led to believe that Anthem had no interest in being a direct party to these discussions. Q. Did you have a series of meetings over the past several months with the current Blue Cross management on these issues? A. Yes, we did. Q. Did you lay out to them your concerns regarding the accomplishment of the original goals of Central Maine Partners? A. Yes, we did. Q. As a result of those conversations were you able to reach agreement regarding how improvements could be realized in the interest of reaching those goals? A. No. We outlined our concerns to Blue Cross in December of 1999, and after several discussions with Blue Cross Blue Shield leadership it was their opinion that we were too far apart to even consider attempting to correct these problems and that we should move forward to the provisions in the shareholder agreement where one party buys out the other. Q. That brings me to my next question, Mr. Chalke. Did Central Maine Healthcare consider selling its interest to Blue Cross? A. We did consider that, yes. Q. Why did Central Maine Healthcare decide not to sell its interest in Blue Cross? A. We still believe that we need a locally controlled health plan in the state of Maine. With Blue Cross selling their interest out to Anthem, there will no longer be any state of Maine owned health insurance plan; and we believe we have a commitment to our employers and our residents to make sure there is one such plan remaining in the state. In addition, as I stated before, we strongly believe that our physicians and our hospitals must have some say in determining how managed care is delivered in the state. The only way we can be assured of that is to have a locally owned plan. Since this was our vision and since we had not been able to achieve it as a 50 percent owner, we saw no possibility that Blue Cross would pursue that vision as a hundred percent owner. Q. So having ruled out the options of business as usual and selling your interest to Blue Cross, tell us how you finally came to the decision to purchase Blue Cross's interest. A. We were committed to a locally owned managed care company in our region and regions we intend to expand into. We believe our physicians need to be actively involved in this plan; and, therefore, the only option for us to maintain a Central Maine Partners Health Plan presence was for us to purchase the stock owned by Blue Cross Blue Shield of Maine. Q. Was it a hard decision? A. It was a decision we certainly gave a great deal of thought to. We recognized that we are primarily providers and that insurance is a somewhat different line of business for us; but based on the things that we are seeing in the state, volatility in the insurance market, insurers that come and two years later they leave, we felt a commitment to stay in this market and provide these services to our local employers. Keep in mind that we have now been the joint owner of a health maintenance organization for some three years. We certainly feel we have learned a good bit about the business during that time. Q. Is this a decision that has been blessed by the Central Maine Healthcare board? A. Yes, it has. Q. Is it the board's belief that it should not walk away from its original commitment to a health maintenance plan? A. Yes, it is. Central Maine Healthcare believes that it is part of its mission to ensure there is a health plan option that is committed to the community, in which decisions regarding local medical care are made by Maine physicians in accordance with Maine practice standards. We are committed to providing that option. Q. I am going to ask you, Mr. Chalke, to cast your mind back to 1997 when we were last before the Bureau. What managed care options were available in Central Maine Healthcare's service area at that time? A. In terms of what payors were licensed in our area? Q. Yes, sir. A. I believe that would include Blue Cross Blue Shield of Maine, Healthsource, Tufts, Harvard Pilgrim, NYLCare and Aetna. I believe those were the primary insurers at that time. Q. And as of August of 1997 Central Maine Partners? A. Correct. Q. Now, in March of 2000 am I correct that Tufts has ceased operations in Maine and Harvard Pilgrim is prohibited from selling new policies in the state? A. That is my understanding. Q. Is NYLCare still operating? A. NYLCare was purchased by Aetna. Q. And Aetna is a large national out-of-state insurer? A. Correct. Q. What about Healthsource? A. Healthsource still operates in the state. Q. Was it acquired by a larger entity? A. It was acquired by CIGNA Health Care. Q. CIGNA is located in Connecticut? A. Correct. Q. Assuming the completion of the transaction presently before the Bureau, Blue Cross will be acquired by a national company? A. Anthem is a national company based in Indiana. Q. Is it fair to say, Mr. Chalke, that the companies in the market for managed care in your service area has shrunk from seven to four over the past three years and that if the Anthem transaction is approved, Central Maine Partners will be the only plan operating in your service area that is not affiliated with a national insurance company? A. Correct. Q. Do you have reason to believe that your local employers appreciate the fact that you remain committed to providing them a locally based managed care option? A. Yes, I have reason to believe that. I have spoken to several employers over the last couple of months who have had to switch their employees' health insurance because of the exit of Tufts from the marketplace. You can only imagine how disruptive that is for the employer, employees and their families to have to switch plans. I had one executive from an employer in our community inform me that his company had just switched to Central Maine Partners Health Plan, and the primary reason he gave for that decision was that Central Maine Partners was owned by Central Maine Healthcare, Central Maine Healthcare owned Central Maine Medical Center, a hospital that has been in service for over a hundred years and, therefore, Central Maine Partners represented stability to him. He was tired of other health plans entering and then leaving the market. Q. Do you have a view as to how Central Maine Partners' members and other potential enrollees will react when Central Maine Healthcare purchases Blue Cross's stock? A. Based on my conversations with local employers, I believe that the transfer of ownership to Central Maine Healthcare will be positive from their perspective. We do anticipate, however, that we may lose some enrollment initially because we will no longer be using the Blue Cross Blue Shield trademark and there are some employers that may gravitate from our plan back into a Blue Cross option. However, we believe that Central Maine Partners after this transaction will be reinvigorated and that we will be able to add significant value to our plan and that our customers will continue to purchase this option for their employees. Q. Do you project that Central Maine Partners will operate on a business-as-usual basis after the stock transfer from Blue Cross to Central Maine Healthcare? A. I believe we initially will. However, our vision for Central Maine Partners Health Plan is to develop a plan that is significantly more employee friendly, patient friendly, provider friendly; and we will be working with our physicians to seek new solutions to some of the problems that have plagued managed care over the last several years. Q. Can you give us examples of initiatives you would expect Central Maine Partners to commence after Central Maine Healthcare exercises its buy-out right? A. We would want to take a serious look at our product offerings. Over time, besides standard HMO benefits we would want to look at PPO options, indemnity options, direct contracting options, anything that our employers might feel would be valuable in terms of insuring their employees. We would actively continue the development of our expanded service area to the Franklin and Bangor marketplaces. Over time, we would like to expand our service area to include the entire central, western and northern Maine counties which cover approximately one-half of the population of the state. Also, we have several concepts and ideas to improve our medical management capabilities, to build on what we have accomplished over the last year or two and to be more forceful in improving the health status and health improvement opportunities within the employer base that is served by Central Maine Partners Health Plan. Q. What is your vision in expanding your service area? A. We believe it is imperative that in a service area encompassing nearly one-half of the residents of the state there be at least one managed care plan in which Maine providers play a significant role in the operations and governance of the plan. Q. Do you see that as beneficial to the citizens of Maine? A. I see it as extremely beneficial to the citizens of Maine. Q. Do you see it as beneficial to the goal of competition in the marketplace? A. Yes, I do. Q. We have talked about why you have made this decision and what you hope to achieve from it. Could you tell us, please, how Central Maine Healthcare expects to implement this decision? A. We have already identified a replacement management company for Blue Cross. This company is the Scheur Management Group. Interestingly, this Group provided a feasibility study, and was considered a potential partner, during the period 1994-1995 when Central Maine Healthcare was first considering the establishment of an HMO, so it has relevant background on what we have been trying to accomplish. It also has the capability and proven track record to manage and grow a plan of our size. We expect that Scheur Management Group will take over the Blue Cross Blue Shield of Maine functions in four months subject to the approval of the Bureau. We also anticipate offering an ownership interest to Venture Health Partnership Group which is an affiliate of Scheur Management Group and owns or operates HMOs in several states including Louisiana and Alabama. This sale would also be subject to further Bureau approval. We also expect to complete the physician/provider stock offering about which I testified earlier, in the year 2001; the Bureau will remember that that was an important consideration in this plan from the outset. As I mentioned, that filing has been delayed but can move expeditiously once Blue Cross is no longer a half owner. Q. Tell us a little bit, Mr. Chalke, about Scheur Management Group and its affiliates? A. Scheur Management Group is a company that is led by Barry Scheur who has been involved in managed care for over 20 years. His company has been involved with the turn-around of several health maintenance organizations across the country. He has worked very cooperatively and at the request of bureaus of insurance in several states to turn around troubled plans. The company is committed to fixing many of the problems that plague managed care today from a provider and patient standpoint. He is familiar with the New England and Maine marketplaces and is absolutely committed to developing a plan built around providers that does the best job possible in meeting the needs of the employers and the patients that the plan serves. Q. Does Mr. Scheur own property in the state of Maine? A. I understand he does. He is a frequent visitor to the state. In addition to their expertise and proven track record and interest in Maine, an important consideration is the fact that, with Scheur Management Group, there is no competing product and we will finally achieve full alignment of interest in a single business. Q. Have you had a number of meetings with Scheur Management Group? A. We have had several recent meetings with Scheur Management. Q. Is Central Maine Healthcare satisfied that Scheur Management Group is ready to make a commitment? A. Yes, we are. Q. Have you negotiated a memorandum of understanding? A. We have negotiated the general terms of a business relationship but have not yet signed a memorandum of understanding. Q. Will that document be made available to the Bureau once it is finalized? A. Yes, it will. Q. Turning you back to Central Maine Healthcare for a moment, does Central Maine Healthcare have the financial resources to take on full ownership of Central Maine Partners? A. Yes, we do. Q. Will Central Maine Healthcare make available in this proceeding copies of its current financials? A. Yes, it will. Q. By when do you expect to have a business plan for the operation of Central Maine Partners that takes into account the purchase of Blue Cross stock? A. We are working with Scheur Management Group to develop that plan which we expect to be completed by the end of April. Q. Over the intermediate term, Mr. Chalke, do you anticipate that management fee expense will increase or decrease? A. We would expect during this transition period that the management fee would increase as we build and as the Scheur Management Group builds the necessary infrastructure to support that plan. Q. Have you anticipated that there will also be transition costs? A. Yes, we have. Q. Is Central Maine Healthcare capable of providing regulatory capital for Central Maine Partners? A. Yes. Q. And any expansion capital? A. Yes. Q. Have you made a determination whether Central Maine Healthcare has the financial capability of taking on this task? A. We believe that Central Maine Healthcare can handle this financial expenditure. Q. Comfortably? A. Yes. Q. In the intermediate term is it Central Maine Healthcare's expectation that, upon approval of the Bureau, Venture Health Partners Group will share in the capital obligations for Central Maine Partners? A. Yes, we would expect that to happen. Q. At the outset of your testimony, Mr. Chalke, you told us that you were here today asking that the Bureau not approve the sale of Central Maine Partners stock from Blue Cross to Anthem but instead direct that the stock be transferred directly from Blue Cross to Central Maine Healthcare, is that correct? A. Correct. Q. Why are you making that request? A. From our vantage point this is only a timing question. We have an absolute right under agreements approved by the Bureau to purchase Blue Cross's interest once the Anthem transaction is approved. Blue Cross's consent is not required for the sale. We are very concerned that a delay in the transfer of Central Maine Partners' stock to Central Maine Healthcare while of no importance to Anthem could seriously impair the effectiveness of the transition, and be harmful to the interests of our members in stability, certainty and continuity. To date Blue Cross has been at best a reluctant partner. We are very concerned that during this transition period while Blue Cross/Anthem is managing Central Maine Partners, which it will eventually not be the owner of, it will have a major conflict of interest. We have tried to think objectively about how this plan could function with Blue Cross/Anthem membership on the board when it is already effectively its competitor. For example, for this transition to really work the plan needs to aggressively market the product before the Fall 2000 open enrollment period and to aggressively move towards service area expansion. We have real doubt that Blue Cross/Anthem will be interested in those initiatives if it remains a lameduck owner. The longer a competitor remains effectively in a position of control, the longer we will be delayed in moving on our business plan. Failure to increase our enrollment during the fall open enrollment period could have a significant negative impact on the plan going forward. In addition we see potential confusion to members from a plan that is incapable of speaking with one voice and that lack of agreement between the owners during this period could hinder the plan from meeting member needs. At bottom we are concerned at the prospect of paying a substantial sum of money for a plan that is less attractive in three to six months, given Blue Cross's conflict, than it is today. Q. Mr. Chalke, do you have a proposal for the Bureau of a way of preventing this conflict from occurring? A. I do. Q. Would you outline for the Bureau what you are proposing? A. At this time we are filing a Form A for the transfer of stock from Blue Cross/Anthem to Central Maine Healthcare. An original executed Form A is attached to this testimony as Exhibit 1 without attachments. We will be separately filing a complete Form A with attachments and filing fee. In addition as part of the Order in the pending proceeding we are requesting the following: (1) approval of the Form A transfer of stock to Central Maine Healthcare; (2) a directive to Blue Cross and Blue Shield and Anthem to comply with post transfer provisions in the management agreement and network access agreements; (3) permission for earlier transfer of management functions to the new manager and termination of Blue Cross Blue Shield of Maine's management fee as of the transition date; (4) Order that Blue Cross Blue Shield of Maine and Anthem transfer to Central Maine Healthcare all information in the format necessary to effectuate an orderly and timely transfer of management functions from Blue Cross Blue Shield of Maine to Scheur Management; and (5) Order that Blue Cross Blue Shield of Maine and Anthem not communicate directly with Central Maine Partners' members, employer groups or providers without the approval of Central Maine Healthcare except as necessary in the performance of its duties under the management agreement in furthering the interests of Central Maine Partners. On or about May 1, 2000, Central Maine Healthcare will file a proposed management contract between Scheur Management Group and Central Maine Partners with the Bureau for approval. As soon as practical Central Maine Partners will file a Form A with respect to offering of an ownership interest to Venture Health Partnership Group for consideration by the Bureau with a modified business plan supporting the new ownership. Q. What does Central Maine Healthcare hope to achieve through these orders? A. We believe that the above orders are necessary to protect Central Maine Partners and its members during the transition and to allow Central Maine Healthcare to have control over the plan and to eliminate any risk that Blue Cross and Blue Shield of Maine will impede the operations of Central Maine Partners. If not approved, we see serious risk that Blue Cross and Blue Shield and Anthem may operate Central Maine Partners and exercise their approval power for their benefit and not the benefit of Central Maine Partners and its members. Ultimately, a failure to operate Central Maine Partners with one voice and one vision can only be disruptive and harmful to the consumers whom Central Maine Healthcare is committed to serving.
Dated: March 27, 2000. Respectfully Submitted, CENTRAL MAINE HEALTHCARE CORPORATION
By:_______________________________ John C. Kane, Jr., Esq. Attorney for Central Maine Healthcare Corporation ROPES & GRAY One International Place Boston, MA 02110
Exhibit 1 FORM A
Notices and correspondence concerning this Statement should be sent to: Michele M. Garvin, Esq. Ropes & Gray One International Place Boston, Massachusetts 02110 Item 1. Insurer and Method of Acquisition. The organization to which this statement relates is: Central Maine Partners Health Plan, Inc. 364 Main Street Lewiston, ME 04240 Currently, Central Maine Healthcare Corporation ("CMHC") and Associated Hospital Service of Maine d/b/a Blue Cross and Blue Shield of Maine ("BCBSME") each hold fifty percent (50%) of the stock of Central Maine Partners Health Plan, Inc. ("Central Maine Partners"). Pursuant to Section 4(d)(ii) of the Central Maine Partners Shareholders' Agreement among Central Maine Partners, CMHC and BCBSME (the "Shareholders' Agreement"), CMHC and Central Maine Partners shall have the option (the "Option") to purchase all of BCBSME's shares of stock in Central Maine Partners ("BCBSME Shares") upon notice of a change of control of BCBSME. CMHC has notice of the intent of BCBSME to transfer its stock to Anthem Insurance Companies, Inc. ("Anthem") pursuant to the change of control provisions if the acquisition of BCBSME by Anthem is approved. CMHC has determined that either it or Central Maine Partners shall exercise the Option upon the approval by the Superintendent of Insurance of the Anthem acquisition of BCBSME. Therefore, control will be established by CMHC for the purpose of this Form A by CMHC or Central Maine Partners exercising the Option to purchase the BCBSME Shares upon the Superintendent's approval of Anthem's acquisition of BCBSME. Upon exercise of the Option by either CMHC or Central Maine Partners (which will retire the BCBSME stock as treasury stock), CMHC will own one hundred percent (100%) of the outstanding shares of Central Maine Partners. Item 2. Identity and Background of Applicant. (a) The Applicant is: Central Maine Healthcare Corporation 300 Main Street Lewiston, ME 04240 (b) CMHC is a non-profit corporation formed on October 13, 1982. The role of CMHC is to facilitate provider participation in managed care plans through appropriate contracting mechanisms and to promote the delivery of health care services to the central Maine region. CMHC also provides for the continuous planning, organization, fund raising, direction, and control of the development and management of a health care delivery system comprised of Central Maine Medical Center, Bridgton Hospital, Rumford Hospital and affiliated entities. Since the inception of the plan in 1996, CMHC has been a fifty percent (50%) shareholder in Central Maine Partners. After CMHC's acquisition of control of Central Maine Partners, CMHC and its subsidiaries will continue to conduct the businesses they currently conduct. Central Maine Partners is expected to continue to furnish efficient, high quality, locally owned and controlled health care coverage and services within the Central Maine Partners service area. (c) Tab A contains a chart showing the interrelationships of the Applicant and its affiliates, all of which are organized in Maine. There are no pending court proceedings involving the reorganization or liquidation of any of the entities identified in Tab A. Item 3. Identity and Background of Individuals Associated with Applicant. A list of the directors and executive officers of CMHC and the required background information is included at Tab B. Additional information will be provided upon request. Item 4. Nature, Source and Amount of Consideration. (a) Either CMHC or Central Maine Partners will purchase the BCBSME Shares in Central Maine Partners out of funds on hand. The purchase price to be paid for the BCBSME Shares is expected to be approximately $1.8 million. (b) Unless CMHC and BCBSME reach an alternative agreement, the purchase price for the BCBSME Shares shall be determined pursuant to Section 4(d)(ii) of the Shareholders' Agreement. Section 4(d)(2) identifies the methodology to be used in determining the purchase price CMHC or Central Maine Partners shall pay upon the exercise of the Option to purchase the BCBSME Shares. The terms of the Shareholders' Agreement were determined by arms-length negotiations between the parties at the time of the organization of Central Maine Partners and were previously approved by the Bureau of Insurance. According to the Shareholders' Agreement, the price to be paid by CMHC or Central Maine Partners for each BCBSME Share upon the exercise of the Option shall be as follows:
less
divided by
As noted above, pursuant to this methodology and based on Central Maine Partners financials for the year ending December 31, 1999, the purchase price to be paid by CMHC or Central Maine Partners for the BCBSME Shares is expected to be $1.8 million, adjusted by the Residual Value Per Share, if any, as described in Section 1(a)(xii) of the Shareholders' Agreement. The calculation will need to be finalized once the Computation Date is established. (c) No portion of the consideration for the transaction will derive from loans made by any lender in the ordinary course of business. Item 5. Future Plans of the Insurer. There are no plans or proposals to declare an extraordinary dividend, liquidate Central Maine Partners, or sell its assets or merge it with any person to persons except as provided herein. Nor are there any plans or proposals to make any material change to the business operations, corporate structure or management of Central Maine Partners as currently conducted, except as described herein. Central Maine Partners currently obtains management services from BCBSME pursuant to a Management Agreement between Central Maine Partners and BCBSME. BCBSME is obligated under the Management Agreement to continue to provide management services to Central Maine Partners until December 31, 2000 whether or not BCBSME continues to be a shareholder of Central Maine Partners. CMHC intends that the Management Agreement between Central Maine Partners and BCBSME shall be terminated as soon as practicable and that Central Maine Partners shall contract with Scheur Management Group, Inc. ("SMG") to provide management services to Central Maine Partners. CMHC also intends that Venture Health Partnership Group, LLC ("VHPG"), an affiliate of SMG, shall acquire a fifty percent (50%) ownership interest in Central Maine Partners as soon as practicable. SMG is a nationally recognized business consulting firm founded in 1988 which provides managed care consulting and hands-on operations management in all segments of the health care industry, but with a particular focus on the managed care industry. In 1999, for instance, SMG's experience included providing interim management leadership for Total Health Care Plan of Cleveland, Ohio. SMG's management team provided strategic and tactical leadership and managed all HMO operations for Total Health Care Plan. An affiliate of SMG, VHPG is a Massachusetts-based HMO acquisition firm that was organized in 1999. VHPG's business goals include the ownership and operation of HMOs that are differentiated through an orientation to the needs of local marketplaces and local provider networks. On January 1, 2000, VHPG acquired SMA Health Plan, Inc. of Metairie, Louisiana, a health plan with 70,000 HMO members in and around New Orleans and 360,000 PPO members in Louisiana, Mississippi, Arkansas, and Texas. In addition, on March 23, 2000, VHPG received approval to acquire Health Partners SouthEast, Inc. of Birmingham, Alabama, a health plan with over 100,000 members. Form A filings with respect to the management contract between SMG and Central Maine Partners and with respect to the purchase by VHPG of a fifty percent (50%) ownership interest in Central Maine Partners will be filed separately. Central Maine Partners currently has an application before the Bureau of Insurance to expand its service area into Hancock, Penobscot and Waldo counties. Central Maine Partners also has plans to expand its service area into Franklin county. Item 6. Voting Securities to be Acquired. CMHC proposes that either it or Central Maine Partners shall purchase all 466 shares of common stock, no par value, of Central Maine Partners currently held by BCBSME. The 466 BCBSME Shares represent fifty percent (50%) of the outstanding shares of Central Maine Partners. Unless CMHC and BCBSME reach an alternative agreement, the purchase price for the BCBSME Shares shall be determined pursuant to Section 4(d)(ii) of the Shareholders' Agreement. The terms of the Shareholders' Agreement were determined by arms-length negotiations between the parties at the time of the organization of Central Maine Partners and were previously approved by the Bureau of Insurance. Item 7. Ownership of the Voting Securities. Currently, CMHC and BCBSME each hold fifty percent (50%) of the stock of Central Maine Partners. As described in Item 1 above, pursuant to Section 4(d)(ii) of the Shareholders' Agreement, CMHC and Central Maine Partners shall have the Option to purchase all of BCBSME's stock in Central Maine Partners upon notice of a change of control of BCBSME. CMHC has determined that either it or Central Maine Partners shall exercise the Option upon the Superintendent of Insurance's approval of Anthem's acquisition of BCBSME. After the purchase of the BCBSME Shares (whether by CMHC or by Central Maine Partners), one hundred percent (100%) of the outstanding shares of Central Maine Partners stock will be owned by CMHC. Item 8. Contracts, Arrangements, or Understandings. As described in Item 1 above, pursuant to Section 4(d)(ii) of the Shareholders' Agreement, CMHC and Central Maine Partners shall have the Option to purchase all of BCBSME's stock in Central Maine Partners upon notice of a change of control of BCBSME. After the purchase of the BCBSME Shares, there will be no contracts, arrangements or understandings relating to the voting securities of Central Maine Partners other than a Memorandum of Understanding ("MOU") between CMHC and VHPG and any sale agreements filed with the Bureau of Insurance pursuant to a separate Form A proceeding. CMHC will file a copy of the MOU with the Bureau of Insurance as soon as it is finalized. Item 9. Recent Purchases of Voting Securities. There have been no recent purchases of Central Maine Partners’ securities. Currently, CMHC and BCBSME each hold fifty percent (50%) of the stock of Central Maine Partners. Item 10. Recent Recommendations to Purchase. There have been no recommendations to purchase any Central Maine Partners’ securities. Item 11. Agreements with Broker-Dealers. There are no agreements, contracts or understandings of any kind with any broker-dealer. Item 12. Financial Statements and Exhibits. The annual reports of CMHC for the most recent two (2) years are included in Tab C. CMHC's financial information for the most recent five (5) years is included in Tab D - Confidential. The Shareholders' Agreement among CMHC, BCBSME and Central Maine Partners and the Management Agreement between BCBSME and Central Maine Partners are already on file with the Bureau of Insurance.
Item 13. Signatures and Certification. Pursuant to the requirements of 24-A M.R.S.A. § 222 and Chapter 180, Central Maine Healthcare Corporation has caused this application to be duly signed on its behalf in the City of Boston and Commonwealth of Massachusetts on this ____ day of _____________, 2000. CENTRAL MAINE HEALTHCARE CORPORATION BY
_____________________________________ Peter E. Chalke Executive Vice President Attest:
_____________________________________ Name_________________ Title__________________
The undersigned deposes and says that he has duly executed the attached application dated ______________, 2000, for and on behalf of Central Maine Healthcare Corporation; that he is the Executive Vice President of Central Maine Healthcare Corporation and that he is authorized to execute and file such instrument. Deponent further says that he is familiar with such instrument and the contents thereof, and that the facts therein set forth are true to the best of his knowledge, information and belief.
__________________________________ Peter E. Chalke
__________________________________ Notary Public
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 27, 2000, a copy of Central Maine Healthcare Corporation's Prefiled Testimony of Peter E. Chalke was served by express overnight mail on each of the persons listed below.
DATED: March 27, 2000
__________________________________________ John C. Kane, Jr., Esq. Attorney for Central Maine Healthcare Corporation ROPES & GRAY One International Place Boston, MA 02110-2624 (617) 951-7000
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