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Subject: Blue Cross Spent Freely On Perks<By Thomas Heath and Albert B.
Date: Mon, 16 Nov 92 05:02:45 EST
Message-ID: <13.1992Nov16.050246@AmeriCast.com>

Blue Cross Spent Freely On Perks<By Thomas Heath and Albert B.
Crenshaw=Washington Post Staff Writers=

Since the mid-1980s, when it began facing severe financial diffi-
culties, the Blue Cross-Blue Shield plan serving the Washington
area spent hundreds of thousands of dollars rewarding employees
with cars, business trips to resorts around the world and meals
at elegant District restaurants and exclusive clubs.

The company allowed executives to fly on the Concorde, courted
clients at faraway spots such as Hawaii, was host of parties at
horse races in Virginia hunt country, held retreats at exclusive
vacation spas, hired relatives of some employees and transacted
business with other family members, according to company records
and interviews with current and former Blue Cross employees.

Regulators and public officials familiar with the Blue Cross plan
that serves 1.1 million people in the Washington area called some
of its spending irresponsible and said it led to rate increases
for customers of the insurance company.

The spending on perquisites "indicates . . . that there's not the
kind of management discipline that you need," said Sen. Sam Nunn
(D-Ga.), who heads a Senate subcommittee looking into the 73 Blue
Cross plans nationwide.

"This kind of mismanagement and laxity appears to be prevalent in
the nonprofit health area," Nunn added.  "These (practices) are
being done at the expense of the policyholders and the soundness
of the Blue Cross-Blue Shield plans."

Nunn began his investigation after the failure of the West Vir-
ginia Blue Cross plan, which left millions of dollars in unpaid
medical bills and thousands of people with no health insurance.

Virginia Insurance Commissioner Steven T. Foster said he was "ap-
palled" by public reports of Washington Blue Cross spending prac-
tices.  Blue Cross-Blue Shield, which recently fired several of
its top managers, said in a statement that it "eliminated certain
expenditures it deemed inappropriate in light of current business
conditions, such as travel on the Concorde," and tightened other
procedures.

For example, the company has canceled a planned marketing trip to
Switzerland next year and is consolidating all its travel through
one agency to improve cost controls, according to company state-
ments and sources.

"We are thoroughly scrutinizing every expense for its necessity
and business purpose to eliminate any expenditures of question-
able business value," according to the statement.  Blue Cross of
the National Capital Area has lost more than $77 million in re-
cent years on its far-flung network of about 40 business subsidi-
aries, driving the company to the brink of financial disaster and
forcing it to seek a $30 million bailout from Virginia Blue
Cross. That bailout is still being negotiated.

The Washington plan serves the District, Montgomery and Prince
George's counties in Maryland and the close-in Virginia suburbs.
Blue Cross and Blue Shield of Virginia serves the remainder of
that state, while Blue Cross-Blue Shield of Maryland covers the
remainder of Maryland.

The Washington plan recently announced that it would close or
sell seven of its overseas subsidiaries, and officials said more
closings or scale-backs are possible as the company tries to put
its house in order before the Nunn hearings.

Nunn said his subcommittee will focus on how the local Blue Cross
plan got into a financial bind, why it ventured into subsidiaries
that he said "bled" company resources and whether its expenses
were reasonable for a nonprofit enterprise.

As the company wrestled with its subsidiary losses during the
past years, current and former employees, internal company docu-
ments, court records and other sources described a host of other
management difficulties, including:One subsidiary that has lost
tens of millions of dollars lent $11.1 million to a Massachusetts
student travel business that later defaulted. As a result of that
deal, the subsidiary ended up owning a Cape Cod beachfront pro-
perty and a rock-and-roll recording studio on a 145-acre farm in
rural Massachusetts.

Another money-losing Blue Cross subsidiary, accused by the Jus-
tice Department in a civil suit of billing several hundred
thousand dollars in false claims to the U.S. Agency for Interna-
tional Development, has agreed to pay $385,000 under a tentative
settlement with the federal government.

A few years ago, the national organization that owns the Blue
Cross-Blue Shield trademark brought a lawsuit accusing the Wash-
ington affiliate of a "secret strategy" to market the Blue Cross
name in foreign countries. The national group won the right to
the trademarks abroad.

In September, Nunn's subcommittee repeatedly criticized execu-
tives of another Blue Cross plan, Blue Cross-Blue Shield of Mary-
land, for using subscriber money to rent a luxury skybox at Bal-
timore Oriole games, sponsor a courtesy tent at the Preakness
Stakes, pay "These (practices) are being done at the expense of
the policyholders and the soundness of the Blue Cross-Blue Shield
plans."<

- Sen. Sam Nunn (D-Ga.)>

high bonuses and send executives and business clients on trips
abroad. The Maryland plan recently announced it will unload the
skybox, end its Preakness tent, cut salaries and scale back
drastically on its marketing and travel expenses.

The Washington plan may have similar problems when it faces the
panel.

One of its subsidiaries, named Protocol, has lost $6.9 million
since 1986 providing health-related services for the foreign com-
munity stationed in Washington.  In recent years, that company
has sponsored a tent at the International Gold Cup equestrian
hunt near The Plains, Va., costing $5,000 to $6,000 for the one-
day event, according to a Gold Cup spokesman. Protocol also paid
for catered food and prizes for race winners and provided tran-
sportation for executives and clients to the Fauquier County
event.

In the last two years, the parent company has sent 70 to 110 em-
ployees, brokers and representatives on vacations to Pebble
Beach, Calif., this year and to Portugal in 1991 as rewards for
selling Blue Cross services, according to current and former of-
ficials. The trips cost $140,000 to $220,000 each, said David
Kestel, a recently retired senior vice president who planned the
company-sponsored trips.

Kestel said the trips rewarded "producers who performed. It was
compensation to our brokers and representatives."

"Everything I was involved in was normal marketing and business
practice," Kestel said. Such entertainment "comes as a price of
doing business," he said.

Bernard R.  Tresnowski, head of the national Blue Cross Associa-
tion, said some of the practices of the District plan were out of
line, but added that others reflected industry standards, includ-
ing the promotional trips.

"In the broker community there are sales awards, like Olympic
trips and that sort of thing. If Blue Cross didn't do that then
the broker community would turn its back on us," he said.

When it comes to entertaining clients, there have been occasions
where "we won't even get a chance to bid (on a contract) because
we didn't play golf with someone," he said.

The company's various European subsidiaries also drew top offi-
cials on frequent trips to London aboard the supersonic Concorde.
A one-way fare on the British Airways Concorde today costs more
than $3,700, compared with $3,200 for a non-supersonic first-
class ticket, $1,969 non-supersonic business class and about $600
for a one-way coach seat.

Kestel, who was not the most frequent user, said he took the Con-
corde to London to save money for the company by eliminating two
nights' accommodations.

"One night in Europe is $500,"  Kestel said. "I had reason to be
over there" because of business in Dublin and a business rela-
tionship with Lloyds of London, he added.

Six top executives had the use of luxury cars, such as Buick Park
Avenues equipped with car phones, provided by Blue Cross-Blue
Shield. The company maintains a corporate membership at Avenel
golf club in Montgomery County.

Top executives also receive an annual allowance of $7,000 to
$14,000 to use as they please for such things as health clubs,
golf memberships, tax preparation or health insurance, according
to a company spokesman.

Executives and other employees also went on company-sponsored
trips around the world, including visiting subsidiaries in Aus-
tralia, Singapore and Paris, according to Kestel and other
sources.

This year, several executives took their spouses on a company-
paid trip to Hawaii whose purpose was to entertain and do busi-
ness with executives of B'nai B'rith, a top Protocol client.
Kestel said spouses went on the trip because B'nai B'rith offi-
cials were invited to bring their spouses.

Blue Cross regularly holds retreats at luxury resorts such as
Greenbriar and the Homestead and is considering holding a
"leadership conference" next year in Palm Beach, Fla., according
to an internal company memo.

Current and former employees of Blue Cross and its subsidiaries
described lunching with clients or other employees at expensive
Washington-area restaurants such as Morton's of Chicago, the
Tower Club in Tysons Corner or the City Club.

Another subsidiary that may draw attention from Nunn's subcommit-
tee is National Capital Administrative Services (NCAS), which re-
cently settled the lawsuit for overbilling with the Justice
Department and which has had losses of $12.2 million since its
creation in 1983.

Last year, NCAS sold a company it owned to an investor group that
included its top financial officer, and lent him and his partners
the money they needed for the purchase without requiring them to
put up cash of their own, according to Blue Cross.

NCAS and at least one other subsidiary bought boxes of engagement
calendars with photographs taken by the wife of the company's
president. The same company also placed its travel business
through the wife of another executive. Blue Cross said that as
part of its travel consolidation, it no longer deals with that
travel agency.  Blue Cross said the transaction involving NCAS
officials' relatives had been disclosed to the parent company
through annual conflict-of-interest statements that must be filed
by all officers.<02:14 11-16C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

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