Blue Cross Directors May Force Vote on Ouster of Chief

In the wake of a failed health-care merger, disgruntled Blue Cross of California directors may force a vote on the ouster of Chairman Leonard D. Schaeffer at a special meeting this weekend, board sources said Friday.

“Some of us have been talking, and we feel we’ve got to present a good case as to why we are disappointed” in Schaeffer’s performance, said one board member, who did not want to be named. “If we can build that support, we’ll ask for his resignation or termination.”

The Sunday meeting was called after eight of the 18 board members wrote Schaeffer insisting that he convene a special meeting to discuss the failed merger of Blue Cross’ WellPoint Health Networks subsidiary and Health Systems International. WellPoint and Health Systems, two of the nation’s largest managed-health-care companies, agreed last month to call off the deal after nine months of often acrimonious negotiations.

Two board members critical of Schaeffer’s leadership said they were unsure whether they could muster the 10 votes needed to oust the chairman.

“There is no proposal before the board or, to our knowledge, any consideration being given to a proposal either calling for Leonard Schaeffer’s resignation or termination,” said Brian J. Donnelly, Blue Cross general counsel and corporate secretary. Statements from a few directors “do not constitute a majority opinion or even a significant minority view,” he said. Schaeffer had no comment.

Board critics said they are upset with Schaeffer’s handling of the Health Systems merger, which broke down in a bitter struggle between Schaeffer and Health Systems Chairman Malik M. Hasan over control of the new company.

“The deal should have gone through,” one board member said.

The board member also complained that Schaeffer has failed to inform the board of key events, such as WellPoint’s decision to file a lawsuit against a well-known health-care accrediting group after its health maintenance organization failed to win accreditation. “We had to read about it in the paper,” the member said.

Other sources close to the board expressed confidence that Schaeffer would survive any attempt to oust him. They said Schaeffer has strong board support, including several longtime personal or business associates and hospital executives and doctors who would be unlikely to cross him.

Schaeffer, the hard-charging chairman of both nonprofit Blue Cross and the for-profit subsidiary, WellPoint, is widely regarded as one of the managed-care industry’s most successful executives. After taking over as chief executive of sleepy Blue Cross in 1986, he engineered a dramatic turnaround by slashing overhead and astutely shifting the firm away from traditional “fee-for-service” insurance into the managed-care business.

But Schaeffer has been a frequent target of criticism from state officials and consumer groups for his plan to switch nonprofit Blue Cross to a for-profit organization, a process that began with Blue Cross’ 1993 sale to the public of a 20% stake in WellPoint. As a result of its planned switch, Blue Cross is obligated to compensate the state by an amount equal to the company’s total value.

Blue Cross’ plan for meeting the state obligation by creating two public health-care foundations with a combined endowment of $3.3 billion was scuttled when the Health Systems merger fell through. State regulators have said Blue Cross is still obligated to fund the charity, and Blue Cross has pledged to meet the commitment.

However, board critics said they are concerned by statements by Assemblyman Phillip Isenberg (D-Sacramento) that they may face personal liability for the merger’s failure and the possible collapse of funding for the foundations. Isenberg, who chairs the Assembly Judiciary Committee, has asked state Atty. Gen. Dan Lungren and California Corporations Commissioner Gary Mendoza to look into the possible loss of public funds in the Blue Cross deal.

Blue Cross board critics said they believe Schaeffer’s chairmanship of Blue Cross and WellPoint is a conflict of interest.

“He should be off the Blue Cross board as a member and director so that Blue Cross directors and the foundations can make decisions” without his influence, a board member said.

Schaeffer’s presence on both boards “is so obviously a conflict,” Isenberg said. “Leonard is absolutely insistent on hanging on and keeping control. If the Health Systems blowup doesn’t convince the board that there is a conflict, then I don’t know what will.”