Table Of ContentS. Hrg. 103-212
OVERSIGHT OF THE INSURANCE INDUSTRY: BLUE
CROSS/BLUE SHIELD—EMPIRE PLAN (NEW YORK)
Y 4. G 74/9: S. HRG. 103-212
Oversight of the Insurance Iidustry. . .
HEARINGS
BEFORE THE
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JUNE 25 AND 30, 1993
Printed for the use of the Committee on Governmental Affairs
DlrC >
to
S. Hrg. 103-212
OVERSIGHT OF THE INSURANCE INDUSTRY: BLUE
PUN
CROSS/BLUE SHIELD—EMPIRE (NEW YORK)
HEARINGS
BEFORE THE
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JUNE 25 AND 30, 1993
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
70-184ts WASHINGTON : 1993
ForsalebytheU.S.GovernmentPrintingOffice
SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402
ISBN 0-16-041561-6
COMMITTEE ON GOVERNMENTAL AFFAIRS
JOHN GLENN, Ohio, Chairman
SAM NUNN, Georgia WILLIAM V. ROTH, Jr., Delaware
CARL LEVIN, Michigan TED STEVENS, Alaska
JIM SASSER, Tennessee WILLIAM S. COHEN, Maine
DAVID PRYOR, Arkansas THAD COCHRAN, Mississippi
JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona
DANIEL K. AKAKA, Hawaii
BYRON L. DORGAN, North Dakota
Leonard Weiss, StaffDirector
Franklin G. Polk, Minority StaffDirectorand ChiefCounsel
Michal Sue Prosser, ChiefClerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
SAM NUNN, Georgia, Chairman
JOHN GLENN, Ohio, Vice Chairman
CARL LEVIN, Michigan WILLIAM V. ROTH, Jr., Delaware
JIM SASSER, Tennessee TED STEVENS, Alaska
DAVID PRYOR, Arkansas WILLIAM S. COHEN, Maine
JOSEPH I. LffiBERMAN, Connecticut THAD COCHRAN, Mississippi
BYRON L. DORGAN, North Dakota JOHN McCAIN, Arizona
Eleanore Hill, ChiefCounsel
Daniel F. Rinzel, ChiefCounsel to the Minority
Mary D. Robertson, ChiefClerk
(II)
CONTENTS
Openingstatements: Page
Senator Nunn 1, 61
Senator McCain 63
Senator Roth Ill
WITNESSES
Friday, June 25, 1993
John F. Sopko, Deputy Chief Counsel; Alan Edelman, Counsel; Eleni P. Ka-
lisch, Counsel; accompaniedby Mike Maloney, Investigator, and Mark Web-
ster, Investigator, PermanentSubcommitteeon Investigations 5
Joan Boyle, Former Employee, Empire Blue Cross and Blue Shield; accompa-
niedby Charles R. Work, Counsel 49
William Fuessler, Former Employee, Empire Blue Cross and Blue Shield;
accompaniedby Herbert B. Derman, Counsel 54
Wednesday, June 30, 1993
Albert A. Cardone, former Chief Executive Officer and Chairman of the
Board, EmpireBlue Crossand Blue Shield 65
JerryWeissman, ChiefFinancial Officer, EmpireBlueCrossand BlueShield.. 72
Harold E. Vogt, Chairman ofthe Board ofDirectors, Empire Blue Cross and
Blue Shield 73
Donald L. Morchower, Acting ChiefExecutive Officer, Empire Blue Cross and
Blue Shield; accompanied by Maroa Velez, Vice President, Auditing,
Empire BlueCrossand Blue Shield 77
SalvatoreR. Curiale, SuperintendentofInsurance, State ofNew York 127
Alphabetical List of Witnesses
Boyle, Joan:
Testimony 49
Prepared statement 228
Cardone, AlbertA.:
Testimony 65
Prepared statementwith attachments 240
Curiale, Salvatore R.:
Testimony 127
Prepared statement 268
Edelman, Alan:
Testimony 5
Prepared statement 141
Fuessler, William:
Testimony : 54
Prepared statementwith an attachment 232
Kalisch, Eleni P.:
Testimony 5
Prepared statement 141
Morchower, Donald L.:
Testimony 77
Prepared statement -235, 260
Sopko,John F.:
Testimony 5
Preparedstatement 141
(m)
IV
Page
Vogt, Harold E.:
Testimony 73
Preparedstatementwith an attachment 254
Weissman,Jerry:
Testimony 72
Preparedstatement 254
APPENDIX
StaffStatement 141
Preparedstatementsofwitnesses in orderofappearance 228
Exhibit List
June 25 and 30, 1993
1. Empire Blue Cross and Blue Shield's "1993 Divisional Plans and Objec-
tives" *
2. Memorandum to Albert A. Cardone, dated November 14, 1991, from
MaroaC. Velez, regarding "RecredentialingProject" 271
3. Memorandum to Maroa C. Velez, dated March 22, 1993, from Harry
Pantos and Helen Hone-Futterknecht, regarding "1992 Year-End
Status Report: Group Integrity Department" 286
4. Memorandum to Donald L. Morchower, Chief Operating Officer, and
Michael Bihari, M.D., Vice President, Empire Blue Cross/Blue Shield,
dated September 26, 1991, from MaroaC. Velez, Corporate Vice Presi-
dent, Auditing, regarding review of the Physicians Provider File
System maintainedbyProfessional Benefits Administration 292
5. a. Complaint, Empire Blue Cross and Blue Shield v. Finkelstein, Horo-
witz, et al, U.S. District Court, Eastern District ofNew York, 91 Civ.
No. 4816 (LDW), filed December5, 1991
b. Amended Complaint, Empire Blue Cross and Blue Shield v. Finkel-
stein, Horowitz, et al., U.S. District Court, Eastern District of New
York, 91 Civ. No. 4816(LDW), filed December5, 1991
c. Miscellaneous documents regarding Empire Blue Cross and Blue
Shield v. Finkestein, Horowitz, etal
6. Sworn Statement of Robert F. Garafallou, former employee of Empire
BlueCrossand Blue Shield, dated September6, 1991
7. Deposition ofAlbert A. Cardone, former Chairman and ChiefExecutive
Officer, Empire Blue Cross Blue Shield, before the Senate Permanent
Subcommitteeon Investigations, datedJune 10, 1993
8. Deposition of Martin F. Carus, Deputy Chief Examiner, Property Com-
panies Bureau, State ofNew York Insurance Department, before the
Senate Permanent Subcommittee on Investigations, dated June 4,
1993
9. Deposition ofMichael Scharff, Examiner, State ofNew York Insurance
Department, before the Senate Permanent Subcommittee on Investi-
gations,datedJune 4, 1993
10. Deposition ofThomas John Ward, former Director ofProgram Security,
Empire Blue Cross Blue Shield, before the Senate Permanent Sub-
committeeon Investigations, datedJune 11, 1993
11. Depositions of Jerry Weissman, Chief Financial Officer, Empire Blue
Cross Blue Shield, before the Senate Permanent Subcommittee on
Investigations, datedJune 11 andJune 22, 1993
12. a. State ofNew York Assembly Bill A. 12350-A and Senate Bill S. 8978,
An Act to amend the insurance law and the public health law, in
relation to requiring that individual and small group health insur-
ance be made available on an open enrollment basis; community
rating ofindividual and small group health insurance policies; porta-
bility ofhealth insurance coverage and continuation of hospital, sur-
gical or medical expense insurance and making an appropriation
therefor; datedJune 29 andJuly 1, 1992
— Page
Prepared statementsofwitnesses in orderofappearance Continued
b. StateofNew York Senate Bill S. 430/Assembly Bill A. 655, An Actto
amend the insurance law, in relation to the creation of a special
advisory panel, certain appointments, the transfer of funds from the
medical malpractice insurance association, and related matters; and
makingan appropriation therefor, datedJanuary 8, 1993
13. Stenographic Record ofApril 22, 1993 Proceedings before the New York
State Senate Standing Committee on Health and the New York State
Senate Standing Committee on Insurance, "a Public Hearing in
Follow-Up to the Enactment of Chapter 1 of the Laws of 1993 to
Determine whether any Further Legislative Action is Necessary in
Connection with Health Insurers' Rates and the Regulatory Activities
ofthe New York State Insurance Department"
14. Stenographic Record of February 25, 1993 Proceedings before the New
York State Senate Standing Committee on Health and the New York
State Senate Standing Committee on Insurance, "a Public Hearing in
Follow-Up to the Enactment of Chapter 1 of the Laws of 1993 to
Determine Whether any Further Legislative Action is Necessary in
Connection with Health Insurers' Rates and the Regulatory Activities
ofthe New YorkState Insurance Department"
15. Summary ofPublic Hearingbefore the NewYork State Senate Commit-
tees on Health and Insurance, February 25, 1993
16. a. "Proposal to Provide a Management and Financial Audit of Empire
Blue Cross and Blue Shield," prepared by Arthur Andersen & Co.,
S.C., for the State ofNew York Insurance Department, dated August
31,1992
b. "Management and Financial Audit of Empire Blue Cross and Blue
Shield, Draft of Final Report," prepared by Arthur Andersen & Co.,
c.SM.eC.m,ofroratnhdeuSmtattoeSotfeNveenwBYuorrnks,(dAarttehduArprAinlde15r,se1n99&3 Co.), dated April
23, 1993, from Stephen P. Bell (Empire Blue Cross/Blue Shield), re-
garding corrections identified in the Arthur Andersen & Co. Draft
Reporton Empire BlueCross and Blue Shield
d. "Management and Financial Audit of Empire Blue Cross and Blue
Shield, Final Report," prepared by Arthur Andersen & Co., S.C., for
the State ofNew York, dated April 30, 1993 *
17. Miscellaneouscorrespondence/documents regarding Arthur Andersen &
Co. Management and Financial Audit ofEmpire Blue Cross and Blue
Shield
18. Letters to Lloyd W. Franks, Director of Administration, State of New
YanodrkMIanysu1r7a,nc1e99D3,epfarrotmmenPtau,ldaE.teGdauJtahniuearr,yA4r,thFuerbruAanrdyer2s,enMa&rcCho.3,
S.C., regarding invoices in connection with the Management and Fi-
nancial AuditofEmpire BlueCross and Blue Shield
19. Letters to Alan C. Drewsen, Corporate Vice President and General
Counsel, Empire Blue Cross Blue Shield, dated November 20, 1992
and March 16, 1993, from Paul F. Altruda, Assistant Deputy Superin-
tendent and Counsel, State of New York Insurance Department, re-
garding Confidentiality Agreement among Empire, Arthur Andersen
andCo., and the SuperintendentofInsurance
20. Contract between New York State Insurance Department and Arthur
Andersen & Company, effective"September 15, 1992, for an independ-
ent managementand financial audit
21. a. "Report ofthe Attorney General and the Multi-Agency Investigatory
Team to the Connecticut State Board ofAccountancy: Investigation of
the Accounting Services Provided by Arthur Andersen & Co. to the
Colonial Realty Company on the Colonial Constitution Limited Part-
nership and the Relationship between Arthur Andersen & Co. and
Colonial Realty, May, 1993" and "Appendix I: Affidavits" *
b. Settlement Agreement, dated May 3, 1993, between the State of
Connecticut, ex rel. Richard Blumenthal, Attorney General, and
Arthur Andersen & Co., regarding Arthur Andersen's performance of
professional servicesforColonial RealtyCompany
VI
Page
22. Annual Reports of Empire Blue Cross and Blue Shield for the years
1987, 1988, 1989, 1990, and 1991
23. Letter to Alan Edelman, Permanent Subcommittee on Investigations,
dated June 1, 1993, from Jeanne C. Miller, Vice President and Senior
Associate Counsel, Chase Manhattan Bank, regarding attached corre-
spondence between Empire and Chase concerning cancellation of
Chase'shealth coveragewith Empire BCBS
24. Correspondence between New York Department of Insurance and
Empire Blue Cross/Blue Shield, dated January 13-March 22, 1993,
regardinggeneric("dummy")codes
25. Correspondence to the Honorable Sam Nunn, Chairman, Permanent
Subcommitteeon Investigations, datedJuly 21, 1992 throughJune 20,
1993, regardingpersonal experience with Empire Blue Cross and Blue
Shield
26. "Between Public and Private: A Half Century of Blue Cross and Blue
Shield in New York," JournalofHealth Politics, PolicyandLaw, vol.
16, no. 4, Winter, 1991, pp. 643-805
27. a. Memorandum to Board of Directors, Empire Blue Cross and Blue
Shield, dated December 13, 1988, from Ad Hoc Committee, regarding
Report of Special Independent Counsel's Investigation ("Craco
Report")
b. "Report of Internal Investigation Into Charges Concerning Manage-
mentand Operations ofEmpire Blue Cross and Blue Shield, prepared
byLouisA. Craco, Special IndependentCounsel"
c. Correspondence between the New York State Insurance Department
and Empire Blue Cross and Blue Shield, dated May 3-30, 1989, re-
gardingFOILrequestsfor "Craco Report"
28. Letters to Empire Blue Cross Blue Shield, dated April 28, 1993 and
June 17, 1993, from U.S. Department ofHealth and Human Services,
Bureau of Program Operations, Health Care Financing Administra-
tion, regardingEmpiresFY 1992 performance in Medicareprogram... 310
29. "Monitoring Insurer Solvency," Report prepared by the State of New
York, Office ofthe State Comptroller, Division ofManagement Audit,
dated April 8, 1992
30. "The New York State Insurance Department: Management Audit
Report, February 1, 1991"
31. Audited Financial Statements for Empire Blue Cross and Blue Shield,
as ofDecember31, 1987 and 1986 toDecember31, 1992and 1991
32. Annual Statements for Empire Blue Cross and Blue Shield, filed with
the New York State Insurance Department, for the years ending
December31, 1987 toDecember31, 1992
33. Deloitte & Touche File Memoranda, dated May 12, 1992, from Ruben
Nava, regarding "Empire Blue Cross and Blue Shield—Meeting with
NewYorkInsurance Department" 318
34. Deloitte & Touche File Memoranda, dated March 2, 1993, from Richard
G. Gander, regarding "Meeting with New York State Insurance De-
partment" 320
35. Quarterly Statement ofEmpire Blue Cross and Blue Shield as ofMarch
31,1993
36. Minutes of Meetings of Finance Committee of Empire Blue Cross and
BlueShieldbetween 1987 and 1993
37. MinutesofMeetingsofAuditCommitteeofEmpire BlueCross and Blue
Shieldbetween 1987 and 1993
38. MinutesofMeetings ofthe Board ofDirectors and Budget and Compen-
sation CommitteeofEmpire Blue Cross and Blue Shieldbetween 1987
and 1993
39. Empire Blue Cross Blue Shield Corporate Plan and Budget for 1987 and
1991
40. "Narrative Summary, Empire Blue Cross and Blue Shield, Small Group
Cancellation Study," dated February 1992, prepared by The Gallup
Organization, Inc
VII
Page
41. Compensation Studies, dated 1987 through 1992, preparedby Sibson and
Company, regarding various aspects of Empire's salary, incentive,
compensation, and benefitplans
42. Executive Employment Agreement and Empire Board ofDirectors' Res-
olutions regardingAl Cardone'semploymentandseverance
43. Miscellaneous documents pertaining to Empire's corporate fleet of as-
signedand pool automobiles
44. Empire's Service Award Brochure displaying gifts from which employ-
ees maychoose career milestone awards *
45. Invoices and miscellaneous documents, dated 1987 through 1992, regard-
ing Empire's purchase ofgifts and/or awards for employees and offi-
cers
46. Empire Corporate Employee Travel, Expense and Conference Planning
Manual, dated September 1992 »
47. Miscellaneous documents regarding attendance of Empire officials at
WaltDisneySeminars in Orlando, Florida
48. Rick Smolan, Phillip Moffitt, and Matthew Naythons, M.D., The Power
to Heal, (NewYork: Prentice Hall Press, 1990)
49. Miscellaneous documents regarding Empire's proposed design and con-
struction renovation ofitsexecutiveoffices andboardroom
50. Miscellaneous documents regarding Al Cardone's membership in and
use ofTheSkyClub *
51. Financial Analyses, dated 1988 through 1992, regarding Empire's Con-
ferencePlanningDepartment
52. Miscellaneous documents, dated 1987 through 1992 regarding Empire's
BoardofDirectorsexpenditures *
53. Diagram, "Wheel Conspiracy-SpinningOff1stBad Group"
54. "Audit Report, Inter-Plan Receivables System (IPRS)," dated July 6,
1988
55. Memorandum to Donald L. Morchower and Jerry Weissman, dated
January 4, 1989, from Eugene Assante, regarding Review of the Na-
tional PaidClaims(NPC)Control System
56. "Audit Report, Inter-Plan Data Reporting System," dated January 9,
1989
57. Memorandum to Donald L. Morchower, dated January 9, 1991, from
Michael W. Nieberding, AVP Advanced Technologies, regarding Indi-
vidualOfficerGoal Attainment
58. Letter to Donald L. Morchower, Chief Operating Officer, Empire Blue
Cross Blue Shield, dated February 18, 1992, from Maroa C. Velez,
Vice President, Auditing, regarding "review ofthe system ofinternal
controls of the Imaging system (OmniDesk) and the LAN hardware
and software as it pertains to the Niagara Project as of December
1991"
59. Memorandum to Jerry Weissman, dated February 25, 1992, from Vin-
centA. Sbarra, regardingProject NiagaraCost/ BenefitAnalysis *
60. Letter to Donald L. Morchower, Chief Operating Officer, Empire Blue
Cross Blue Shield, dated July 7, 1992, from Maroa C. Velez, Vice
President, Auditing, regarding "EXCEL Audit, Findings and Recom-
mendations" :
61. Letter to Donald L. Morchower, Chief Operating Officer, and Victor
Botnick, Vice President, Empire Blue Cross Blue Shield, dated No-
vember 20, 1992, from Maroa C. Velez, Vice President, Auditing,
regardingreviewofPhysicians Provider FileSystem 322
62. Memorandum to Albert A. Cardone et al., dated February 25, 1993,
from MaroaC. Velez, regarding "Dummy Code Utilization Status" 326
63. Computer Printout, dated January 6, 1993, provided by the New York
State Department of Insurance listing complaints closed against
Empire Blue Crossand Blue Shield in 1992
64. New York State Insurance Department Inter-Office Memoranda, dated
October 18, 19 and November 1, 1989, regarding Empire Blue Cross/
Blue Shield(EBCBS) Possibly MisleadingAdvertisement
VIII
Page
65. Letter to Empire Blue Cross/Blue Shield, dated April 9, 1987, from
Donald Lundgren, Deputy Superintendent, State of New York Insur-
ance Department, regarding Empire Blue Cross/Blue Shield Health-
net
66. Letter to Robert P. Dougherty, New York State Department ofHealth,
dated September 6, 1993, from Frederic L. Bodner, Chief, Health and
LifePolicyBureau, StateofNew York Insurance Department, regard-
ing Blue Cross/Blue Shield ofthe Rochester Area Article 44 Applica-
tion
67. a. Special Investigation ofEmpire BlueCross and BlueShieldconducted
by the New York State Insurance Department, dated January 26,
1989, regarding allegations by former Empire Blue Cross and Blue
ShieldTreasurerGustave Mattia
b. Correspondence between Empire Blue Cross and Blue Shield and the
New York State Insurance Department, dated September 21, 1988
through November 1, 1989, regarding the New York State Insurance
Department'sSpecial Investigation
68. a. Original and Revised Versions of "Report of Examination of the
Empire BlueCrossand Blue Shield as ofDecember 31, 1987"
b. Correspondence between the New York State Insurance Department
and Empire Blue Cross and Blue Shield, dated April 16, 1990 through
January 17, 1991, regarding "Report of Examination of the Empire
BlueCrossand Blue Shield asofDecember 31, 1987"
69. Correspondence between the New York State Insurance Department
and Empire Blue Cross and Blue Shield, dated March 3, 1987 through
July 30, 1992, regardinginvasion ofstatutory reserves
70. Milliman & Robertson Study, "Empire Blue Cross and Blue Shield,
Reasons for the Deterioration of Empire's Community Rated Small
Group Pool," datedOctober9, 1990
71. Letter to Charles Henricks, Assistant ChiefExaminer, New York State
InsuranceDepartment, dated February7, 1992, fromJerry Weissman,
Chief Financial Officer, Empire Blue Cross and Blue Shield, listing
experience rated accounts which generated an underwriting loss in
1991
72. Memorandum to Joanne Jenkins, dated December 4, 1992, from Salva-
tore R. Curiale, Superintendent of Insurance, New York State Insur-
ance Department, regarding Governor's Briefing on future rate in-
creases forEmpire BlueCrossand Blue Shield
73. List ofEmpire Blue Cross and Blue Shield's National Control Accounts
whichcancelledcoverage from 1988to Present 332
74. Incentive payment calculations for Empire Blue Cross and Blue Shield
officersawardedJune 1993 forcorporate performance in 1992
75. SEALED EXHIBIT: Underwriting results for Empire Blue Cross and
Blue Shield's National Accountsfor 1991 and 1992
76. SEALED EXHIBIT: Miscellaneous documents prepared by Blue Cross
and Blue Shield Association, dated August 18, 1992 through May 27,
1993, regardingEmpire BlueCrossand Blue Shield's performance
77. SEALED EXHIBIT: Deposition ofBeverly Palmer, Vice President, Cor-
porate Quality Control, Empire Blue Cross and Blue Shield, before
the Senate Permanent Subcommittee on Investigations, dated June
11, 1993
78. Empire Blue Cross and Blue Shield Memoranda, dated September 21
and October 24, 1988, regarding duplicate payments made by Medi-
care and Empireas primarycarrier 336
79. Affidavit of Maroa C. Velez to the New York State Department of
Insurance,datedJune 29, 1993 338
80. Statement of Maroa C. Velez, Vice President, Audit Division, Empire
Blue Cross and Blue Shield, submitted to the Senate Permanent
Subcommitteeon Investigations, datedJune 30, 1993 340
81. Statement of Arthur Andersen & Co. submitted to the Senate Perma-
nentSubcommittee on Investigations 344
82. Supplemental Statement ofEmpire Blue Cross and Blue Shield submit-
ted totheSenate PermanentSubcommitteeon Investigations
