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No severance for North Dakota Blues CEO who presided over financial loss

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FARGO -- Paul von Ebers, fired last week as chief executive of Blue Cross Blue Shield of North Dakota after the insurer reported multimillion-dollar losses, has not received a severance payout.

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"Paul von Ebers was terminated for cause and there is no severance at this time," said Ann McConn, chairwoman of the Blue Cross Blue Shield board of directors.

So far, the board has not decided to launch a national search to replace von Ebers, and McConn repeatedly expressed the board's confidence in the interim chief executive, Tim Huckle, and the rest of the management team.

Huckle is the longtime chief operating officer, and served as interim chief executive before von Ebers was hired in 2009.

The board found ample cause to fire von Ebers, McConn said, with factors ranging from implementation of policy and strategy to the heavy losses sustained by a subsidiary company.

"It's an overall assessment of the CEO and the leadership of the company," she said in an interview, but did not elaborate beyond noting the heavy losses recently made public.

Last week Noridian Mutual Insurance Co., which does business as Blue Cross Blue Shield of North Dakota, reported bottom-line figures for capital and surplus of $199 million as of the end of 2013, a drop of almost $72.9 million from the $271.9 million reported a year earlier.

Of that total, $51 million came from losses a subsidiary firm, Noridian Healthcare Solutions, sustained in the troubled Maryland health care exchange. Noridian Healthcare Solutions was the prime contractor in establishing the online marketplace until Maryland severed its contract as of March 31. Total losses last year attributed to Noridian Healthcare Solutions were $78 million.

Blue Cross Blue Shield also saw a loss last year of $25.2 million from its health insurance operations, a blow softened by investment gains of almost $12.4 million.

The loss on providing health insurance stemmed partly from the simultaneous conversion of computer record systems by several large health providers, which slowed claims processing and hampered projections used to make premium rate requests for 2013.

"It was a perfect storm that led to the loss of almost $75 million," said Adam Hamm, North Dakota insurance commissioner. "You've had the worst financial performance in the history of the company and the lion's share of that was based on this decision," a reference to the Maryland venture that turned sour.

Von Ebers was not available for comment.

Despite the losses, Blue Cross Blue Shield remains financially sound and stable, Hamm said. That assessment was echoed by a spokesman for the national Blue Cross Blue Shield Association.

The association has been monitoring Blue Cross Blue Shield of North Dakota since its reserves were expected to fall below a level the association expects its members to meet that is set higher than regulatory requirements, said Robert Elfinger, the association's manager of media relations.

"It remains a strong local brand that will continue to provide secure and stable coverage to its members in North Dakota," he said.

Standard & Poor's, the credit rating company, placed Blue Cross Blue Shield of North Dakota on a watch last December, after quarterly operating performance failed to match expectations.

Then in February, after Maryland severed its contract with Noridian, Standard & Poor's downgraded the North Dakota Blues' credit rating to BBB+ from A-.

Hamm said he had a "detailed conversation" with McConn about the company's difficulties and its plans to get back on track, but could not divulge specifics.

"At this point, I am satisfied with what she told me," including the board's ongoing oversight, he said. More meetings with McConn and executive staff will take place, Hamm said.

Hamm's staff has been examining Blue Cross Blue Shield in recent months for a routine financial audit and a targeted market conduct examination. By law, the subject of that examination is confidential until it is completed.

During those examinations, Hamm said, his lead examiner and financial analyst have been monitoring the Maryland consequences. But the die had been cast in February 2012, when the contract was awarded.

Regulators oversee but do not operate insurance companies, Hamm said.

"This is why it's so important that companies have the right CEOs making the right business decisions," he said.

The magnitude of the financial fallout from Noridian Healthcare Services' role in the ill-fated Maryland health exchange only became apparent in recent months.

Before severing its contract with Noridian in February, Maryland had paid the company about $55 million. The state has faulted Noridian for using inadequate "off-the-shelf" software to build the exchange.

Maryland officials have said they intend to seek to recover their costs for a system they said never worked properly.

Noridian has countered that the state's own actions, including frequent change orders, were a major contributor to the problems. Those contradictory claims likely will end up in court, contributing to uncertainty about the ultimate final loss.

Von Ebers was a vocal advocate of North Dakota creating its own online marketplace, as some states, including Minnesota, have done. He touted Noridian's expertise in computer systems and said North Dakota would be better served by creating its own exchange.

But North Dakota officials, including Hamm, decided to have the federal government build the state's exchange - and assume the financial risk, given uncertainty about costs and the challenge of creating such a complex system.

Noridian Healthcare Solutions is one of a number of for-profit subsidiaries owned by nonprofit Blue Cross Blue Shield of North Dakota.

But it is difficult to gauge the net financial cost or benefit to the parent company - and therefore to premium payers - because the company normally does not have to publicly disclose profits or losses of subsidiaries.

In the past year, the Blues effectively contributed a capital infusion of $42 million to Noridian Healthcare Solutions, by reclassifying money owed to the parent company as equity.

But that investment, for accounting purposes, has a value of zero due to requirements imposed by accounting standards. That's because Noridian is not considered "readily marketable" because of the cloud of uncertainty caused by the Maryland fiasco.

The company contends Noridian Healthcare Solutions has significant value, with about 1,200 employees and major contracts for processing Medicare claims, McConn said. It is one of the nation's top Medicare claims processors.

Over its life, Noridian Healthcare Solutions has helped Blue Cross Blue Shield premium payers by holding down administrative costs through computing efficiencies, she said.

Severance issue arose in 2009

The issue of whether an ousted top executive at Blue Cross Blue Shield of North Dakota will get a severance package has been the source of controversy in the past.

Mike Unhjem was fired as the North Dakota Blues' chief executive in 2009 following a public uproar over $238,000 spent on a reward trip for sales staff at a resort in the Grand Cayman Islands in the Caribbean.

Following Unhjem's dismissal, North Dakota Insurance Commissioner Adam Hamm ordered the North Dakota Blues to adopt a policy prohibiting severance payments for executives when there was no legal obligation to do so.

Hamm concluded that a severance paid to Unhjem totaling $2.5 million was unjustified because the former top executive should have been fired for cause, including excessive spending.

Instead, the Blue Cross Blue Shield board terminated Unhjem without cause, enabling him to collect the severance, a buyout of time remaining on his contract.

Unhjem was paid $1.08 million a year at the time of his dismissal.

Recently fired chief executive Paul von Ebers last year received compensation totaling almost $573,000, including $371,000 in base salary and $200,000 in bonuses, according to company figures.

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