Ch. 356

2003 LAWS OF MARYLAND

WHEREAS, CareFirst has enjoyed significant taxpayer and State funded
exemptions and subsidies to assist in its mission; and

WHEREAS, In recent years, CareFirst has exited from several segments of the
Maryland—health insurance market, including the withdrawal from the
Medicare Choice program and the withdrawal of its subsidiary HMOs, FreeState and
Delmarva, from both the individual and small group insurance markets in Maryland,
resulting in over 6,000 medically uninsurable individuals; and

WHEREAS, Citing a need for increased access to capital, on January 11, 2002,
CareFirst filed an application with the Maryland Insurance Commissioner to convert
to a for profit company and to be acquired by a California based health insurer for
$1.3 billion; and

WHEREAS, In 2002, the profits of CareFirst rose 13% to $104 million, its
revenue was $6,7 billion, and the number of its members increased to 3.24 million;

and

WHEREAS, On March 5, 2003, after extensive review, the Maryland Insurance
Commissioner found that the proposed sale and conversion of CareFirst is not in the
public interest; and

WHEREAS, The Insurance Commissioner found that the Board of Directors of
CareFirst misapprehended, or ignored, its overriding responsibility to the mission of
CareFirst and its insureds to provide coverage at a minimum cost and expense; and

WHEREAS, The Insurance Commissioner found that the management of
CareFirst did not view their corporate mission as restraining or guiding their
business activities; and

WHEREAS, The Insurance Commissioner found that the Board of Directors of
CareFirst failed to seek and consider material information relevant to the decision to
convert, information which an ordinarily prudent person would have sought and
considered under the same circumstances, and which would likely have caused a
prudent board to reconsider the decision to convert; and

WHEREAS, The Insurance Commissioner found that the management of
CareFirst insisted on large bonuses and permanent roles in the combined company
that conflicted with the interests of CareFirst; and

WHEREAS, The Insurance Commissioner found that the decision of the Board
of Directors of CareFirst to grant merger incentives was an egregious breach of its
duties of care and loyalty and that a key motivation behind the conversion was
enrichment of the executives of CareFirst; and

WHEREAS, The Insurance Commissioner found that the bidding process for the
sale of CareFirst was flawed and did not produce fair market value; and

WHEREAS, The Insurance Commissioner found that CareFirst matched or
exceeded other nonprofit and for profit insurers on capital spending and that
CareFirst has adequate capital to fund its capital investment needs; now, therefore,

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