Insurer’s success evolves from “WellPoint Way”;

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The insurer that wants to buy CareFirst is praised for its acumen by business analysts but not by doctors.

The Baltimore Sun

THOUSAND OAKS, Calif. – “The WellPoint Way” began the moment Leonard D. Schaeffer saw the shrimp and the ice sculpture. It was 1986, his first day as chief executive of Blue Cross of California, a company that was on its way to losing $157 million that year.

“The first day, they had a reception for me,” he recounted. “They had a huge ice sculpture – the thing had to be 5 feet tall. It was a Blue Cross, made of blue ice, with shrimp all around. I asked where it came from, and they introduced me to the pastry chef. My first official act was to fire the pastry chef.” That first act set the tone for the transformation of the nearly insolvent Blue Cross of California (BCC) into WellPoint Health Networks Inc., fast-growing and prosperous enough to offer $1.3 billion to buy Maryland-based CareFirst BlueCross BlueShield.

At its headquarters, nestled here in the picturesque hills above the beaches of Malibu, a laminated card spelling out The WellPoint Way perches atop nearly every desk. And if that doesn’t suffice, the highlights are repeated on the back of the ID cards all employees wear.

The WellPoint Way ranges from the broadly idealistic – “improve accessibility to and affordability of healthcare services and coverage” and “redefine our industry through a new generation of consumer-friendly products” – to the intensely pragmatic – 15 percent annual growth in earnings per share.

Under the strong hand of Schaeffer, WellPoint has been marked by innovation, focused management and hard-nosed bargaining that has sometimes alienated doctors and hospitals.

And the WellPoint way could come to Maryland. The deal to buy Owings Mills-based CareFirst would give WellPoint 3.1 million more members and a strong anchor on the East Coast, one of the regions it has targeted for growth.

The deal is a long way from a sure thing, however. WellPoint has to decide whether it wants to go ahead after the Maryland legislature imposed several conditions on the transaction. And regulators in Maryland, Washington and Delaware – where CareFirst operates – need to give CareFirst permission to become for-profit and sell itself, a process expected to take at least a year.

The WellPoint Way has been a clear business success. Since the company assumed its current form just over five years ago, membership and profit have more than doubled, revenue and share price have more than tripled.

“They’re on a tear right now,” said health economist J.D. Kleinke, president of Colorado-based Health Strategies Network.

Well- Point has, in recent months, been named most admired health care company by Fortune, one of the top 50 public companies by Business Week and the best large health insurer by Forbes Magazine. Schaeffer has been on Worth magazine’s list of top CEOs for three years in a row.

Not everyone is bestowing plaudits – especially not doctors and hospitals. “They’ve been a successful business, but they’ve done it at the expense of straining their friendships with physicians and hospitals,” said Dr. Jack Lewin, executive vice president of the California Medical Association.

Schaeffer was a pioneer in converting a Blue Cross plan to a for-profit operation and taking it to Wall Street, accomplishing it in phases. WellPoint was first created as a for-profit unit of Blue Cross of California in 1992. The whole company was converted in 1996, with WellPoint becoming the parent, and two health-related foundations in California getting more than $3 billion worth of stock in return.

After expanding by buying three non-Blues health insurance businesses, WellPoint has, in the past year and a half, bought the already for-profit Blue Cross plans in Georgia and Missouri, and has reorganized the structure of both, while keeping all the top managers in Missouri and many in Georgia.

The Missouri deal just closed at the end of January. In Georgia, as WellPoint management took hold, the Blues plan’s profit doubled from the third quarter to the fourth.

‘Product jocks’

“Simply, the WellPoint ‘magic’ is working,” said David Shove, a health analyst at Prudential Securities, in a recent research note reporting the Georgia results. Shove, like all 18 analysts whose ratings were compiled by Bloomberg News, has a “buy” recommendation on WellPoint.

The WellPoint magic, Shove said in an interview, comes from the fact that “they’re not only underwriting junkies, but they’re product jocks.”

Clifford A. Hewitt, a health analyst at Legg Mason Wood Walker in Baltimore who made WellPoint his choice for Legg’s “select list,” said underwriting and actuarial acumen are a key part of WellPoint‘s business success. “One of the reasons they’re respected is that they’re very good on the actuarial side; they’re good at pricing products correctly,” Hewitt said.

Pricing is critical, so the company doesn’t end up spending more on benefits than it takes in through premiums. Alice F. Rosenblatt, WellPoint‘s chief actuary and executive vice president, said the company has more actuaries than most insurers, allowing specialization in areas such as drug costs or small-group policies. And it has its own extensive database of claims, giving it a better basis for predicting costs.

Sophisticated pricing is increasingly important as Well- Point continues to develop new products, with an emphasis on giving the consumer choices – the “product jocks” side of Shove’s formulation.

“They’ve been an innovator in recognizing that the old model, in which managed care would just say ‘no’ to the consumers and beat up on the doctors and hospitals, put them in a political no-win situation,” Hewitt said.

Deborah F. Lachman, senior vice president of small group services for Blue Cross of California, said WellPoint breaks down the market into high-end, where employers will pay relatively high premiums for rich benefits; medium, the “bread and butter” of the business; and low-end products, where “cost-constrained” employers buy a “skinny benefit” that “would come out at a fairly low price point.”

It doesn’t just offer a wide range of prices and benefits to each employer. It’s the only insurer with the information systems and the actuarial horsepower to offer, if the employer is willing, nine different plans to each worker in a small group. And individuals buying family coverage can elect different plans for different family members.

“They’re in the vanguard of mass customization,” said Uwe Reinhardt, a health economist at Princeton.

BCC has about 800,000 members in its small-employer group, with an average group size of about seven workers. Lachman said more than half of small employers now choose to offer choices through the program WellPoint calls EmployeeElect. A recent study by the Kaiser Family Foundation reported that 66 percent of California employers offer health insurance now, compared with 48 percent in 1999.

The low-cost policies aren’t just for cash-strapped small employers. In a hearing before Maryland’s insurance commissioner on the CareFirst deal, Lachman testified, “The uninsured is the biggest single business opportunity we have.”

WellPoint has a marketing packet for low-cost policies it gives to companies that are laying off workers. WellPoint also put together an insurance package for three Native American tribes looking to cover members by using casino revenues.

Although they may be providing coverage to people who wouldn’t otherwise have any, some critics say the benefits are so thin that they’re hardly real insurance.

The low-cost WellPoint plans are “junk policies,” complained Jamie Court, executive director of the California-based Foundation for Taxpayer and Consumer Rights.

“They excel at finding ways to dilute insurance products,” Court said. “WellPoint has pushed the envelope as far as changing the meaning of insurance.”

WellPoint, of course, doesn’t see it that way. “They may not be plans you would want personally, but for $69 a month for catastrophic coverage, it’s better than having no insurance,” said David C. Colby, executive vice president and chief financial officer.

Schaeffer argues that consumers should be trusted to make wise decisions about the trade-offs between premiums and benefits.

“The issue is paternalism,” he said. “If people are given information that is accurate and complete, they will make good choices, and they will feel good about the choices they make. People aren’t stupid.”

WellPoint‘s innovative strategies aren’t limited to low-cost insurance products. In 1998, it became the first insurer to petition the federal Food and Drug Administration to have the popular non-sedating antihistamines Claritin, Allegra and Zyrtec converted to over-the-counter status.

Not only do over-the-counter drugs carry much lower price tags, they aren’t covered by prescription plans. WellPoint estimated that the switch would save it $80 million a year.

Last year, an FDA advisory panel recommended that the drugs go over-the-counter, and last month, Claritin’s maker, Schering-Plough Corp., said it would do that. Just last week, WellPoint said it would petition the FDA to also make Schering-Plough‘s new allergy drug, Clarinex, available over-the-counter.

As health insurers continue to worry over prescription costs that are rising at nearly 20 percent a year, “Our FDA petition is just one component of an overall strategy to identify inefficiencies in the process,” said Robert C. Seidman, vice president and chief pharmacy officer.

WellPoint, Seidman said, is experimenting with promoting generic drugs to doctors and patients, mimicking some of the marketing techniques of the drug manufacturers. For example, he said, the insurer recently sent letters to 40,000 patients taking cholesterol-controlling drugs, suggesting they ask their doctors if the generic version of Mevacor is right for them. “We stole that from the brand-name pharma playbook,” Seidman said.

WellPoint‘s reputation is based not just on the innovative things it’s done, but on the things it hasn’t done, the fads it’s avoided.

“Len (Schaeffer) never did the foolish things HMOs tried to do – buy hospitals, be brokers, give capitation,” Reinhardt said. “He said, ‘I’m an insurance company; I will write insurance and offer an infinite variety of products.’ ”

When other companies were rushing to sign up seniors for Medicare HMOs, WellPoint stayed away. Schaeffer – who ran the Medicare program as head of the Health Care Financing Administration during the Carter administration – predicted, correctly, that the government was paying the HMOs too much, and would figure that out soon enough.

“I said, ‘I’m not going to be part of a program that’s going to have windfall profits in the beginning until the government wakes up,’ ” Schaeffer recounted. “We didn’t make the big profits at the front end, and we didn’t have the losses at the back end.”

Other insurers have cut back their Medicare HMOs sharply, or dropped out entirely.

Aside from Medicare, as other insurers saw HMOs as the inevitable future, WellPoint held back, continuing to stress its more loosely managed preferred-provider organization (PPO) products. Currently, it has about 30 percent of its members in HMOs, with the rest in PPOs or similar plans.

Schaeffer, said Reinhardt, “is a guy who astutely studied markets and did not astutely study fads. You can only do that if you have a good amount of self-confidence, and he has an abundance.”

The self-confidence – some say brashness – of Schaeffer and WellPoint‘s aggressive efforts to reduce doctor and hospital costs have led to friction with health providers.

Blue Cross developed a lot of penetration statewise, and took advantage of it in two ways,” said C. Duane Dauner, president of the California Health- care Association, the state’s hospital association. “Blue Cross ratcheted down payments to all hospitals. And Blue Cross aggressively went hard at lowering utilization. They reduced benefits to subscribers in a variety of ways.”

“Twenty, 30, 40 years ago, Blue Cross was the best payer to the hospitals. Now, most hospitals would say it’s the worst,” Dauner said.

While all insurers have some tension with providers over negotiating reimbursement rates, “WellPoint has been the most egregious in terms of strained relationships with doctors,” said Lewin, of the California Medical Association.

The tension boiled over in California in 2000 and early 2001, as BCC’s rate negotiations broke down with two huge hospital chains in the state, Sutter Health and Catholic Healthcare West (CHW).

Sutter’s contract with Blue Cross ran out at the end of 2000, and for seven weeks, BCC patients who had been receiving treatment from Sutter’s 26 hospitals and thousands of affiliated doctors had to find other providers.

In June 2000, CHW, with 39 hospitals, filed suit against BCC, saying the insurer owed CHW $50 million for claims it had refused to pay, in violation of its contract and state law. WellPoint denied the allegations.

WellPoint‘s clashes with doctors and hospitals in California were a key factor in persuading the Maryland Hospital Association and the Medical and Chirurgical Faculty of Maryland (Med-Chi), the state medical society, to oppose the WellPoint-CareFirst deal.

In California, however, things have calmed, at least somewhat. Both Sutter and CHW have negotiated new rates without public battles, and CHW settled its lawsuit last year. Terms of the settlement were not disclosed.

“With Blue Cross, things look good now,” said Bill Gleeson, Sutter’s vice president for communications and marketing. “There’s a new team in place that we worked with (to negotiate reimbursements), and we noticed an improved rapport with this new team and more of a willingness to reach a win-win solution.” BCC now pays Sutter rates comparable to those of other large insurers, Gleeson said.

Schaeffer said WellPoint is working to build better relationships with providers, brandishing his laminated WellPoint Way card that lists “become a trusted partner” as a goal for 2002.

“We have been the toughest negotiators, and we were not as interpersonally sensitive as we could have been,” he said. “We went maybe further than we should have on both sides.”

Those not directly involved in the negotiations say the highly public confrontations weren’t good for business on either side.

WellPoint‘s moved on,” said Kleinke, the health economist. “Everyone recognized that if you make docs miserable with price, they’ll complain to the patients.”

WellPoint has also been criticized by consumer groups in California.

WellPoint has made a real practice of putting the interests of the stockholders ahead of the interests of the consumers,” said Beth Capell, spokeswoman for an advocacy group called Health Access.

On a survey of overall consumer satisfaction for a state report card on HMOs, only 50 percent of BCC’s HMO members gave favorable ratings on access to care and customer service.

That was the lowest of the 17 HMOs in the survey. The report card also included a number of clinical measures, and BCC’s HMO tended to be in middle on most.

Contract renewed

On the other hand, the California Public Employees’ Retirement System, CalPERS, which buys insurance for more than a million public employees and retirees and their dependents, recently renewed its contract with BCC for preferred-provider coverage.

“Our members have given Blue Cross high customer satisfaction marks,” CalPERS board President William D. Crist said in a statement, “and its claims processing is known for performance, accuracy and efficiency.”

Schaeffer said WellPoint‘s own surveys show customers are generally satisfied. “You’ve got to be doing something right if you go from 2 million members to 6 million members,” he said, noting the California numbers, which exclude the growth Well- Point has made through acquisitions.

Keeping careful count of membership, of satisfaction, of claims backlog, and almost anything else the company can measure is part of the WellPoint way as well.

“I used to have a room like this,” Schaeffer said, sitting in a large executive conference room, “that was, floor to ceiling, all four walls, graphs. We’d have a plan, the red line, and an actual, the blue line.”

Now, all WellPoint‘s managers have computer access to all the figures, and, like the graphs Schaeffer used to have on his wall, an indication of which figures fail to meet targets.

During interviews, several WellPoint executives mentioned a phrase often attributed to Schaeffer – “Hit your numbers or die” – only to deny that such a draconian dictum was really part of the WellPoint Way.

“If it were true, we would have a lot of corpses,” said Colby, the CFO. “But you’ve got to know where you are. We don’t like surprises. We expect a manager to know about a problem. That’s the only reason to have a manager – to change the course of events.”

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