WellPoint Makes a Strong Recovery

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Six years ago its prognosis was poor. Today its expansion is being cheered by investors and challenged by consumer advocates.

Los Angeles Times

If its recent flurry of acquisitions survives regulatory scrutiny and emerges intact, WellPoint Health Networks Inc. will have the nation’s third-largest enrollment among publicly traded managed-care companies, moving ahead of rival Cigna Corp.

That would cap a remarkable shift in fortune for the company whose ambitious 6-year-old expansion strategy began with an embarrassing failure. In November 1995, a planned merger with Health Systems International was effectively terminated when the chief executive of that company, Malik M. Hasan, relayed the following message to a WellPoint attorney: “You’re a liar and a cheat and I’m outta here.”

On Dec. 29, 1995, the day the merger deal died, WellPoint‘s and Health System’s stock prices were within $11 of each other, at $32.13 and $43.25 respectively. Now, WellPoint‘s stock is about $100 higher, as Chairman and Chief Executive Leonard D. Schaeffer is fond of pointing out, and WellPoint, the parent of Blue Cross of California, has become the managed-care industry juggernaut in growth and rising profit. WellPoint shares closed Friday at $120, up 22 cents, while shares of Health Net Inc., as Health Systems is now called, closed at $20.98, down 7 cents, both on the New York Stock Exchange. “We prefer to focus on results,” Schaeffer said in an interview. “The facts are pretty straightforward.”

Those facts engender awe, admiration, envy and grudging respect even from competitors. But they also create concern, fear and outright derision from detractors who view WellPoint as the coming health-care nightmare.

“They’re profiteers, commercial barons, and they’re upfront about it. That’s what’s so disgusting,” said Jamie Court, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. Court said WellPoint has built itself on the backs of policyholders with sharp premium increases and reduced care.

Although WellPoint, based in Thousand Oaks, has its critics among consumer advocates, it is widely admired on Wall Street for its success.

“They’re only a step or two away now from a good platform for a true national health-care company that can compete with the major players,” said Greg Crawford, an analyst with Fox-Pitt, Kelton Inc. in San Francisco. “Their strategy has always been pretty well articulated, but it’s actually happening now.”

Crawford said WellPoint must be doing something right by its customers, whose numbers in California have increased by 373,000, or 9.5%. “If this was a bad company, they would have seen a retreat from their California customers, an exodus. Instead, they’ve seen tremendous growth in the state,” he said.

Although managed-care industry stock prices have floundered, WellPoint‘s have risen from $86 a share last summer to as high as $122. As rivals such as Aetna Inc. and Cigna have faced major lawsuits over patient care and billing practices, WellPoint‘s name for the most part has remained off the courtroom dockets. And WellPoint‘s latest acquisitions will double its customer base to more than 15.9 million in less than two years, even as its profit continues to rise.

What’s responsible for the turnaround?

In part, WellPoint now can boast “very strong and consistent leadership and managerial direction,” said Albert Lowey-Ball, a health-care management consultant and associate professor at the University of San Francisco. “They are able to scope out the direction of costs and the market better than anyone else in the industry.”

That’s a far cry from what analysts were predicting in 1996 after the merger attempt was aborted due to disagreements over management of the new entity.

Attempts to Thwart Competitors’ Growth

WellPoint, it was said then, hadn’t just lost the reins of a deal that would have created the nation’s second-largest publicly held health maintenance organization. Analysts said the company had wasted nearly a year in negotiations with Health Systems while state and national rivals such as Kaiser Permanente had become more competitive with successful corporate reorganizations.

Moreover, analysts said, WellPoint had put its plans to create a national presence on hold at the wrong time, had lost a perfect opportunity to slash expenses, and probably had scared off potential partners after the well-publicized fracas with Health Systems.

In fact, WellPoint has moved aggressively on a variety of fronts. Just this year, the company moved to thwart competitors’ growth plans and to acquire market share dominance in Georgia, Missouri and in the mid-Atlantic region by purchasing, respectively, Cerulean Co., Right Choice Managed Care Inc. and CareFirst BlueCross/BlueShield for a total of $3.1 billion to $3.3 billion.

No one can accuse Schaeffer of failing to think big. In March 2000, Aetna, the nation’s largest health insurer, disclosed that it had received a $10.3-billion joint buyout offer from WellPoint and ING America Insurance Holdings, part of a giant Dutch financial conglomerate. Aetna‘s board voted unanimously to reject the offer.

“When we went public, we said we would grow by 15% a year at a time when others were growing at 40% to 50% a year,” Schaeffer said. “Now, those others have hit a wall.”

Analysts say WellPoint has invested heavily in electronic upgrades and computer systems that not only provide doctors and patients with better warnings about drug interactions but also help it better predict cost and market trends.

It also embraces the best practices of its acquisition targets, such as Right Choice’s widely praised evaluation and compensation programs for health-care providers, which rewards health plan physicians for patient satisfaction and treatment outcomes rather than for cost containment and economizing.

Broad Choices and Flexible Co-Payments

But WellPoint isn’t soft on health plan customers. It expects patients to shoulder higher costs for so-called breakthrough treatment drugs, to take drugs deemed most effective and efficient or pay more for drugs that are not recommended. WellPoint also has a history of keeping premiums high enough to stay ahead of medical costs.

At the same time, the company earns kudos from observers for taking on lengthy pharmaceutical company patents. WellPoint, for example, managed to persuade a federal advisory panel to urge the Food and Drug Administration to shorten the patent protection on three popular prescription allergy drugs: Zyrtec, Allegra and Claritin.

WellPoint also wins praise for offering health plans that give patients a broad choice of doctors and flexible co-payments for medical care.

“In most service industries, companies are selling their services. Our world view is that you sell what people want and need,” Schaeffer said. “We succeed because we’ve never said that we’ve figured it all out. There is no one answer that has any longevity. People’s needs change. There are new diagnostic breakthroughs and new therapeutic approaches. You have to be in an environment where you are constantly rolling out new products.”

As an example, Schaeffer cited what his companies offer small businesses with fewer than than 50 employees. “We offer them a plan that allows every employee to choose the right plan for them, so those small companies get to choose among nine different health plans and four dental plans. We offer them more options,” Schaeffer said.

To others, WellPoint is the 800-pound gorilla that forces hospitals, physicians and customers to accept its terms or else. Critics also say the furious pace of its acquisitions ultimately will reduce choices and raise prices.

The Abell Foundation, a Maryland-based philanthropic organization, is criticizing WellPoint‘s effort to purchase CareFirst, the largest insurer in the Washington-Baltimore area. The Abell Foundation said the purchase would jeopardize the state’s health-financing system and CareFirst should not be allowed out of its role as insurer of last resort of the poor.

Some analysts are not concerned about the rapid pace of WellPoint‘s acquisition strategy, even though several managed-care firms brought trouble upon themselves by growing too fast.

“No, they definitely aren’t moving too quickly. They have a lot of cash on hand and they have a productive portfolio,” said Peter Boland, a management consultant, industry analyst and president of Boland Healthcare in Berkeley. He said competitors in the industry did not have a clear product strategy, “but WellPoint did. They knew that you have to give customers a choice and that you don’t have to be a preferred provider to do that.

“They present a number of network models with different price tags,” Boland said. “WellPoint has become the General Motors of health care. There are several models and it doesn’t matter what brand as long as you’re buying GM.”

Boland said he foresees no downside for consumers because the same market-share pressure WellPoint is able to utilize in raising premiums is applied on physicians, hospitals and pharmaceutical companies to keep costs low.

But not everyone is convinced that such cost savings will benefit the consumer. When Joyce Dubow, senior policy advisor for the AARP in Washington, heard that WellPoint wanted the patents removed from the three allergy drugs so they could be sold over the counter, her question was simple and focused: “What happens to those dollars? Are they rolled back into health care or do they revert to stockholders?” Dubow said. “The interests [of stockholders and patients] are not mutual and we want the consumer to benefit.”

Dubow said she is pleased to hear concern about the CareFirst acquisition from Maryland Gov. Parris Glendening and insurance commissioners in Maryland and in Washington. Both commissioners say they will conduct hearings on the purchase, and Glendening has raised concerns about the possibility of poor residents losing health-care coverage in the changeover.

Critics Point to Rising Premiums

That’s exactly what should be feared, said Court, of the Foundation for Taxpayer and Consumer Rights. “They reduce the scope of their policies. They severely restrict reimbursement on out-of-network care.

“Our employees use Blue Cross and our premiums have gone up 30% in the last six months. We’re a small business and that’s a staggering impact. They’re making money because they make people pay more.”

Schaeffer said WellPoint‘s premium structure is driven by rising outpatient, hospital and pharmaceutical costs. “Our premiums are going up because the underlying health-care costs are going up,” he said.

Crawford, of Fox-Pitt Kelton, agreed, adding that WellPoint‘s emphasis on efficiency and cost control “gives investors more confidence in their operating results.”

“But the same thing also gives them a greater cost advantage for their customers. Some people want what Blue Cross used to be, the old docile health plan where it was much easier to get approval for care,” Crawford said. “It’s not the same way they operated 10 years ago, but 10 years ago they were nearly broke.”

Consumer Watchdog
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