Sale of WellPoint to Rival Has Origins in Failed 2002 Merger

By LAURENCE DARMIENTO

Staff Reporter

WellPoint Health Network Inc.’s decision to be acquired by Anthem Inc. had its roots in another deal involving the Thousand Oaks-based company that came apart earlier this year.

Now the question becomes who does this latest twist in strategy benefit?

Just a year ago, WellPoint was preoccupied with a proposed $1.4 billion purchase of CareFirst BlueCross Blue Shield, a Maryland-based plan that fit into the company’s strategy of becoming a leading Blues insurer in various regions of the country.

But excessive bonuses that CareFirst officials voted themselves, as well as strong consumer opposition, caused the Maryland insurance commissioner to sink that deal in March putting a chill on similar acquisitions of nonprofit Blues plans by publicly traded insurers elsewhere in the country.

“There are not a lot of other candidates to acquire,” said Adam Miller, an analyst with Williams Capital Group.

Instead, WellPoint has forged a $15 billion deal with Indianapolis-based Anthem, its leading competitor and another for-profit insurer whose core business is operating state licensed and formerly non-profit Blues plan.

Together, the new company will have the No. 1 market share in 12 out of the 13 states in which it operates, with a total membership of 26.2 million customers and annual revenues of $36 billion easily making it the nation’s largest insurer.

Executives of the two companies said the new entity, to be named WellPoint Inc. and based in Anthem’s Indiana home, will give it the heft it needs to bring innovative products to the market, ultimately helping keep a lid on health care costs. WellPoint Chief Executive Leonard Schaeffer, who will be chairman of the merged company, said it will do nothing less than “redefine the industry” with its use of new information technology.

But not everyone is sure it will mean that much. Already, consumer advocates are calling on state regulators to take a hard look at the deal, especially given the $37.5 million in special salary and bonuses that Schaeffer will make on it.

WellPoint shareholders are set to receive one share of Anthem stock plus a $23.80 per share cash premium for each WellPoint share they hold. That has consumer advocates pointing to the $77.8 million in cash premiums Schaeffer will receive on his 3.27 million shares and options of company stock.

The payout to WellPoint shareholders could be worth less if Anthem’s stock continues to drop, as it did last week, falling 13 percent from its $77.26 closing price prior to the acquisition announcement.

Though shares of acquiring companies generally take a hit when a deal is announced, Anthem’s drop may also reflect general uncertainty about the deal on Wall Street. To be sure, some analysts say that the new, larger company will benefit from a growing preference among large corporations to deal with fewer insurers when establishing health benefits. But there’s also concern that with pressure throughout the industry to hold the line on premium increases, the new company will feel a squeeze in the earnings side.

Of course, a reduction in the steady rise in health care costs would be welcomed from all quarters, and the companies said they have identified some $250 million in so-called “synergistic” savings, including some 250 jobs at WellPoint’s corporate headquarters.

But consumers groups don’t expect it will make much difference. And while the new company would presumably have enough heft to negotiate better deals with the big pharmaceutical companies, Tom Morrison, a vice president at benefits consultant Segal, said he doubted there would be many savings there either, since most negotiations between insurers, medical care providers and others are regional. “It’s a very state oriented issue,” he said. “I don’t see how this benefits California companies.”

The very structure of the two companies Blues plan operators in separate states has minimized anti-trust concerns since there has been very little direct competition between them, except when it came to bidding for regional Blues plans to add to their portfolios.

For that reason, analysts expect the deal to survive a lengthy review process expected to last until next summer.

New Health Care Giant

Name: WellPoint Inc.

Headquarters: Indianapolis, Indiana

Membership: 26 million

Annual Revenues: $36 billion

Expected Close: Summer 2004

Chairman: Leonard Schaeffer, chairman and CEO of WellPoint (right)

Chief Executive: Larry Glasscock, president and CEO of Anthem (left)

Next Largest Competitor: UnitedHealth Group Inc. with 18 million members and $25 billion in annual revenues