CareFirst eyes sale to WellPoint

Big health insurer would first convert to for-profit status

Deal worth $1.3 billion

Complex review could take 18 months, involve hearings

November 21, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross Blue- Shield, the state's largest health insurer, announced yesterday that it wants to convert its nonprofit status to for-profit and sell itself to WellPoint Health Networks Inc. for $1.3 billion.

WellPoint, with $9 billion in annual revenue and 10 million members, was the first Blues plan to switch to a for-profit. In addition to its base California Blues, it acquired the Georgia Blues in March, and last month announced a deal to buy the Missouri Blues as well. It also has snapped up a number of non-Blues health insurers. If the CareFirst deal goes through, WellPoint would have nearly 16 million members and annual revenue of $13 billion.

The proceeds from the purchase would go for public or charitable purposes.

The announcement will set off a complex review process, expected to take 18 months and involve regulators and politicians in Maryland, the District of Columbia, Delaware and in Congress.

The governments will look at whether the deal should be approved, how it would affect CareFirst's 3 million members, whether the price is fair and how the proceeds should be used.

Maryland Insurance Commissioner Steven B. Larsen said he will follow a process that will include public hearings and an independent consultant to judge the value of the company.

William L. Jews, chief executive officer of CareFirst, said he felt that the company needed more size and more access to capital to continue to thrive. "We think this transaction represents a significant opportunity to enhance services and products," Jews said.

Blue Cross and Blue Shield of Maryland proposed creating a for-profit subsidiary in 1995, but set the plan aside when state regulators raised objections.

Instead of converting, the insurer grew by combining with its nonprofit Blues neighbors, joining with the District of Columbia plan in 1998 - in the process, creating CareFirst as a holding company - and with the Delaware Blues last year.

But the idea of conversion was not forgotten. Early this year, state officials said CareFirst had told them it was considering converting and/or being acquired. Since then, Jews said, the company and its investment banker, Credit Suisse First Boston, have "looked at a broad array" of options.

Both he and WellPoint's chief executive, Leonard D. Schaeffer, said that, while there would be savings from the combination, they did not anticipate reductions in CareFirst's 6,300 employees. "We want to grow the company, and, if it grows, there won't be a reduction in staff," Schaeffer said.

WellPoint has been growing. Revenue was up 38 percent in the most recent quarter, reflecting the Georgia acquisition, said Douglas B. Sherlock, senior analyst for Sherlock Co., which follows health insurers.

Sherlock said WellPoint has "a pretty good knack for developing interesting new products," such as its recent "Flexscape" for small businesses, in which the employer sets a contribution level and the workers choose what type of coverage they want.

Charles Pepin, an investment analyst and a vice president of T. Rowe Price Associates Inc. in Baltimore, said Price is the largest holder of WellPoint stock, with its various funds controlling about 6 percent of WellPoint's outstanding shares.

"It's been one of the most well-run companies in the managed-care sector over the past several years," Pepin said. "Its management delivers consistent results."

For regulators, legislators and consumers, however, the focus will be on how the deal affects the public, rather than investors.

Del. Michael E. Busch, an Anne Arundel County Democrat who chairs the House Economic Matters Committee, said the conversion-and-acquisition proposal will "generate a tremendous amount of debate within the legislature." In legislation passed several years ago, Larsen was given the authority to determine whether a conversion is in the public interest and to set terms.

But the legislators in Maryland would have to decide what to do with the money.

Since CareFirst built its value as a nonprofit, it is, in effect, owned by the public, and the proceeds of the sale would go to a foundation or other public purpose. If the deal goes ahead, Busch said, one of the things to be considered is whether the state could set up an insurance plan for those who have difficulty obtaining coverage because of chronic health problems.

A preview of the debate was provided on a micro level in Busch's committee, which held a hearing yesterday on the state's "open enrollment" program, designed to provide affordable health coverage - without medical exams - for those who have difficulty getting insurance, particularly those with chronic medical problems.

Although called to focus on open enrollment, the hearing became a wide-ranging discussion on Blue Cross and its former role as "insurer of last resort."

Representatives of the state medical society and hospital association called for legislative and regulatory action to hold CareFirst to what they said was its original mission.

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