Insurer's success evolves from `WellPoint Way'

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

April 21, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

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.

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