Va. deal fuels doubt about CareFirst sale

Substantially smaller Blues plan to bring triple what WellPoint is offering

Is local insurer worth more?

But firm is still nonprofit, unlike Richmond company

April 30, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross Blue- Shield's already-controversial plan to sell itself encountered more turbulence yesterday, as a substantially smaller Blue Cross plan in Virginia announced plans to sell itself for triple the amount CareFirst negotiated for itself.

The new transaction raised questions as to whether CareFirst had undervalued itself, and fueled speculation over a strategic battle to acquire mid-Atlantic Blues plans.

CareFirst warned that the deals can't be compared directly. But opponents - who object not just to price but to the idea of nonprofit CareFirst being acquired by a for-profit company - said this offers another reason the deal should be blocked.

"Once this starts to register with people, it's only going to get uglier," said Del. Michael E. Busch, chairman of the House Economic Matters committee and a key opponent of the proposed sale during the recent General Assembly session, where the deal attracted substantial opposition.

CareFirst, Maryland's largest health insurer, is seeking permission from regulators to be acquired by WellPoint Health Networks Inc. for $1.3 billion. In the process, CareFirst would convert from nonprofit to for-profit status. CareFirst has 3.1 million members, with 2001 revenue of just under $6 billion, and earnings of $92.4 million.

Anthem Inc., an Indiana company that owns Blue Cross plans in eight states, made a cash and stock deal it valued at $4 billion to acquire Trigon Healthcare Inc., a publicly traded Blues plan based in Richmond that serves most of Virginia. Trigon has 2.2 million members, 2001 revenue of $2.9 billion and earnings of $116.1 million.

Analysts said a number of factors account for Trigon's higher valuation, including higher profitability and the fact that it already has a for-profit status.

However, they said, the Anthem-Trigon deal is likely to lead to a higher price for CareFirst.

As Maryland Insurance Commissioner Steven B. Larsen began two more days of hearings on the CareFirst deal, Clifford A. Hewitt, a health analyst at Legg Mason Wood Walker, predicted, "He's not going to sign off on $1.3 billion."

CareFirst may not be worth as much as Trigon, he said, but would seem to be worth more than $1.3 billion.

Because the money from a CareFirst sale will be paid to health foundations to compensate for the benefits it reaped as a nonprofit, regulators and legislators want to make sure any deal commands the highest price possible.

Shellie Stoddard, an analyst for Standard & Poor's, said yesterday's sale triggers "a chess game" between Anthem and WellPoint that would "absolutely" drive up the price on Blues transactions.

With Blue Cross plans seeking or considering mergers and/or for-profit conversion in New York, New Jersey, Pennsylvania and North Carolina, "the whole mid-Atlantic region is now up for sale, so will somebody say, `I gotta have CareFirst'?" asked Hewitt.

WellPoint, the parent of Blue Cross of California, has recently bought the Blues plans in Georgia and Missouri. The CareFirst deal would give it about 15 million members, with Blues plans in six states. If the Trigon deal is completed, Anthem would have more than 10 million members, and Blues plans in nine states.

Gregory Crawford, an analyst for Fox-Pitt, Kelton, agreed, "When you have two large Blue Cross Blue Shield plans attempting to consolidate the market, they will bid against each other," which would "most definitely" increase the value of Blues franchises.

Hewitt said he thought Anthem might find it difficult to try to acquire CareFirst while it is trying to digest Trigon, meaning: "CareFirst really falls into WellPoint's lap."

Crawford and Stoddard, however, said they thought Anthem would likely be interested in making a bid for CareFirst and would have little trouble getting financing.

"This opportunity would be seen as strategically important," Crawford said.

Lauren Green-Caldwell, a spokeswoman for Anthem, said through an aide that the company never discusses what deals it is considering, but "historically, there have been times we have been in the process of pursuing more than one transaction at a time."

William L. Jews, president and chief executive officer of CareFirst, said the price for Trigon cannot be compared to that for CareFirst.

"You have to look at it based on performance," he said. "To draw a direct line is inappropriate. The math is different when you're dealing with a for-profit and a nonprofit."

The WellPoint's $1.3 billion offer, he said, had been supported by the investment bankers advising CareFirst.

He said he hoped the public would not draw conclusions based on the "superficially" similar deals and would wait for a valuation being done by consultants for Larsen, the insurance commissioner.

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