Playing health plan poker

New factors may raise stakes for CareFirst

Sale of rival is one of them

Buyer WellPoint is locked in battle with foe Anthem

May 26, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross BlueShield, the Maryland-D.C.-Delaware Blue Cross plan, has 3.1 million members and a deal to sell itself for $1.3 billion. Trigon Inc., the Virginia Blue Cross plan, has 2.1 million members and a deal to sell itself for $4 billion.

What's wrong with this picture?

Plenty, say critics of CareFirst's plan to convert to for-profit operation and sell itself. The Trigon deal, they say, is evidence that CareFirst underpriced itself.

"The price of poker just went up," Del. Michael E. Busch, chairman of the House Economic Matters Committee, said the day the sale of publicly traded Trigon to Indianapolis-based Anthem Inc. was announced last month.

Nothing at all, say some analysts.

"Trigon is three times as profitable as CareFirst, and it's growing," said Todd Richter, an analyst for Banc of America Securities. "CareFirst is flat." The difference in profitability, he said, fully justifies the difference in price.

The public has a big stake in the debate over the value of CareFirst.

The purchase price will be paid to health-related foundations in Maryland, the District of Columbia and Delaware. The higher the price, the more the foundations get - and the more they can undertake public health efforts such as helping to cover the uninsured.

The Trigon price - high by industry standards at 26.2 times last year's earnings, compared with 19.3 times adjusted earnings for CareFirst - and a hefty run-up in share prices for health insurers, could be seen as justifying a higher price for CareFirst.

Even before the Trigon deal, one analyst, James A. Lane of Salomon Smith Barney, wrote in a research note, "The $1.3 billion purchase price seems low; we expect more attractive counteroffers."

With Trigon garnering a higher multiple of earnings, "If the price of health plans is going up, it's not crazy to say the marketplace has improved and [CareFirst] should get more," said Kenneth S. Abramowitz, a health analyst and managing director of the Carlyle Group, a private investment firm.

On the other hand, few in the industry believe that CareFirst should bring nearly as much as Trigon.

Of the CareFirst price, Abramowitz said, "It's not top dollar, obviously, but the company doesn't deserve top dollar. It's a reasonably fair price, given the challenges."

Scott Keller, an analyst for DealAnalytics.com., said, "The price Anthem is paying for Trigon is extremely high, and there is a variety of quasi-rational explanations.

"You're not going to see very many companies in this industry selling at this high a multiple." Trigon's earnings have been so consistent that "it's a real annuity business," Keller said.

Since the CareFirst sale was announced in November, much of the discussion here has been on whether it's important to the state to maintain a nonprofit Blue Cross Blue Shield plan.

In other states that have had Blue Cross acquisitions and conversions, however, the key argument has been not over whether conversion is a good thing, but over the price.

Consumer advocates say it is up to regulators and the public to make sure full value is placed on a Blue Cross plan that's selling itself.

"What is the incentive for these companies to bargain for a higher price?" asked Joseph P. Ditre, executive director of Consumers for Affordable Healthcare Foundation.

The Maine group is suing to challenge the $81.7 million paid to a foundation from the sale of that state's Blue Cross plan to Anthem. "The managers are trying to get themselves jobs in the new entity," Ditre said.

Maryland Insurance Commissioner Steven B. Larsen, who will rule late this year or early the next on whether the CareFirst deal is in the public interest, will also have to decide if the price is fair.

This month, he hired a consultant for $1.8 million (paid by WellPoint, under state law) to determine CareFirst's value.

CareFirst Watch, a coalition of D.C. consumer and medical groups, has hired valuation experts, too.

And CareFirst and WellPoint have their own experts, of course, who have already declared the price fair.

Although WellPoint and CareFirst have a binding contract for a $1.3 billion sale, there are two ways the price could wind up higher:

First, Larsen, or the D.C. or Delaware regulators, could find that the sale of CareFirst is in the public interest but that the $1.3 billion price is too low. It would then be up to WellPoint to decide whether it wanted to pay more or walk away.

(WellPoint already is considering whether to drop the deal because the Maryland legislature required that the price be paid in cash, while the contract calls for stock and cash. Most analysts, however, believe this is not a deal-breaker.)

Second, another bidder - Anthem seems the only realistic possibility - could toss in an unsolicited higher bid.

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