By Joe Weber If there was any doubt about his ambitions to build a coast-to-coast health-care powerhouse, WellPoint (WLP) CEO Larry C. Glasscock has dispelled it with his newest deal. Less than a year after vaulting his Indianapolis Blue Cross/Blue Shield outfit into national prominence with a $16.4 billion purchase of a California insurer, Glasscock on Sept. 27 turned his sights eastward, agreeing to pay $6.5 billion for New York State's biggest health-care insurer, WellChoice (WC). "Together, our competitive position in the industry is strengthened," the banker-turned-health-care magnate told analysts on a conference call.
By snapping up the high-profile WellChoice operation, Glasscock gets access to New York City, 10 New York downstate counties, and New Jersey. WellPoint already serves Connecticut.
But the region's importance goes beyond the sheer numbers -- the five million WellChoice customers he'll be taking directly -- because the area is home to more giant company headquarters than any other single market. That gives Glasscock a big edge in pursuing national corporate accounts. With this deal, WellPoint cements its position as the nation's biggest health-care insurer, rising to 33 million customers nationwide.
SWALLOWING RIVALS. The deal could also accelerate the already hot competition in the New York market, leading to better products and more choices -- but probably not lower costs for health insurance. UnitedHealth Group (UNH), the nation's second-biggest insurer, last year bought Connecticut-based Oxford Health Plans for $4.96 billion -- beating out WellChoice, which also made an offer to swallow its smaller rival. Oxford competes not only with WellChoice but national players including Aetna (AET), plus several powerful local insurance plans in and around the New York metro market.
So will the consolidation -- both in the New York market and nationally -- mean lower costs for consumers? Not exactly. "It should help control health-care costs," says Dr. Michael Stocker, the WellChoice chief executive officer who now will run the Northeast unit of WellPoint. But even he admits health-care inflation won't abate.
Instead, he and other experts say, consumers can expect better products, especially those tailored for the larger companies that the national plans will pursue tenaciously. The lower costs from consolidation generally "don't show up in lower premiums," adds Joy M. Grossman, senior health researcher at the Center for Studying Health System Change.
WINDFALL FOR NEW YORK. The promise of reduced costs has been a selling point in just about every health-care merger in recent years. Economies of scale have been cited as a compelling reason in UnitedHealth's pending $7.4 billion purchase of California-based PacifiCare Health Systems (PHS), for instance, along with most other such deals.
"Whether they're successful in that pursuit remains to be seen," says Thomson Financial merger analyst Richard Peterson. "It's like your cable TV bill. Has deregulation led to lower cable costs on a monthly basis? I think not." But in health care, he adds, double-digit premium increases could be mitigated some by cost-cutting deals.
Still, the WellPoint-WellChoice deal will create a windfall for New York State because of WellChoice's peculiar ownership structure. The outfit, formerly known as Empire Blue Cross Blue Shield, converted into a publicly traded company in 2002 only after agreeing to be owned primarily by the state through an outfit called the New York Public Asset Fund.
As a result, New York State will get about $2 billion in cash directly from the deal and another $2 billion in stock in WellPoint, much of which it will sell over time, with the money slated for such programs as graduate medical education, a drug-discount program for the elderly, and health benefits for the poor. The New York Public Asset Fund, with its 62% stake in WellChoice, has already approved the deal.
STICKING POINT. The sale will also offer quite a boon to managers of WellChoice, from CEO Michael A. Stocker on down. The former family practitioner brought in to run the once-troubled New York operation 11 years ago will collect $5.58 million six months after the sale closes, plus 30,000 shares of WellPoint stock, which he could sell in the spring of 2007.
WellPoint stock closed at $75 a share on Sept. 27, down just 8 cents for the day. WellPoint officials say the top 20 executives at WellChoice together could collect as much as $73 million in all -- depending on whether they stay on or not -- though that tally could shrink if many, like Stocker, remain at the company.
Such windfall payments have been sticking points in prior deals. After deriding big payments to California executives involved in the earlier WellPoint deal there, California's insurance commissioner extracted concessions for state residents as a condition for the deal to proceed. Since New York now stands to pocket large sums, the WellChoice sale should sail through.
CONSUMER COSTS.It's unclear how New Jersey, where WellChoice serves a modest 14,000 residents, will view the deal, however. A spokesman for front-running Democratic gubernatorial candidate Jon Corzine would say only that Corzine, now a senator from New Jersey, would review it, should he be elected. Corzine has made affordable health care a big part of his campaign.
Clearly, though, not everyone is happy about the deal. Dr. Donald J. Palmisano, a New Orleans surgeon and former president of the American Medical Assn., decries it as another example of consolidation that serves only the companies involved. "The patients get double-digit premium increases, and the doctors get a take-it-or-leave-it attitude from the insurers," complains the physician, noting he now speaks only for himself, not the AMA. "What you see are increased profits [for insurers] and increased costs to the consumer."
And yet, without such mergers, the spread of such cost-control products as medical savings accounts and other consumer-directed health-care programs could suffer, contend the backers of such deals. Stocker, for instance, argues that the growth of WellPoint will help spread risks and costs across larger groups, holding down the rise in medical costs for everyone involved.
And nowadays the drive is to be national in scope. "It's fair to say there are not a lot of neighborhood health-insurance companies," Stocker says. Certainly, the fast-growing WellPoint is already far more than that.
Weber is Chicago bureau chief for BusinessWeek