Health Care and Insurance

Insurer may be low on targets: WellPoint's latest megadeal could be last for a while

October 3, 2005

A lack of available targets may steer Well-Point Inc. away from its diet of multibilliondollar acquisitions after it digests the latest purchase, New York-based Blue Cross/Blue Shield insurer WellChoice Inc.

That, in turn, might slow the company's frenetic growth rate, according to analysts who follow the health insurance industry.

Blockbuster deals like the $20.8 billion merger that created WellPoint last year swelled the health insurer into the biggest player in its industry. In 2004, it reported a $960 million profit, nearly triple what it earned in 2001.

Analysts say maintaining that pace without more megadeals might prove difficult. Well-Point executives, however, say the company can grow at a rapid clip on its own, by luring additional customers. And they don't think they've done their last big deal.

"This is a consolidating industry," said David Colby, WellPoint executive vice president and chief financial officer. "It's going to happen.

"I just can't tell you who, when or where."

WellPoint on Sept. 27 announced it had agreed to buy WellChoice, New York's largest health insurer, for $6.5 billion in cash and stock. The deal requires the blessing of state regulators in New York and New Jersey and other approvals.

The deal would increase the number of states where WellPoint is a Blue Cross/Blue Shield licensee to 14. It also would expand its base of customers from 28 million to 33 million, with the vast majority covered under Blues policies.

WellPoint CEO Larry Glasscock said the purchase has a litany of benefits. By combining forces, the companies could save $125 million a year by 2010.

Glasscock's company also gains access to a New York City market stocked with Fortune 500 companies, boosting its efforts to land large national accounts.

But the deal also represents a last call of sorts for WellPoint.

The company has spent billions buying for-profit insurers with Blues licenses, like Virginia-based Trigon Healthcare Inc., which it purchased in 2002.

It changed its name from Anthem Inc. to WellPoint Inc. last year after buying California-based WellPoint Health Networks Inc.

With the addition of WellChoice, Well-Point would have the No. 1 market share in New York and nearly every other state where it's licensed to sell insurance under the Blue Cross/Blue Shield name.

WellPoint sells insurance under other names in states where it's not a Blues licensee, but that's a fraction of the company's business. Roughly 90 percent of Well-Point's customers buy Blue Cross/Blue Shield policies.

"That's one of the most trusted brands in America," WellPoint spokesman Jim Kappel said.

However, WellChoice was the last large, for-profit Blues insurer that hadn't been acquired, noted Phillip Seligman, an analyst for New York-based Standard & Poor's.

The remaining plans are not-for-profits. Analysts note that buying one of them comes with potentially insurmountable regulatory obstacles. Anthem learned that a few years ago, when regulators helped block its purchase of Blue Cross Blue Shield of Kansas.

That means Well-Point will look to make smaller deals that complement its existing businesses, according to Seligman.

"It isn't so much to just build members, but really to get strength in certain areas so that it will help them in competition," he said.

That may mean companies that sell products like dental or behavioral health coverage, according to Jason Fox, a Detroit-based analyst with H&R Block Financial Advisors.

"In general, I don't think they're going to go after big, non-Blues companies," he said. He noted that Blues companies have similar corporate cultures, smoothing acquisition efforts.

It also might mean buying a company like Las Vegas-based health services provider Sierra Health Services Inc., said Ivan Feinseth of New York-based Matrix Investment Research. That company is much smaller than WellChoice, but "they're performing very well yet they're still cheap," he added.

WellPoint, however, won't be the only one shopping for smaller purchases. David Toung, an analyst for New York-based Argus Research, sees a shallow pool of targets in this arena.

"I think the targets will get more expensive because I'm sure UnitedHealth and even Aetna will be looking at the same acquisitions," he said.

A switch to smaller acquisitions means WellPoint might have a tougher time reaching the 15-percent annual earnings-pershare growth health insurers seek, Seligman said.

Colby, however, disagrees. He said the company should be able to meet those expectations if it grows its customer base 3 percent to 5 percent a year, while also benefiting from continued health care inflation and from controlling administrative expenses.

For now, internal growth-adding customers without a merger or acquisition-is where the real action lies, Colby and Feinseth said.

Companies can save money growing internally because they avoid integration expenses and the loss of focus that can accompany an acquisition, Feinseth noted.

WellPoint projected growing its customer base by more than a million people this year.

"There are transactions like the one we announced (last week) ... but the bottom line is you only do acquisitions to put you in a better position for organic growth," Colby said.

Take, for instance, the WellChoice deal. It gives WellPoint a major presence in a market rife with "large employers with multistate operations," Glasscock told analysts during a Sept. 27 conference call.

But WellPoint won't have this market to itself. It can count Connecticut-based Aetna and Minnesota-based UnitedHealth among its competitors.

UnitedHealth moved into New York by swallowing Connecticut-based Oxford Health Plans last year.

"All this does is it gives WellPoint the opportunity to build their national accounts," Seligman said. "It doesn't mean they will be successful."

Adding customers in New York and elsewhere is a key part of the company's strategy, Colby said, but so is finding additional companies to buy.

A successful deal allows insurers to combine computer and case management systems and spread costs over a larger membership. That leads to a big competitive advantage, one many companies are seeking.

Colby noted that the 10 largest health insurers in 1995 controlled 27 percent of the market. Today, they control 48 percent. He counts 40 Blues plans today, but he thinks half that number will be around in 10 years.

"This is a business that is yielding tremendous economies of scale," he said.

Still, WellPoint won't use acquisitions as a crutch. Colby said the company avoids setting annual goals or targets for growth through acquisition. It's too speculative to do so.

"I think it becomes a very slippery slope when you have to start assuming acquisitions to achieve certain growth targets," he said. "Then it puts you in a place where you feel like you have to do a deal."
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