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WellPoint CEO: Acquisitions of hospitals, doctors unlikely

April 24, 2013

New WellPoint CEO Joe Swedish threw cold-water Wednesday on widespread speculation that he will lead the company through a new wave of hospital and doctor acquisitions.

Swedish, who took the helm of the Indianapolis-based health insurer a month ago, also talked about leading WellPoint for the next decade, a period in which he expects the entire health care industry to shift to serve customers more like retailers.

Swedish, 61, had spent his entire career managing hospitals, including the past eight years as CEO of Michigan-based Trinity Health Corp., a Catholic hospital system. But in spite of many questions about the prospect, he’s not looking to get back in that business.

“To be clear, I do not currently see vertical integration as a likely path for WellPoint,” Swedish said during an investor conference call Wednesday morning. “The models are so divergent that it just does not seem to be the best use of capital.”

Analysts, investors, local health care providers and even WellPoint’s own employees have been asking about the possibility of WellPoint acquiring hospitals and doctors since Swedish was named to replace former WellPoint CEO Angela Braly in mid-February.

When Swedish’s appointment was announced, Wedbush Securities analyst Sarah James said his background as a hospital CEO fit right in with the industry trend of health insurers acquiring more health care providers.

“We view vertical integration as one of the key themes for the industry over the next 5-10 years,” James wrote in a Feb. 13 note to investors. “There is a range of savings numbers emerging from insurers that used integrated care models,” and, she added, “we see vertical integration as a way to reduce medical expense.”

WellPoint already spent $800 million in 2011 to acquire California-based CareMore, which operates clinics and a health plan for seniors in the federal Medicare program. WellPoint has replicated CareMore to operate more than 25 clinics.

Swedish emphasized that WellPoint is moving to work more closely with health care providers than the confrontational stand that it and most health insurers have taken in the past. But he spoke about new kinds of contracts, rather than acquisitions.

“[We] will certainly engage with leading providers that are similarly addressing cost efficiency challenges and are willing to align with our products and networks,” Swedish said on Wednesday.

Swedish has enjoyed a favorable start to his tenure, as WellPoint reported better-than-expected financial results for the quarter ended March 31.

The Indianapolis-based health insurer earned $885.2 million in the first three months of the year, or $2.89 per share. Profit was 3.4 percent higher than in the same quarter a year ago.

Excluding investment losses and other extraordinary charges, the company would have earned $2.94 per share, a nearly 26-percent increase over the same quarter last year.

On that basis, analysts were expecting profit of $2.38 per share, according to a survey by Thomson Reuters.

The higher earnings prompted WellPoint to raise its full-year profit forecast to $7.75 per share, up from its previous prediction of $7.60 per share. Wall Street analysts have been forecasting $7.78 per share, even before WellPoint’s better-than-expected first-quarter results.

WellPoint’s revenue in the quarter was $17.7 billion, below analysts’ predictions of $18 billion, but up 15 percent from a year ago.

The company lost 321,000 insurance plan members during the quarter, with the losses concentrated in its senior plans, local group employers, individuals and Medicaid plans. Its total enrollment in health plans stands at 35.8 million.

Investors cheered the financial results, bidding up WellPoint's stock price as much as 7 percent in morning trading, to a recent $73.09.

Swedish said he’s spending his first 90 to 120 days on the job working to understand WellPoint’s business, including the issues that were preventing it from achieving its full potential under Braly, who resigned amid investor anger in August.

“I recognize that performance over the last five years was inconsistent,” Swedish said in a reference to Braly’s five years leading the company. “I know the issues that created the volatility, but I want to better understand some of the dynamics that contributed to the deviation and expected performance.”

Swedish also said he’s working to understand whether WellPoint is positioned well for 2014, when new health insurance exchanges created by President Obama’s 2010 health reform law start up. That could disrupt the part of WellPoint’s business from which it derives a large portion of its profits.

In the long term, Swedish said, the exchanges, where customers will buy insurance largely on their own, as well as continued efforts to expose consumers to price and quality information about health care providers, will push health care toward a retail environment.

Right now, the financing of health care operates in a largely wholesale environment, where health insurers, governments and employers do most of the buying of health care, using a language of codes and billing practices that are nearly indecipherable to average consumers.

That transition, Swedish said, will put enormous pressure on health care costs.

“As the industry evolves to more of a retail model that is consumer-centric, affordability and access will be critical to the value proposition and every market,” Swedish said. “Key to that will be an intense focus on [overhead] efficiency in direct care costs, including provider reimbursement models. Both are critical to support product design advances toward the goal of improved affordability and access for broader population.”
 

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