WellPoint CFO says insurance 'mega-mergers' unlikely

February 9, 2010

WellPoint Inc.’s chief financial officer, Wayne DeVeydt, said health-insurance “mega-mergers” are unlikely under the Obama administration and his company is more likely to buy Blue Cross-Blue Shield plans in “medium-sized” transactions.

DeVeydt, speaking to investors in New York on Monday, also said WellPoint, the biggest U.S. insurer by enrollment, will pay a dividend “at some point,” with a yield of at least 2 percent. The Indianapolis-based company hasn’t decided on just how much to pay, or when, and is still waiting to see how the health-care debate in Washington plays out, he said.

Obama’s efforts to expand insurance to more than 30 million uninsured Americans, paid partly by new taxes on insurers, is unlikely to pass Congress in its current form, DeVeydt said. Democrats will probably push through pieces of the legislation, he said. Among those are an expansion of Medicaid, the program for the poor, and reduced rates for insurance companies covering the elderly through Medicare Advantage policies, he said.

“The more likely outcome now is you start to see smaller pieces of it broken off and pushed through on unrelated bills,” DeVeydt said. With a broad national bill stalled, “I do think you’ll see the fight go much more to the state level.”

The Obama administration on Monday asked WellPoint’s subsidiary to justify a proposed rate increase in California, saying the insurer was planning to raise rates as much as 39 percent on some customers.

“These extraordinary increases are up to 15 times faster than inflation and threaten to make health care unaffordable for hundreds of thousands of Californians, many of whom are already struggling to make ends meet,” Health and Human Services Secretary Kathleen Sebelius said in a letter to Anthem Blue Cross, the subsidiary.

The increase was “difficult to understand” given WellPoint’s $2.7 billion profit in the fourth quarter of 2009, Sebelius said. The profit included $2.2 billion from the insurer’s sale of its drug-benefits unit to Express Scripts Inc. of St. Louis, WellPoint said in its Jan. 27 earnings statement.

An Anthem spokeswoman, Peggy Hinz, said the company wouldn’t discuss the size of the rate increase or the amount of people affected. In a telephone interview, she declined to comment on Sebelius’ letter, saying Anthem was preparing a statement.

WellPoint fell 4 cents, to $61.65, Monday in New York Stock Exchange composite trading. The shares have gained 35 percent in the past 12 months.

DeVeydt, at the UBS conference, said WellPoint agreed on the health-care system needs to be fixed, calling affordability “a real problem for this country.”

Democrats’ current proposals would only make care more costly, raising taxes on insurance policies while doing nothing to slow the rising price of medical care, he said.

The outcome of the health-care overhaul, as well as financing rates and debates on corporate taxes will affect the company’s dividend determinations, the CFO said. WellPoint will probably know enough to decide by year-end, he said.

Obama’s Federal Trade Commission is unlikely to approve mergers among the biggest insurers, including UnitedHealth Group Inc. of Minnetonka, Minn.; Aetna Inc. of Hartford, Conn.; and Philadelphia-based Cigna Corp., DeVeydt said in a question-and-answer session after his presentation at the UBS AG health-care conference. The administration wrongly believes that mergers in the industry will lead to “higher prices and price-fixing,” DeVeydt said.

Consolidation will be necessary in the coming years as the costs of care rise and the U.S. population ages, he said. Larger insurers will have the scale to negotiate better rates with doctors and hospitals and the resources to finance technology and wellness programs to keep patients healthier, he said.

WellPoint, insurer of one out of every nine Americans, already owns state Blue Cross plans in 14 states. As the health- care debate stalls in Washington, WellPoint expects more Blue Cross and Blue Shield companies to consider sales. State regulations mean those plans, many of them not-for-profits, are much easier to sell to another Blue Cross like WellPoint, he said.

“The pipeline is significant,” DeVeydt said. “There just aren’t any dealers or takers right now” as the health-care debate leaves the value of health plans uncertain.

WellPoint’s board of directors has decided to start offering the company’s dividend at some point, the CFO said. The insurer wants to offer “a meaningful amount” that would likely be at least 2 percent of its stock price. Any less than that and the offering isn’t worth the cost to the company in lost financial flexibility or the administrative expense, DeVeydt said.

“The answer is ‘Yes we will’” offer a dividend, DeVeydt told a questioner. “What hasn’t been answered is when.”


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