WellPoint Inc. surprised Wall Street, yet again, and is paying the price for it.
The Indianapolis-based health insurer saw its stock tumble as much as 4.8 percent Wednesday morning after it unexpectedly named a career hospital executive to be its next CEO.
Joe Swedish, 61, the CEO of Michigan-based hospital system Trinity Health, will take the helm of WellPoint on March 25, the company announced Tuesday after the markets closed.
Investors expected WellPoint to name a health insurance veteran to lead the company after its previous CEO, Angela Braly, an attorney, oversaw multiple mistakes in WellPoint’s pricing of its products, large rate hikes made with poor political timing and multiple downward adjustments to earnings forecasts. Braly, who also was unknown to Wall Street when she was named CEO in 2007, was forced out in August 2012 after investor anger boiled over.
Such basic operational mistakes led many WellPoint shareholders to look for someone with the experience to fix those problems. The two candidates mentioned most often were Jim Carlson, the former CEO of Virginia-based Amerigroup Corp. who joined WellPoint after the two companies merged, and Ron Williams, the former CEO of WellPoint rival Aetna Inc.
Swedish, for all his accomplishments, does not have the background shareholders were looking for.
“I fail to see how that’s going to be, in the near term, in the strategic and operational best interests of the company,” said Sheryl Skolnick, managing director of CRT Capital Group in Connecticut. She added, “You don’t experiment with the shareholders’ money, especially not with a business that has maybe stabilized but is still highly fragile.”
Other analysts also criticized WellPoint’s board of directors—which drew considerable fire from investors for its reluctance to fire Braly—for Swedish’s selection.
“WellPoint had a lay-up, but the board chose to increase the degree of difficulty instead,” wrote Carl McDonald, a health insurance analyst at Citigroup, in a note to investors.
“WellPoint’s biggest issue over the last five years has been poor execution, and its biggest challenge over the next couple of years is that the profitability of its core businesses may be savaged in 2014 and beyond because of health reform,” McDonald added.
The bulk of Pesident Obama’s 2010 health reform bill will take effect next year, upending the markets for individual and small-employer health insurance that, by McDonald’s estimates, account for 25 percent of WellPoint’s annual profits.
Others, however, viewed Swedish’s appointment as smart, given that health reform is also pushing health care providers to operate health plans and is pushing health insurers to operate doctor and hospital practices.
At Trinity Health, Swedish oversaw a Medicare Advantage plan the system operated, which served roughly 30,000 seniors. He also has served for three years on the board of Coventry Health Care, a health insurance competitor of WellPoint.
WellPoint, the nation’s second-largest health insurer, is rapidly trying to expand its CareMore subsidiary—purchased in 2011—which operates health plans and clinics for seniors.
“While not a name or background we expected, it may be argued that Mr. Swedish’s experience and interests align well with the likely U.S. health care system of tomorrow – that being a more integrated delivery care model where payers and providers together move increasingly toward accountable care and overall efficiency,” wrote Tom Carroll, an analyst at Stifel Nicolaus & Co., in an investor note.
Joshua Raskin, a Barclays Capital analyst, noted that WellPoint rival Aetna, based in Hartford, Conn., saw fantastic success under its former CEO Jack Rowe, who was a physician and former hospital executive.
In an interview, Swedish said he would look to form new kinds of “collaborations” and “alignments” with hospitals and doctors.
“I didn’t have any strained relations with payers,” Swedish joked about his time as a hospital CEO, when asked about the long-standing antagonism between insurers and health care providers. Then he added, more seriously, “I quite frankly am not anchored by that tradition. I frankly am looking forward to the creativity.”
Swedish will be paid handsomely to lead WellPoint, a $70 billion organization that operates Blue Cross and Blue Shield plans in 14 states, including Indiana.
His expected pay package—if various incentives are met—is valued at $11.2 million, according to a WellPoint securities filing. On top of that, Swedish also will be paid $5.1 million in cash and stock as a signing bonus and to cover compensation he will forego by leaving Trinity.
Swedish and his wife will move from Novi, Mich., to the Indianapolis area in the next six weeks. The couple have three grown children.
Swedish, a native of Virginia, earned a bachelor’s degree from the University of North Carolina-Charlotte and a master’s in health administration from Duke University.
Swedish has spent his entire career in hospitals, including serving as CEO of Centura Health in Colorado. He has led Trinity since December 2004, using two major mergers to grow it into the nation’s 10th-largest hospital system with $9 billion in annual revenue. Swedish recently signed a letter of intent to absorb Pennsylvania-based Catholic Health East, which would make Trinity the nation’s fifth-largest hospital system.