Critics of WellPoint choice may not be easily swayed

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Wall Street analysts are a confident lot. But they don’t always know best. More than a few scoffed at the potential of innovations like iTunes (we all know how that turned out). And it’s almost a quarterly ritual to watch them downgrade the shares of companies—after missed earnings expectations caused the value to tumble.

So despite a wave of criticism from Wall Street, it’s way too early to declare WellPoint Inc.’s board dysfunctional for making a surprise choice—Joe Swedish, CEO of Michigan-based hospital system Trinity Health—for the company’s new CEO.

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It is an eyebrow-raising selection, to be sure. Trinity, after all, is a not-for-profit hospital system, which wouldn’t seem the best training ground to lead WellPoint, a giant health insurer with an inconsistent record generating the predictable stream of quarterly profits investors demand.

Citi Research analyst Carl McDonald said in a report that the WellPoint board opted for a “thematic hire”—someone positioned to guide the company as health care reform blurs the lines between health care providers and insurers—just as it did six years ago when it picked Angela Braly as CEO.

The selling point on Braly, a WellPoint executive vice president unknown on Wall Street, was that her experience and skills dealing with politicians and regulators would help the company navigate the then-unfolding debate in Washington, D.C., over health care reform.

That didn’t work out so well—at one point, she even found herself in a counterproductive spat with President Obama. But what really soured Wall Street on Braly, and forced her ouster in August, were operational miscues, especially WellPoint’s repeated negative earnings surprises.

“The board chose to again make a thematic hire as CEO, rather than focusing on WellPoint’s biggest issue, which has been poor execution,” McDonald said in a report.

While the walls are indeed coming down between insurers and providers, he said, the reality “is that virtually all of WellPoint’s earnings (and problem areas) today stem from the health insurance business, an area in which Mr. Swedish has a lot less expertise.”

Jefferies analyst David Windley said that given the company’s past troubles, and the looming challenges associated with full implementation of the Patient Protection and Affordable Care Act in 2014, investors would have been reassured to have a seasoned insurance executive at the helm.

He said WellPoint “has been an inconsistent operator in recent years, with mistakes in pricing, steep rate hikes at inopportune times, and guidance cuts”—all areas where Swedish is thin on experience.

An additional dig is that Swedish is 61, old enough to cast uncertainty over how long he will be at the helm.

“It’s certainly possible to paint a scenario in which the market starts to get comfortable with WellPoint’s new CEO just as he approaches retirement, forcing the board to go looking for another CEO,” Citi’s McDonald said in a report.

But hold on a minute, other, more measured analysts say. It isn’t as if Swedish will be running the entire, 38,000-employee company by himself, they point out. He’ll have a seasoned management team alongside, one that—judging by the company’s solid fourth-quarter results—might be hitting its stride.

And there’s something to be said for bringing in an outsider’s perspective at a time implementation of the reform law is forcing insurers and health care providers to replace their long history of acrimony with a spirit of collaboration aimed at increasing efficiency and holding down costs.

Despite the negative initial reaction, “Mr. Swedish’s deep provider experience will eventually prevail as the confluence of payer and provider continues,” Stifel Nicolaus analyst Tom Carroll predicted in a report.

That’s the pitch to Wall Street that WellPoint’s board is making. As Chairwoman Jackie Ward said in a statement: “Joe’s background, in concert with our management’s insurance-market expertise, creates a team uniquely qualified to manage all facets of our evolving health care system.”

In an interview with IBJ, Swedish added: “My arrival is representative of the landscape transforming in health care.”

Swedish’s words may prove to be prescient. But Wall Street is populated largely by confident, cocky types, not the sort who are likely to swiftly change their views and admit error. So he and the board may face a long slog winning over Wall Street—and proving that the company did not bungle a CEO search for the second time in six years.•

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