WellPoint memos show job cuts starting with mid-level execs

With a national unemployment rate of nearly 10 percent eroding its customer base, WellPoint Inc. is cutting at least 30
middle-management employees and reshuffling its corporate organization, according to internal memos obtained by IBJ.

And that’s just the beginning.

The cuts are part of a continuing evaluation process aimed at
wringing more dollars out of its far-flung operation, according to WellPoint spokeswoman Kristin Binns.

“It’s
an ongoing exercise: no start, no finish,” she said.

That has many of WellPoint’s 5,000 Hoosier employees
anxious about future changes, according to current and former employees. The company already announced 1,500 U.S. job cuts
in January and agreed to sell off its prescription-drug business, which employs 459 at Indianapolis International Airport.

But the company, which employs 42,000, has to make hard choices in an environment that has not been kind to health
insurers. From mid-2008 to mid-2009, WellPoint lost nearly 600,000, or 2 percent, of its most profitable customers—those
on employer health plans.

And WellPoint executives don’t expect employers to start hiring those workers
back until 2011.

WellPoint insures more Americans than any of its peers, 34.2 million as of June 30. Its profits
fell 4.8 percent, to $1.3 billion, during the first half of the year, compared with the same period last year, mainly due
to investment losses.

Health reform could bolster the prospects for WellPoint and other health insurers by pumping
more than $450 billion in new money into the industry.

WellPoint CFO Wayne DeVeydt says health insurers must be “extremely efficient” in the future.

But
that money won’t start flowing until 2013, under proposals pending in the U.S. House and Senate.

In the
meantime, WellPoint and its peers have to figure out some way to keep profits up. Cutting costs has been the strategy across
the industry, said Dave Shove, an analyst at BMO Capital Markets in New York.

“Everybody’s doing
it,” said Shove, noting that health insurers have been unable to grow their revenue much as job losses have stolen away
their customers.

“If there’s less business, you need less people to take care of them,” he
added.

Connecticut-based Aetna Inc. announced 1,000 job cuts in December. The next month, Philadelphia-based
Cigna Corp. announced 1,100 job cuts.

At an investor conference in September, WellPoint Chief Financial Officer
Wayne DeVeydt hinted that WellPoint might have additional cost-cutting announcements to make when it releases its third-quarter
financial information on Oct. 28.

Analysts believe WellPoint’s latest cost-cutting is an attempt to meet
its profit goals in the short term.

But there are also reasons to hold down costs for the long term as a way
to succeed after health insurance reforms take effect.

Health reform would make the health insurance industry
significantly more regulated.

The government would no longer allow health insurers to deny coverage to sick people,
would force them to base premiums on an entire “community” of people, rather than person by person or company
by company, and would cap the percentage of medical bills insurance plans can allow patients to pay out of their own pockets.

Those changes could make health insuran

ce, which is already a low-margin business, even
more challenging. That will force companies to be even more efficient, which will likely lead to more
mergers among health insurers.

“You have to have an extremely efficient [administrative]
structure and you have to have very good network discounts with providers. And the only way you get both
of those is with scale,” DeVeydt said at the investors conference.

After health reform passes, he predicted,
“You’re going to see a lot more consolidation in this industry, mostly with what I call mid-tier and lower-tier
organizations.”

The memos, all written Sept. 24, detail a general streamlining of reporting assignments
so there are fewer people reporting directly to WellPoint’s executive vice presidents—the 10 officers directly
below WellPoint CEO Angela Braly.

For example, DeVeydt appointed one person to oversee all financial planning
and analysis for the company’s health insurance subsidiaries and the corporate office. Previously, multiple people handled
those duties.

In DeVeydt’s case, the shifts did not immediately result in layoffs, but he did hint that
further changes in staffing could come soon.

“Over the next few weeks, I will work with each of my direct
reports to finalize their organizational size and structure,” he wrote.

Cindy Miller, WellPoint’s
chief actuarial officer, made similar comments after shifting around reporting assignments.

“Until further
notice, all of the staff that currently supports this work will report into [this] organization,” she wrote.

In other departments, the organizational shuffling did leave some employees out in the cold.

Joan Kennedy,
the key architect of WellPoint’s highly touted 360° Health management program, is leaving.

The Human
Resources Department will see three people go—one due to retirement—in the areas of diversity, social responsibility
and wellness.

Brad Fluegel, who oversees WellPoint’s marketing, communications and lobbying, eliminated
22 positions.

Those cuts included Steve Northrup, a vice president of federal affairs, and Marjorie Maginn, a
staff vice president of industry and political affairs.

WellPoint decided to kill its Institute of Health Care
Knowledge, which it launched with a bit of fanfare just over a year ago. The institute distributed scientific studies about
health and health care to WellPoint customers and to the public.

The job cuts don’t mean WellPoint isn’t
hiring anybody. Fluegel’s organization has openings, some of which are advertised on Internet job boards.

WellPoint also created a division called corporate strategy development and innovation, and is now looking for a person
to lead it.

In addition to the personnel changes, WellPoint is ramping up investment in an effort to put all
its insurance subsidiaries on the same computer systems and to allow information from one part of the company to flow easily
to other parts.

Internally, the company calls this its North Star strategy.

Company officials are
also scouring for process improvements they can make to save time and money, using principles from lean manufacturing and
the Toyota Production System, Binns said.

“It’s truly an effort for efficiency, and an opportunity
to cost out,” she said. “That’s what customers expect of us.”•

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