$6.5 billion deal for Empire Blue parent would mean big presence in New York

Just 14 months after UnitedHealth Group Inc. acquired a major New York-area health insurer, WellPoint Inc. is poised to net an even bigger fish.

WellPoint, Indianapolis, has agreed to acquire WellChoice Inc., New York, the parent of Empire Blue Cross and Blue Shield, for $6.5 billion in cash and stock.

Health plan acquisitions are notoriously difficult to carry off. WellPoint needs approval from WellChoice shareholders and federal antitrust regulators as well as state regulators before it can complete the WellChoice deal. But a New York state fund that owns 62% of WellChoice’s stock would get about $4 billion if the deal goes through. The fund is backing the deal.

If WellPoint completes the deal, the company would emerge providing or administering health plans with a total of about 34 million people, up from 29 million people today.

The deal would widen the gap between enrollment at WellPoint and enrollment at UnitedHealth, the second biggest private U.S. health insurer, which now insures or administers health plans with 23 million members.

UnitedHealth ended up with 1.4 million of its members and a highly regarded brand name in the New York market in July 2004, when it closed on a deal to acquire Oxford Health Plans Inc., Trumbull, Conn.

UnitedHealth, a carrier with a major presence in many states, talked about using expanded New York operations to go after the business of the many national employers based in New York.

WellPoint, a company that has Blue Cross and Blue Shield licenses in many states along with UniCare, a national health insurance unit, might be in an even better position to compete for national accounts. WellPoint’s Blues plans can fill in any gaps in its network by offering employers access to the BlueCard program, a system that can link Blues plans in many states together to serve the needs of national and multisite employers.

Ratings analysts reacted to the WellChoice deal announcement by noting that Anthem Inc., Indianapolis, completed the merger with WellPoint Health Networks Inc., Thousand Oaks, Calif., that formed the new WellPoint Inc. less than a year ago, in November 2004.

Analysts in the Chicago office of Fitch Ratings put WellPoint on “Rating Watch Negative.”

Anthem and WellPoint both have had a good track record of integrating Blues plans, but, at some point, the challenge of integrating the old Anthem and the old WellPoint and WellChoice could get to be too much, according to the Fitch analysts.

Analysts at Moody’s Investors Service, New York, say WellPoint has avoided one of the worst afflictions that plague corporate acquisitions–computer problems–by keeping acquired companies’ old computers going.

Until now, WellPoint’s strategy of preserving “legacy systems” has worked well, but the legacy system strategy could eventually prove to be unwieldy, Moody’s says.

Another challenge facing WellPoint and WellChoice could be consumer advocates.

WellPoint and WellChoice both started out as nonprofit companies, with stock that was held in trust for the benefit of the public. Both companies were required to make big donations to private foundations when they converted to stock company charters.

When Anthem and WellPoint announced their deal, consumer advocates in California came out and argued that the companies should make big donations to charity because of the tax advantages WellPoint had continued to enjoy after its 1993 conversion to for-profit status.

Dr. Michael Stocker, the chief executive of WellChoice, and Larry Glasscock, the chief executive of WellPoint, have been emphasizing both companies’ longstanding commitment to making charitable contributions and getting involved with community affairs.

Glasscock also has hastened to assure potential critics of the WellChoice deal that the deal will have little negative effect on health coverage costs.

“While premiums must keep pace with rising health care costs, we can assure our members in all of our states that this merger will not add in any way to premium increases,” Glasscock says.

CORPORATE SNAPSHOTS

Company

WellPoint Inc.

WellChoice Inc.

Jurisdictions where company holds a Blue Cross license or both a Blue Cross and a Blue Shield license

California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New Hampshire, Ohio, Virginia and Wisconsin

New York

Chief Executive

Larry Glasscock

Dr. Michael Stocker

Headquarters

Indianapolis

New York

Health Plan Members

29 Million

4.5 Million

Revenue (2Q05)

$11.3 Billion

$1.7 Billion

Net Income (2Q05)

$559 Million

$75 Million

Source: Company filings