WellPoint Announces Deal To Purchase WellChoice for $6.5B

Indiana-based WellPoint, the largest health insurer in the U.S., has reached a deal to purchase New York-based WellChoice for $6.5 billion in cash and stock, the AP/Philadelphia Inquirer reports (Heher, AP/Philadelphia Inquirer, 9/28). According to the Times, talks between the two companies began last month when WellPoint made an unsolicited bid of $73 per share for WellChoice. Executives close to the negotiation said that talks have been ongoing since then (Kaiser Daily Health Policy Report, 9/27). WellChoice, which owns Empire Blue Cross Blue Shield, is the largest health insurer in New York state and has five million members (AP/Philadelphia Inquirer, 9/28). Together, WellChoice and WellPoint -- which also uses the Blue Cross Blue Shield brand for its subsidiaries -- will serve more than 33 million members in 14 states (Krantz, USA Today, 9/28).

Deal Details
After several weeks of negotiations, WellPoint agreed to pay $77.23 in cash and stock per share of WellChoice, a 9.4% premium on WellChoice's closing price on Monday (AP/Philadelphia Inquirer, 9/28). The New York Public Asset Fund -- which was the largest shareholder of WellChoice, holding 62% of shares -- has approved the deal and will receive $1.99 billion in cash and 27 million shares of WellPoint, the companies said (Bloomberg/Baltimore Sun, 9/28). The funding would go to pay the salaries of members of health workers union 1199/SEIU (Kaiser Daily Health Policy Report, 9/27). The fund had rejected two previous offers from WellPoint because of "unsatisfactory terms," fund Chair Mallory Factor said (Lee/Swiatek, Indianapolis Star, 9/28). WellChoice shareholders would receive $38.25 in cash and 0.5191 shares of WellPoint for each WellChoice share. The deal is subject to shareholder and regulatory approval. The companies expect it to become official in the first quarter of 2006 (Ryerson-Cruz/Hallam, Bloomberg/Hartford Courant, 9/28). WellChoice President and CEO Michael Stocker would become the new CEO of WellPoint's northeast region (AP/Philadelphia Inquirer, 9/28).

Industry Trend
According to the Wall Street Journal, analysts are not surprised by the announcement because "rumors about such a combination had been circulating since the summer." The deal reflects the "ongoing consolidation trend that we've been seeing in the industry, especially among public Blue Cross Blue Shield plans," Scott Fidel, an analyst at J.P. Morgan Securities, said. The Journal reports that slowed membership increases, large premium increases becoming less common and the fact that size helps insurers negotiate rates with providers has contributed to the trend of consolidation in the insurance industry (Martinez, Wall Street Journal, 9/28). Gary Claxton, a Kaiser Family Foundation vice president and director of the Health Care Marketplace Project, said, "If you want to grow, you have to look at new markets or consolidation." He said that insurers have been unable to grow by adding new employers or members, so consolidation is their only option. The timing of the WellPoint-WellChoice deal makes sense, in part because of new Medicare rules that benefit health insurers with businesses in many states, Dallas Salisbury, CEO of the Employee Benefit Research Institute, said (Marshall, Long Island Newsday, 9/28). Brian Prenoveau, an analyst at Muriel Siebert, said he expects the nation's 13 remaining publicly traded managed care operators to continue purchasing smaller companies (USA Today, 9/28). James Rohack, a trustee of the American Medical Association, said, "We believe that these large consolidations of the insurance industry have prevented competition from occurring at the local level that could keep costs under control and reduce prices for patients" (Heher, AP/Chicago Sun-Times, 9/28).

Reaction
WellPoint CEO and President Larry Glasscock said, "We believe there's much to be gained by combining strengths of each organization. Our combined companies will be strongly positioned to compete in the marketplace." Stocker said, "Our companies will be positioned to promote preventive health care (and) engage consumers in maintaining their own good health," which could help slow health care cost increases (AP/Philadelphia Inquirer, 9/28). He added, "It will be seamless for WellChoice customers. They will continue to be served by the same health company they know today" (AP/Chicago Sun-Times, 9/28). Factor said the deal is "a great deal for everybody, all in all. I am pleased we got to this point" (Indianapolis Star, 9/28). In a research note on Tuesday, Bear Stearns analyst John Rex said the deal "could serve to further level the playing field" for WellPoint with United Health/Oxford, the nation's second-largest health insurer (AP/Chicago Sun-Times, 9/28).

Financial Impact
WellPoint said the deal likely will have a neutral impact on earnings this year but will increase profits after 2006. WellPoint estimated pretax savings of $25 million in 2006, $50 million in 2007 and at least $125 million by 2010 (AP/Philadelphia Inquirer, 9/28). Prenoveau said the deal could help WellPoint increase profits by cutting costs (USA Today, 9/28). Charles Boorady, an analyst at Citigroup, previously said the deal would allow both companies to lower prescription drug spending by moving WellChoice's members onto WellPoint's in-house pharmacy benefit manager (Kaiser Daily Health Policy Report, 9/27).

Outlook for WellPoint Acquisitions
The New York Times on Wednesday examined how -- with the purchase of WellChoice -- WellPoint's growth as a result of acquiring BCBS health plans "could be in for a lull." According to the Times, WellPoint has grown to be the largest U.S. health insurer by "steadily acquiring state Blue Cross providers." However, the remaining BCBS plans that WellPoint has not acquired are not-for-profit organizations that would be difficult to purchase. Moreover, few BCBS plans have shown interest in being acquired by WellPoint. Glasscock said that additional acquisitions are not the only way for WellPoint to grow, noting the company aims to "grow organically by more than one million members" this year (Freudenheim, New York Times, 9/28).