Blue Cross Stock Sale May Raise Record $400 Million : Health: Analysts say initial public offering from for-profit subsidiary could be nation’s largest. O.C. has two such publicly traded health maintenance organizations.

In what analysts say could be the nation’s largest initial public offering of a health insurance firm, Blue Cross of California next month hopes to raise more than $400 million in a stock sale from its new for-profit subsidiary.

Blue Cross, based in Woodland Hills, is currently a nonprofit entity. But its new subsidiary, WellPoint Health Networks Inc., will represent virtually all of Blue Cross’ operations, having 2.1 million members statewide.

Recent filings with the Securities and Exchange Commission show that the new subsidiary is much bigger than previously thought when plans for the stock sale were announced last summer.

According to SEC records, WellPoint will include all of Blue Cross’ managed-care operations, including CaliforniaCare, the Blue Cross Preferred Provider Organization, dental and pharmacy plans. Altogether, these plans have annual revenue of about $2 billion.

In announcing the stock offering, Blue Cross joins a growing number of publicly traded managed care operations. In Orange County, health maintenance organizations PacifiCare Health Systems Inc., located in Cypress, and FHP Inc., in Fountain Valley, are both traded publicly.

Jack D. Massimino, senior vice president at FHP, said Wednesday that his company, which also has about $2 billion in revenue, welcomed the move.

Massimino said that Blue Cross’ reputation as one of the best managed care operations in the state will help all publicly trraded HMOs.

“If you expand the base (of publicly traded HMOs), you will generate a whole lot of interest among investors,” Massimino said. “This can only mean good news for all of us.”

Massimino said FHP, which went public on the NASDAQ market in 1985, was able to tap into capital more easily as a public company than as a nonprofit company. Nonprofit companies are forced to borrow to underwrite projects such as facility expansions.

Analysts also said it’s a good move for WellPoint. Compared to many imperiled Blue Cross operations in other states, analysts like the California company’s prospects because of its earnings growth in recent years.

“This will be a hot offering,” said Jim Collins, a San Francisco stock analyst and editor of OTC Insight. Collins points out that Blue Cross’ current management team has led its turnaround from a loss of $155 million in 1987, to a profit of $201 million for the nine months that ended Sept. 30.

The stock sale “is an excellent move for Blue Cross,” said Douglas Sherlock, a managed-care consultant in Philadelphia. “Their competitive position in the state will be greatly strengthened. They may be in the business of acquiring other Blue Cross plans in other parts of the country.”

For investors, however, the downside is that Blue Cross’ current management will have 98% voting control of WellPoint. Blue Cross Chairman Leonard D. Schaeffer will also be chairman and chief executive officer of WellPoint.

But WellPoint’s stock sale will not enrich Blue Cross’ current management. While it had originally proposed a stock option plan for management, Blue Cross dropped that plan entirely after discussions with the state Department of Corporations, which is reviewing Blue Cross’ restructuring.

In the past the agency has balked at nonprofit health plans converting to for-profit status if the move could quickly enrich managers operating the new company.

Not included in Blue Cross’ new subsidiary is a unit that handles about $6.5 billion a year in Medicare claims processing for the federal government. But that is largely an administrative function and has little bearing on the bottom line, SEC documents show.

Blue Cross will continue to operate its Medicare operation, and it will also continue to provide various charitable services to 300,000 other members, mostly through programs such as providing coverage for children without insurance. These operations generate about $400 million in premium revenue for Blue Cross.

After the stock offering--which is expected to draw heavy demand--Blue Cross of California will in effect largely be a publicly traded company, ending more than half a century of being run entirely as a nonprofit entity.

Blue Cross would be the third among 73 Blue Cross and Blue Shield plans nationwide to raise money through equity markets--a trend analysts expect to continue in the competitive health care industry.

In its latest SEC filing, Blue Cross said it plans to offer the public up to 17.25 million shares of Class A common stock, or about 18% of all WellPoint common stock outstanding. Its lead underwriter will be Merrill Lynch & Co.

Blue Cross will retain 80 million shares of Class B common stock. However, each Class B share will have 10 times the voting power as a Class A share, effectively giving Blue Cross’ management 98% voting control of WellPoint.

But consumer advocates worry that insurance prices could rise, or that Blue Cross management, motivated by profits, may not be as dutiful in providing unprofitable community-oriented services. There’s concern about commitments to charitable trusts and nonprofit foundations, said Nettie Hoge of Consumers Union in San Francisco.

Blue Cross officials declined public comment on the stock sale, citing SEC restrictions during the so-called quiet period.

However, Blue Cross Chairman Schaeffer has said the restructuring won’t have an adverse impact on consumers. And to the extent that WellPoint is successful, company executives have said, it could enhance the charitable functions at Blue Cross.

Under Schaeffer, Blue Cross has made a noticeable turnaround. In its SEC filing, which breaks down the new subsidiary’s financials as if it had operated as a separate entity, WellPoint had revenue of $1.63 billion through the first nine months of this year, up 19% from the same period a year earlier.

WellPoint’s net income, meanwhile, is up 24% through Sept. 30, to $144.1 million from $116.6 million the previous year.

Blue Cross said Schaeffer would be the only WellPoint director who is also a director of Blue Cross. And the nine-member WellPoint board that Blue Cross has proposed will include three independent directors with no previous ties to Blue Cross. The five remaining directors are made up of senior Blue Cross executives.

While Blue Cross’ management will not be given any stock options, they can freely buy stock during the public offering, and that has led at least one analyst to be critical of the public offering.

“I think it’s wrong,” said Bob Mescal, a research analyst at New Issues, a Florida newsletter that provides advice for investors.

Mescal, who has read through Blue Cross’ SEC filings, said he was also troubled by the fact that a WellPoint shareholder would not have any real ownership rights because of the stock structuring. “You don’t have a real voice in the company,” he said.

The proposal by Blue Cross of California to go public has raised debate beyond California. Mark Orloff, a vice president at Blue Cross and Blue Shield Assn. in Chicago, said the national group was studying the California affiliate’s restructuring proposal to make sure it was in compliance with the national guidelines for affiliates, including community responsibilities.

“We’re very interested in the issue,” Orloff said about affiliated plans creating for-profit subsidiaries to raise cash, as Indiana and Wisconsin plans have also done in the last year. “But no conclusions have been made yet.”

Times staff writer James M. Gomez contributed to this report.