The billion-dollar buyout offers may be gone for Health Systems International Inc., the parent company of California's second-largest health maintenance organization. But for the company's executives, the riches remain.
Health Systems, the corporate parent of Health Net, let two competing buyout offers evaporate last week, including one from FHP International for $1.69 billion in stock, or about $34 per share. That left some Health Systems shareholders red-faced, because the company's stock was trading near $25 before the offers and has fallen back to that level since the bidders quit.
But for a group of the company's executives, the bounty a sale could bring might seem like little more than icing on a cake. That's because four years ago, when Health Net converted from a nonprofit company to a for-profit one, 32 Health Net officers were permitted to buy a 20% stake in the company for just $1.5 million. Today, that investment is worth $150 million.
Chief Executive Roger Greaves, 57, contributed $300,000 of that initial investment, which means that in four short years, he has gone from being the head of a nonprofit company with no equity stake, to having 907,806 shares of Health Systems stock. That 2% of the company that Greaves holds is now worth about $24 million. According to the terms of the conversion, Greaves is prevented from selling most of his stock until 1997.
Other health care companies have undergone similar conversions in recent years, including Health Net's Woodland Hills neighbor, Blue Cross of California. However, because of the way that conversion was structured, Blue Cross CEO Leonard Schaeffer has not reaped the windfall that Greaves has. But that could soon change.
Health Systems, with 1.4 million members in six states, was created last January when Health Net merged with QualMed Inc., a managed health care company based in Colorado. Greaves, who has run Health Net for 12 years, now shares the CEO title at Health Systems with QualMed executive Malik Hasan.
Consumer groups complain that Greaves and his cohorts have unfairly cashed in on Health Net's for-profit conversion. They point out that Health Net, which was founded in 1979, enjoyed the tax-exempt status of a nonprofit company throughout the 1980s. By the time Health Net converted to for-profit status, it was a huge business, with more than 800,000 members, and contracts with doctors and hospitals across the state.
Greaves "chose to develop a nonprofit company," said Judith Bell, a director in the San Francisco office of Consumers Union, which publishes Consumer Reports magazine. "Just because (Greaves) decided to walk away from the nonprofit world, why is it he can walk away with bags of gold?"
But Greaves, who received $2.8 million in salary and bonus payments in 1993, is quick to point out that the company's conversion, including the sale of its stock to company managers, was done with the blessing of the California Department of Corporations, which oversees HMOs. In fact, he said, the state supported management's investment in the company because "the state deemed it important and appropriate to keep the management in place."
Some medical industry analysts agree. "This is a company that has been built from the ground floor with Greaves at the helm," said John Edelston, an analyst based in Woodland Hills. Still, Edelston added, "it is a lot of money for an individual to get in a short amount of time."
Greaves also stressed that taxpayers were compensated for the for-profit conversion by Health Net's creation and endowment of the Wellness Foundation, a public charity that funds disease-prevention and health-education programs in California.
As part of the conversion, Health Net was required to contribute the equivalent of its estimated market value at that time, or $300 million, to the foundation. Health Net was also ordered to give the foundation 80% of its stock--a non-voting stake worth more than $600 million today. So while Greaves' wealth has skyrocketed, the foundation's wealth has kept pace.
"Critics are usually folks who haven't put forth a lot of effort and don't understand what creating value is," Greaves said. "All Roger Greaves did was build value and success for the people of California. Should that be criticized?"
The situation is vastly different across the street from Health Net at Blue Cross, where CEO Leonard Schaeffer has presided over a similar for-profit conversion, but so far has not reaped similar financial rewards.
In January, 1993, Blue Cross took its giant managed health care business and put it in a for-profit subsidiary called WellPoint Health Systems Inc. Blue Cross owns 80% of the equity in WellPoint.
In contrast to Greaves' holdings, Schaeffer's investment in WellPoint is limited to 800 shares he purchased on the open market, the company said. State officials say that is because there was a key difference between the Health Net and Blue Cross conversions.
When Health Net converted, it endowed a charitable foundation and stepped completely out of the nonprofit universe, state officials said. But Blue Cross set up no foundation and continued to operate as a nonprofit company, though with a $2.24-billion stake in a for-profit subsidiary. As a result of that arrangement, the state has kept WellPoint from disbursing stock or options to company executives.
That may soon change, however, because Blue Cross has submitted a plan to set up a foundation of its own and cut WellPoint's ties to its nonprofit moorings. If that plan is accepted by the Department of Corporations, state officials say WellPoint will probably be allowed to start giving stock options to executives, including Schaeffer.
"We certainly hope so," said John Cygul, head of investor relations at WellPoint.