WellPoint, Health Systems Agree to Merger : Health care: WellPoint is to acquire its rival for $1.8 billion in stock. The long-rumored deal would create a powerhouse in California but is likely to draw scrutiny from state regulators.
WellPoint Health Networks will announce today that it has agreed to acquire rival Health Systems International for $1.8-billion in a stock transaction, a company source said late Sunday afternoon. The merger would create the nation’s largest publicly held managed care company and a health care powerhouse in California.
The agreement, which has been rumored for several weeks, would form a health care giant with $5.4 billion in revenue, 4.2 million members and the marketplace clout to drive down prices for physician and hospital services. In California, it would make the second-largest heath maintenance organization after Oakland-based Kaiser Permanente, a privately owned nonprofit company with 4.6 million members.
In approving the deal, WellPoint and its biggest shareholder, Blue Cross of California, rebuffed an offer by Blue Shield of California to buy WellPoint for $48 a share, or $4.8 billion. Blue Cross and Blue Shield are unrelated companies.
However, the WellPoint merger is likely to draw scrutiny from California regulators, who have pressured Blue Cross to get the maximum value for its WellPoint stake in order to fund a health care charity that would be the nation’s sixth-largest philanthropic foundation.
Two years ago, nonprofit Blue Cross spun off most of its managed care operations into a for-profit subsidiary, Wellpoint, but retained 80% of the company’s stock. State law requires nonprofit companies that switch to for-profit status to reimburse Californians for taxes not paid when it was a nonprofit company.
Sources close to Blue Shield have contended that the San Francisco-based insurer’s proposal was not given a fair hearing by WellPoint and that the offer would have provided more cash for the charity to begin its operations.
Under the WellPoint-Health Systems proposal, Blue Cross would own 44% of the stock in the new company and would receive $1.2 billion in cash to fund the new charity, California Healthcare Foundation. Health Systems stockholders would receive 1.09 shares of WellPoint common stock for each Health Systems share.
Even before the formal announcement, the merger generated some fallout: Roger F. Greaves, Health Systems’ co-chairman and co-chief executive, resigned on Friday. Sources said Greaves, 57, was unhappy with the lesser management role he would have after the merger.
Malik M. Hasan, Health Systems co-chairman and co-chief executive, would become chairman of the new company. Leonard Schaeffer, chief executive of WellPoint and Blue Cross, would be president and chief executive.
Hasan, a Pakastani-born neurologist with a reputation as a tough negotiator, would oversee physician and hospital relations for the new company--a key role he sought actively, sources said.
Schaeffer, who is credited with transforming Blue Cross from a sleepy money-losing organization into a highly profitable one, will become president and chief executive. Schaeffer is a former chief of the federal Health Care Financing Administration under the Carter Administration and a former state budget director for Illinois.
Wall Street sources have said WellPoint hopes to trim $200 million in administrative costs and other expenses in the year after the merger. The consolidation of the two Woodland Hills-based companies is likely to result in the loss of hundreds of jobs.
The new company would put a lot of pressure on Kaiser, which has been struggling with declining membership during a period of intense competition, industry analysts said. The new company could also pressure smaller HMOs to merge. “It now clearly sets the stage for a direct challenge to Kaiser’s market dominance,” said Peter Boland, a health care consultant in Berkeley.
Industry watchers noted that a WellPoint-Health Systems combination would be highly attractive to corporate customers because it would offer a wide variety of health care plans that would provide “one-stop shopping” for employers, who are the biggest purchasers of health care. Between them, WellPoint and Health Systems offer several varieties of HMOs, less-restrictive managed-care plans known as preferred provider organizations and workers’ compensation programs, among others.
