Leonard Schaeffer
Not since the demise of President Bill Clinton’s health-care plan has the nation witnessed such uncertainty on health coverage. The landscape seems to be changing daily: Corporations are talking about saddling workers with the selection and management of personal health plans; California’s two largest pension funds are introducing pilot programs that would bypass HMOs and contract directly with doctors; and presidential candidates are raising the ante with proposals that would bust the caps off any federal-budget surplus.
A leading player in this shifting landscape is California-based WellPoint Health Networks. The health company, known in California as Blue Cross and as Unicare elsewhere, currently has more than 7 million members in a variety of health programs and plans, including HMOs, preferred-provider organizations and point-of-service and other hybrid plans. The publicly traded company also has another 30 million members through specialty services, including life and disability insurance, pharmacy benefits, dental plans, vision plans, mental-health coverage and a network workers’ compensation program.
In addition to California, this health-care behemoth has a major presence in Texas, the Midwest and Northeast. Last year, it was named by Fortune magazine as the “most admired” health-care company. But in the mid-’80s, it was at the brink of insolvency. So when Leonard D. Schaeffer took over the company, he did two things to attract more customers. He offered small businesses the same range of health-plan options that large organizations received and allowed more open-access plans as opposed to HMOs.
In addition, Schaeffer rather ruthlessly reshaped the struggling company. He pared anything that seemed like waste; avoided most Medicare business; laid off 3,000 employees; converted the company into a for-profit business; and endowed two health foundations. Schaeffer also engineered the acquisition of other regional players, including John Hancock Mutual Life Insurance and Mass Mutual Life Insurance. He is now working on a merger with Blue Cross/Blue Shield of Georgia.
Under Schaeffer, the company’s revenues rose to $6.4 billion, and it won praise on Wall Street. Yet, in the last two quarters of 1999, its stock dropped 32%. Schaeffer still remains convinced of the financial viability of his strategies. But time will show if he is right. Meanwhile, doctors groups, such as the California Medical Assn., insist he has been and continues to be an exceedingly tough negotiator.
Before joining WellPoint as CEO, Schaeffer developed his health-care chops in the Carter administration, as head of the Health Care Financing Administration, and then, in the private sector, as president of Group Health Inc. He lives in Westlake Village with his wife, Pamela. This is not too far from his new new hilltop corporate offices in Thousand Oaks, where he sat down recently to discuss the many facets of health care.
Question: How do you see health-care issues playing out in this presidential-election year?
Answer: The first issue is how do we take this American health-care system, which is the finest in human history, and make it available to all Americans? Because the irony is that as good as it is, it has become unaffordable.
In the early ‘90s, there were efforts to come up with a government-sponsored program, but for a whole bunch of historical reasons Americans have always shied away from a government-managed program, and I don’t see us developing a completely integrated health-care delivery system, because it’s just too big and complex. So by default the private sector was told, “You solve the problem.” So there was a dramatic reduction in the cost of health-care premiums, but these new methodologies created customer dissatisfaction.
Currently there are two kinds of legislation: state and federal. Things have worked well here in California; . . . our governor was extremely sensible about his approach in signing these bills. However, most of those things we were already doing, and the same thing can be said of the proposed U.S. Senate bill. That is to say, we don’t have any gag clause, and we have a grievance process for outside, third-party review.
However, some of the proposed laws, particularly those in the House of Representatives, are a bit punitive and could result in higher prices for members. In other words, if you mandate certain benefits, everyone will pay higher costs. Also, it raises some issues about when you put benefits into legislation, the medical-science base continues to develop and, usually within a year or two, the benefit is out of date. So, in general, we don’t like to see benefits put into legislation.
The HMO backlash is real and legitimate, because about 8% of the people consumed about 71% of the services; and then there are the other 68%, who consume only 7% of health-care resources. They are terribly irritated since they average less than $150 in health-care costs [annually]. But what we’ve done at this company is to give people choice; 73% of our members have chosen open-access plans--and for those individuals, it is exactly the right thing.
Q: All health plans profess to be affordable. So what is unique about WellPoint?
A: In the last 12 months, we’ve grown by over 600,000 [members], and no other health plan has come near that in California or anywhere else. The question is: Why are we growing? Our theory is that we offer people choice, while other companies offer only HMOs. Secondly, we offer the ability to opt out of any given program, including the classic HMO, into other networks. And in California, among the large-group employees, we have a reputation for excellent service, and that attracts large employee [groups], such as CalPERS, the California public-employee [pension] system.
Q: But a September 1999 HMO survey by California Cooperative Health Care, which ranks HMOs, gave you only an 80% overall rating. Eight other companies received higher ratings. Why?
A: You can always do better, and we’re certainly trying. But it’s a hard case to make that the company that is growing most rapidly is not doing the job. Our surveys show that our members, for whatever reason, are either satisfied or very satisfied with the plan they have chosen. Also, only 27% of our members are in our HMO. So that survey, if it is accurate, is different from others. . . .
Q: In the last 10 months, WellPoint stock has gyrated from a high of $97 to a low of $50. Why?
A: Health stocks are currently very volatile. In 1998, our stock went up 106%; we had one of the highest price [to] earning ratios, and we were the heroes of Wall Street. In our 1999 third-quarter earnings announcement, we exceeded expectations, and that is the 18th time. However, in 1999, the entire industry has been depressed because of several variables, including HMO backlash, what is happening in Washington and the announcements by various plaintiff attorneys that they are going to sue. Fortunately, not one has sued us yet, but this is not a good time for our industry. However, relatively speaking, we are a very strong stock, in an industry that is currently depressed.
Q: What did you learn from your time in the Carter administration?
A: Look, I’m in this business not so much for the business, but for the opportunity to help people get access to appropriate care. I tried to do that when I was in government, I tried to do that when I worked for nonprofits and I’m trying to do that now.
The issue is, to do that well you have to have substantial resources, which means . . . having access to capital. I think where some other companies got lost was in only developing HMOs and telling their members: “Like it or not, you had better get in it.” At WellPoint, we’ve always offered choice, and our consumers have responded.
Although health-care financing can be centralized, health care is locally delivered and consumed. So, the notion that the federal government can be successful in the middle of this is probably naive.
However, there has to be a private-public partnership, if we are going to reach every American, particularly here in California where we’ve got some challenges with the uninsured. It turns out that 43% of the people who are uninsured have incomes at 200% or more above poverty level. These are not rich people, but our research uncovered that most of these people are under the impression that health-care premiums are three to four times what they cost.
In California, there are many reasons for that, including language and cultural issues and many employment issues. But we have to reach out. We have new advertisement telling people what a basic health-insurance policy actually costs, and we’ve had a dramatic reaction to that advertisement. For the other 60% uninsured, we are going to have government assistance.
Also, I think privacy is a very legitimate issue, and we’ve gone to great lengths around here to ensure that personal data is not shared or viewed by anyone who is not entitled to it.
Q: Some state medical groups have cited WellPoint as a 400-pound gorilla because of your large presence. What do you think is behind this criticism?
A: I don’t think we are a 400-pound gorilla. We perform a very important role in society. On one hand, we want to make sure our members have appropriate, quality care, and on the other, it has to be affordable. The goal is to pool the risk and make sure we get the minimum amount, so we have enough money to fund the care. We try to do that across California in what is called “selective contract,” which allows us to work with our providers to get the highest quality at an affordable cost. By virtue of the size of our membership, we are able to do that. But we want our providers to be successful and be able to deliver the best care. It is a balancing act.
Q: You still see financial benefit in the baby-boom generation, but aren’t you concerned about the impending costs related to an aging population?
A: Indeed, more people are growing older, but, more importantly, they are living longer. What we are going to see is that health care as a part of GNP is going to grow. The good thing is the American economy is growing dramatically, so presently we are not being overwhelmed by health-care costs.
However, as baby boomers age, they will consume more services and change how it’s delivered. They will also need help with their parents and kids. As that occurs, we’re going to see a huge shift in the practice of medicine in the scientific area down to the genetic and molecular level. In 25 years, we’ll have much less in the way of invasive surgery, and we’ll have drugs that alter people’s genetic makeup. We’ll be working early in people’s lives creating ways to help them avoid problems. But it will probably cost a lot of money. So there will always be a role for organizations like ours that have the dual responsibility for access to care and making it affordable.
Q: Some have portrayed your management style as dictatorial. Is that a key ingredient in the company’s success?
A: I don’t know if I’m dictatorial, but I do not hide my views, and people have a strong sense of my presence. When I first came to the company, we had lost $157 million, and that had to be turned around. So, in the early years, it was called a top-down management style, which means it was almost as important that we make decisions and move forward than that the decisions were always right.
Over the last several years, we’ve tried to move away from that style, because there is no way that someone sitting in Thousands Oaks can know the right thing for someone in San Francisco, Atlanta or Illinois. But the issue is real straightforward: We are organized to help our members get the care they need, at a cost our payers can afford, working with high-quality providers in the community and doing it in a way that benefits our shareholders. We are here to create value for our members, for our payers and, in turn, we will create value for our shareholders.
Q: The company, along with the foundations, is a success. But didn’t that come at the cost of 3,000 people losing their jobs?
A: Oh, I wouldn’t say that. Long before the foundations came into existence, [the company’s] predecessor, Blue Cross, was on the verge of insolvency. To prevent the state from closing us down, we had to dramatically reduce our costs and our work force.
The foundations came into existence when we realized we had to take the whole company public. We had taken WellPoint public, but the parent company, Blue Cross, was a not-for-profit company, and it just wasn’t working. So we created two foundations, and we worked hard to develop this company, and the result was that the original $3-billion donation turned into $4 billion, five years later. It immediately became the sixth-largest philanthropy in the U.S. and the largest one created from a conversion.
So, in 100 years, I think, the company will still be here. But, for sure, those foundations will be here, and this is very important to me. With those kinds of assets, I’m convinced the quality of life for Californians will have improved. And on my tombstone, I would like the foundations as well as WellPoint added, because those are the things I’m personally proud of.
