Behind Aetna Bid, a CEO That Could

During most of Leonard Schaeffer’s reign as head of WellPoint Health Networks Inc. and its main division, Blue Cross of California, Schaeffer intentionally toiled in a ground-floor office rather than take the penthouse preferred by most chief executives.

“Let the employees have the view,” he once said. “They do the work.”

It was a symbolic gesture to motivate his work force. But now Schaeffer is bidding to capture the loftiest seat in the U.S. health-care industry by acquiring Aetna Inc., the nation’s biggest medical insurer, via a $10.3-billion deal jointly proposed by WellPoint and ING Groep, a Dutch insurance and financial-services provider.

And Schaeffer, 55, is undertaking a daunting task: Not only has he never run a health-care company as big as Aetna--which is three times larger in members and sales than WellPoint--he’s also making the bid when the whole health-care industry is in turmoil over the merit of “managed care.” And Aetna in particular is in lousy financial shape.

A merger would mean Thousand Oaks-based WellPoint would provide health-care insurance for more than 28 million Americans, and its annual revenue would surpass $34 billion. It’s understood that, under their proposal, WellPoint would absorb most of Aetna’s U.S. Healthcare business and ING would get its smaller financial-services and international holdings.

“This would be one of the greatest challenges in the industry,” said William McKeever, an analyst with PaineWebber Inc. in New York. “This is a gargantuan acquisition” for WellPoint, “and it’s either going to be a disaster or a home run.”

Aetna has said only that it will review the bid, but the company--whose stock price had plunged in response to the company’s woes--is under severe pressure to accept it or find an alternative that will please its investors.

Analysts said it’s unlikely another major health insurer would step in with a rival offer for Aetna, for various reasons pertaining to each company. Regardless, McKeever said, “if I was going to bet on one management team to pull it off, it would be WellPoint’s.”

Indeed, WellPoint and Schaeffer--who declined to comment--get generally high marks for profitably steering the company through the shifting currents that are buffeting the health-care industry today.

Those currents include rising medical costs, growing public cynicism over the managed-care concept and the insurers’ decidedly mixed ability to keep a lid on costs while still providing good service.

While others in the industry have struggled to maintain growth, WellPoint’s operating profit in 1999 (excluding one-time gains or charges) rose a respectable 13% from the prior year, to $297 million, on revenue of $7.5 billion. WellPoint, with 7.3 million members, last year also was named by Fortune magazine as the “most admired” company in the health-care field.

WellPoint is “good at blocking and tackling, that is, doing basic things like processing claims efficiently and managing medical costs,” McKeever said. Even so, the woes of Aetna and other health-care providers have made trouble for WellPoint’s stock, which has dropped 17% over the past 12 months.

WellPoint fell $1.13 a share, to $60.75, on Thursday while Aetna’s stock--rallying in response to the merger offer--gained $2.81, to $55.81, both on the New York Stock Exchange. But Aetna’s price, which is well below the $70-a-share in cash and stock that WellPoint and ING are proposing to pay, reflects many investors’ doubts that the takeover will succeed.

Chairman and CEO Schaeffer, meantime, is known for leading with a mixture of prudence, ruthlessness, an eye for detail and financial savvy. Doctor groups say he’s a tough negotiator, and some have even portrayed his management style as dictatorial.

“I don’t know if I’m dictatorial, but I do not hide my views, and people have a strong sense of my presence,” he told The Times last month.

And clearly Schaeffer already has shown his talent for turning around an ailing company--though one that was far smaller than Aetna.

He was hired by Blue Cross of California in 1986 when the company was near insolvency. It lost more than $200 million in the mid-1980s and suffered from a bloated bureaucracy, a sharp rise in health-care costs and a well-deserved reputation for poor service.

Schaeffer was hired away from Group Health Inc., a Midwest health maintenance organization where he was president. Before that, he had held various management or financial posts at Student Loan Marketing Assn. and Citicorp, and he headed the U.S. Health Care Financing Administration during the Carter presidency.

He moved swiftly at Blue Cross. He ultimately slashed about 3,000 jobs and various overhead costs, sold the company’s headquarters building for $90 million, avoided most Medicare business and renegotiated more-profitable contracts with doctors and hospitals.

Schaeffer also unveiled new products that gave corporate employers more flexible plans to offer their workers, renewed Blue Cross’ attention to service and converted the company into a for-profit business that ultimately led to the creation of WellPoint as Blue Cross’ parent company.

In recent years, Schaeffer has engineered several small acquisitions for WellPoint, enabling the company to expand in markets outside of California, in Texas, New York and the Midwest.

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WellPoint of View

WellPoint Health Networks, in a joint proposal with Dutch company ING Groep, recently made a $10.3-billion offer for Aetna Inc. A look at WellPoint:n Headquarters: Thousand Oaks

* Employees: 10,600

* Chairman: Leonard Schaeffer

* California market share: 18%

* Medical enrollees (U.S.): 7.3 million

* Insurance companies: Blue Cross of California, UNICARE