WellPoint to Buy Missouri’s RightChoice for $1.3 Billion
WellPoint Health Networks took an expensive step toward becoming a national health-care company Thursday with its agreement to buy a well-regarded Midwestern managed-care company for $1.3 billion.
The purchase of RightChoice Managed Care of St. Louis is the latest in a string of acquisitions by WellPoint, which since 1997 has picked up insurers in Georgia, Illinois and the mid-Atlantic region to diversify beyond its California base.
WellPoint, based in Thousand Oaks, is the parent of Blue Cross of California, the state’s second-largest managed-care organization behind Kaiser Permanente. RightChoice operates Blue Cross-Blue Shield of Missouri.
Analysts said Thursday’s deal is another sign of how cost pressures within the industry are causing health insurers to consolidate. The largest managed-care firms have the most clout to negotiate better deals with pharmaceutical companies and spread their administrative costs over a broader revenue base, said Greg Crawford, an analyst with Fox-Pitt Kelton Inc. in San Francisco.
“Companies are looking for greater economies of scale,” Crawford said. “We will see this trend toward consolidation continuing.”
The cost savings from such consolidations so far haven’t resulted in lower health insurance premiums for consumers because overall costs continue to rise, but health-care companies say they have helped reduce the size of premium hikes.
The deal will increase WellPoint’s membership by 2.8 million, or 29%, to 12.65 million. When the transaction is completed early next year, WellPoint will rank as the fourth-largest health insurer, behind Cigna.
WellPoint said it will pay RightChoice shareholders $66 a share in cash and stock, a 46% premium over the Wednesday close of $45.11 on the New York Stock Exchange. Under the terms of the deal, shareholders may choose to receive cash or stock under a prorating formula that limits the total cash payout to 30% of the total price. Analysts said the premium, while significant, was fair because RightChoice, a well-run company, is a prime acquisition target.
WellPoint investors, however, weren’t as enthusiastic about the benefits of the proposed transaction, which must be approved by shareholders. WellPoint shares dropped $5.62 to $101.50 on the NYSE. RightChoice shares, meanwhile, soared $16.99 to $62.10 on the Big Board.
Crawford praised the latest WellPoint deal as a marriage of two well-run companies with a demonstrated ability to control costs. But, as a consequence of those strengths, the immediate savings expected to result from the deal are small.
WellPoint said in a conference call with analysts that it would gain $30 million from the merger through lower costs and increased revenue. A portion of the $30 million will result from reduced overhead as redundant administrative functions are eliminated.
But WellPoint said the acquisition won’t boost earnings until 2003. WellPoint had profit of $375 million on revenue of $10.6 billion for the 12 months that ended in June. RightChoice earnings for the same period were $47 million on revenue of $1.1 billion.
WellPoint said that once the acquisition is completed, it will create a Midwestern division to be run by John O’Rourke, chairman and chief executive of RightChoice. In addition to RightChoice’s existing business, the unit will include WellPoint’s business in the region.
Analysts expect WellPoint to expand a fast-growing RightChoice business called HealthLink beyond the Midwest. The unit administers health plans for large employers that are self-insured. HealthLink, which has driven much of RightChoice’s recent growth, charges a fee for its services but assumes no risk, which is borne by employers.
Analysts also expect WellPoint to integrate RightChoice’s widely praised evaluation and compensation program for health-care providers. The company compensates physicians in its managed-care programs in part on patient satisfaction and clinical performance. Blue Cross of California recently instituted a similar program in its HMO network, but the program has not been adopted in the company’s larger preferred provider organization or in other WellPoint businesses in other states.
