WellPoint Health Networks Inc.'s national expansion was set back Wednesday as Maryland's insurance commissioner rejected the giant medical insurer's controversial bid to buy CareFirst Inc., a large Blue Cross plan on the East Coast.
"I concluded that this transaction is not in the public interest," said Commissioner Steven Larsen. "The application is denied." He cited WellPoint's proposed $1.37-billion purchase price as being too low, along with other factors that failed to meet state requirements.
WellPoint, based in Thousand Oaks, is the parent of Blue Cross of California. One of the nation's largest for-profit managed-care companies with 13.2 million members, it has expanded in recent years into Missouri, Georgia and other states under Chairman and Chief Executive Leonard Schaeffer.
To extend its reach, WellPoint offered to buy CareFirst, a nonprofit Blue Cross organization with 3.2 million members in Maryland, Delaware, Virginia and the District of Columbia.
With CareFirst, WellPoint's annual revenue -- which was $17.3 billion last year -- would have swelled by an additional $6 billion, or more than a third.
CareFirst, based in Owings Mills, Md., planned to convert to for-profit status to complete the sale with WellPoint. But the conversion needs approval from regulators in those states, and Larsen's decision suggests the deal is on thin ice in the other locations as well.
It would be "difficult for the transaction to go forward under these circumstances," Larsen said at a news conference.
WellPoint expressed disappointment with the ruling, saying it later would "decide which additional actions, if any, are appropriate." CareFirst said it was "shocked and disappointed," but didn't immediately note whether it would contest the order. It has 30 days to file an appeal.
The sale "for the foreseeable future is probably dead," said Clifford Hewitt, an analyst with investment firm Legg Mason Wood Walker Inc. in Baltimore. WellPoint probably would stay interested in acquiring CareFirst, he said, but the conversion plans and the terms would have to be vastly restructured to satisfy regulators.
The insurance commissioner's action "didn't leave much light in terms of just going back and tinkering with the deal," Hewitt said.
In rejecting the proposed sale, Larsen placed blame on CareFirst and its board. Their auction "was flawed and did not produce fair market value" for CareFirst, he said, adding that the firm agreed to post-sale packages totaling nearly $120 million for CareFirst executives that ran afoul of state laws.
CareFirst and WellPoint last month dropped those packages and replaced them with lower "retention bonuses." But they still violated the "anti-bonus" provision of Maryland laws covering insurers trying to convert to for-profit status, Larsen said.
CareFirst countered that "any insinuation that the board's process was tainted is unfair" and that its directors reviewed everything "with total commitment and reasoned judgment."
Yet the bonuses are just one reason the deal, announced in November 2001, has been controversial from the start. Various outside analyses of CareFirst's market value exceeded WellPoint's offer, with one estimate topping $2 billion.
Some legislators and advocacy groups also objected to the acquisition on grounds that a purchase of CareFirst, a provider of insurance to many low-income people, may make health coverage too expensive.
Larsen said WellPoint did not provide enough pricing and underwriting information for him to get "a complete" analysis of the transaction's effect on CareFirst's consumers, which is mandatory for approval of a sale. Data gathered from secondary sources provided only a "mixed" answer, he said.
WellPoint's stock briefly dropped after Larsen's announcement, but quickly rebounded and finished the day at $67.74 a share, up $1.07, on the New York Stock Exchange.
Investors seemed to remain sanguine about WellPoint's outlook because Larsen's report mostly found fault with CareFirst, according to Hewitt of Legg Mason. "I don't think there was anything in there that condemns WellPoint," he said.