Feature Article originally published in Small Business Times, Nov. 14, 2003   WellPoint acquisition could rock HMO market Competitors from afar may target southeastern Wisconsin By Andrew Weiland, of SBT The southeastern Wisconsin health care insurance industry is on the verge of a transformation that will bring the nation's largest HMO operator to the market and could attract new competitors from other states. The corporate acquisition of the parent company that operates Blue Cross & Blue Shield United of Wisconsin could give the merged company more leverage to negotiate for lower health care contracts in the state. Anthem Inc., an Indianapolis-based company, announced in late October that it intends to acquire WellPoint Health Networks Inc., the Thousand Oaks, Calif.-based company that had announced in June it will acquire Cobalt Corp. of Milwaukee. The merged company, which will be based in Indianapolis and will assume the WellPoint Inc. name, will oversee the Blue Cross & Blue Shield United of Wisconsin plan. The merger will create the largest managed care company in the nation, with 26 million members in Blue Cross & Blue Shield plans in 13 states. For the last 12 months ended Sept. 30, WellPoint and Anthem had a combined $1.6 billion in net income. That size could give the company leverage to negotiate lower prices with health care providers, according to some industry observers. "Now are you going to see more serious negotiations with health care providers? I think absolutely," said Tammie Miller, vice president of Grace Matthews Inc., a Milwaukee-based merger and acquisition advisor. Rebecca Kapustay, who was named in early October to be the president and chief executive officer of Blue Cross & Blue Shield United of Wisconsin, is confident WellPoint will be able to use its resources to make health care more affordable in the region. "Our responsibility is to make sure health care is affordable," she said. "If we don't do that, we don't have a reason for existing." Milwaukee's largest health care provider, Aurora Health Care, is aware of WellPoint's reputation as a strong negotiator, according to Paul Nannis, vice president of government affairs and community relations for Aurora. "We expect them to be tough negotiators," Nannis said. "On the other hand, we believe strongly in what we are doing." Aurora executives are confident they offer high-quality services at reasonable prices, Nannis said. "(WellPoint has) a reputation of being a pretty tough negotiator with providers in other markets they are in right now," said Tim Waldoch, assistant vice president of managed care contracting for Froedtert & Community Health, the system that operates Froedtert Memorial Lutheran Hospital in Wauwatosa and Community Memorial Hospital in Menomonee Falls. "We're going to have to be able to prove our worth and negotiate contracts that are fair for us, fair for them and fair for our patients," Waldoch said. Anthem's acquisition of WellPoint is expected to be completed in mid-2004, pending approval of regulators and shareholders. An Anthem spokeswoman said the merged company will be reasonable in its negotiations with local health care providers. "Our philosophy is to seek agreements that are fair for physicians, fair for hospitals and fair for our members," Anthem spokeswoman Deborah New said. However, even if WellPoint is able to negotiate lower prices with providers, there are no guarantees it will pass the cost savings on to consumers. The company is publicly held and could provide any cost savings it negotiates to its investors. Negotiating for lower contracts is only one avenue the company will use to reduce costs, Kapustay said. "Contracting, that only gets you so far," she said. "You have to look at the big picture." The company will use its resources to reduce administrative costs, increase use of technology to reduce costs and encourage members to live healthier lifestyles so they receive less medical attention, she said. The company plans to establish a Web site that members, health care providers and employers all will be able to use, she said. Members will be able to file claims online, for example. The Web site will allow WellPoint to provide information more quickly and at lower costs, Kapustay said. Jessica Ollenburg, president and chief executive officer of Greenfield-based Human Resource Services Inc., said Wisconsin businesses should still shop around to find the best deal from health maintenance organizations (HMOs). "We're going to tell our clients to do some shopping, because (WellPoint lowering prices) is not necessarily a given," she said. "I think the jury's still out on that." WellPoint already has significant market share in Wisconsin, so the company will have little motivation to lower its rates, Ollenburg said. However, at least two out-of-state HMOs are considering entering the Wisconsin market, according to Ollenburg. To gain market share, the new players would be more likely to offer lower health insurance rates, she said. "They're looking at it very seriously and doing research," Ollenburg said, declining to identify the firms. "If I know two, there's probably a few more. This is such a lucrative area." Health care costs in the Milwaukee area are significantly higher than the costs in most other major metropolitan areas in the nation, providing ample opportunities for new HMO competitors, she said. "A number of HMOs are looking to enter this market," Ollenburg said. "There's an excellent opportunity to move in and gain some profits." Kapustay, who was named to the Wisconsin post before Anthem announced it will acquire WellPoint, will remain in that position after the merger with Anthem is completed, New said. "The current Blue plan presidents will be asked to stay in their current roles to maintain continuity and leadership," New said. New said Anthem executives are confident the merger with WellPoint will be successful and will benefit Wisconsin health care consumers. "In the case of both of our companies, every time we've completed a Blue merger we've been able to increase membership, decrease expenses and help keep health care affordable," she said. "We need to understand local needs and develop products and services to meet them and attract new members." Nov. 14, 2003 Small Business Times, Milwaukee