Nation's largest private health insurer wants to get even bigger

WellPoint seeks to acquire the parent of New York City's Blues plan, and physicians aren't thrilled.

By Katherine Vogt — Posted Oct. 17, 2005

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The proposed $6.5 billion merger of WellPoint Inc., the nation's largest private health insurer, and WellChoice Inc., the owner of Empire BlueCross BlueShield in New York, has critics crying foul that the already consolidated managed care industry is narrowing even more to a few mega-companies that essentially have monopolistic control of some markets.

The deal, if approved by regulators, would give WellPoint its first entry into New York state and also into the New York City metropolitan area. Analysts echoed WellPoint president and chief executive officer Larry Glasscock's assertion, in a conference call to investors, that the deal gives WellPoint a stronger base for negotiating national contracts with more large companies, given that New York is the base of more Fortune 500 companies than anywhere in the nation.

The merger, announced Sept. 27, also would strengthen WellPoint's position in consumer-directed health plans, a market that WellChoice has aggressively pursued in the last year.

The combined company, under the WellPoint umbrella, would serve more than 33 million members and operate as a Blue Cross or Blue Cross Blue Shield licensee in 14 states.

Physicians, as they have in past health plan mergers, were alarmed at the WellPoint-WellChoice deal.

"It's a trend of more market power being concentrated into the hands of fewer dominant health plans. That can't be good for competition, and it can't be good for consumers. And we don't believe that it will be good for patients and their physicians because there will be less choice," said Donald Moy, general counsel for the Medical Society of the State of New York.

In the conference call to investors, Michael Stocker, MD, WellChoice president and chief executive, said his company's members would "benefit from the resources of the nation's leading health benefits company." Once the deal closes, Dr. Stocker would serve as WellPoint's president and as chief executive of its Northeast region, covering more than 7 million members in Connecticut, Maine, New Hampshire, New Jersey and New York.

But J. James Rohack, MD, immediate past chair of the AMA, said health insurance premiums have risen dramatically without an expansion of benefits as the industry has consolidated.

"With the for-profit companies, their driver is to their shareholders, and those shareholders aren't necessarily the patients. Nor are they the doctors, hospitals or employers in that community," he said. "So to produce a quarterly profit for shareholders, they're going to use tactics to squeeze as much profit out of the premium as they can."

That imbalance of leverage can force physicians into participating in networks that they might not otherwise choose, Moy said.

"The plans have the power to exert too often one-sided contracts which they give to physicians on a take-it-or-leave-it basis. Because they have a very strong market power, physicians might be forced to participate if their patients aren't able to see them [otherwise]," he said.

While the AMA and other medical associations have called for federal and state regulators to thoroughly scrutinize health plan mergers, for the most part their approval has sailed right through. In an Aug. 24 research report, Banc of America Securities analyst Joseph D. France wrote that as soaring rates have slowed and enrollment has stagnated, merger and acquisition activity has been on the rise.

Indianapolis-based WellPoint itself was created in 2004 by Anthem Inc.'s acquisition of California-based WellPoint Health Networks. The deal catapulted the company into the spot as the nation's largest insurer with 28 million members, ousting UnitedHealth Group from the top spot.

Meanwhile, UnitedHealth Group has responded with its own major acquisitions including the purchase of Connecticut-based Oxford Health Plans, and its pending deal to acquire California-based PacifiCare Health Systems.

Critics say these mega-deals have left consumers with little choice in coverage in several markets. A 2004 study by the AMA found that in 87 of 92 markets, a single insurer had a market share of 30% or more and that in 34 markets, a single insurer had a market share of 50% or more.

Moy said the New York medical society was considering what actions it could take to try to stop the merger. "We'll have to explore what the available options are. I'm not discounting anything," he said. However, Bear Stearns analyst John Rex said in a Sept. 27 research report that the WellPoint-WellChoice merger could likely survive regulators' tests.

"WellPoint has no membership in New York state, where the vast majority of WellChoice's membership resides. As a result, we do not look for antitrust to be an issue and in fact, could serve to further level the playing field with now market-dominant UnitedHealth/Oxford," he wrote.

In addition to clearing regulatory hurdles, the transaction must still be approved by WellChoice stockholders. However, the New York Public Asset Fund, which owns about 62% of WellChoice's stock, has already voted to accept the deal. If approved, the merger could be completed during the first quarter of 2006.

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New York nonprofits also have urge to merge

Group Health Inc. and HIP Health Plan of New York, two well-established, nonprofit health insurers in New York, announced plans to join forces just two days after the $6.5 billion merger between Indianapolis-based WellPoint and New York-based WellChoice was disclosed.

The companies said that, if the GHI-HIP merger is approved by regulators, they would be the largest insurer in New York state, with 4 million members and annual revenues of more than $7 billion.

Group Health, established in 1937, serves about 2.6 million people in New York. HIP Health Plan of New York, which was founded in 1947, has about 1.4 million members in New York, Connecticut and Massachusetts.

The combined company would operate under a governing foundation with an equal number of directors from each entity.

Financial details about the transaction were not disclosed.

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