WellPoint gets double blow as it faces investigation, tosses CFO

The health plan fired its face to Wall Street over personal conduct issues and discovered California is looking into dividend payments.

By Pamela Lewis Dolan — Posted June 25, 2007

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WellPoint's new CEO took over on June 1 -- and inherited two large headaches.

The first was word in late May from California state regulators that they are investigating a $950 million divided payment WellPoint-owned Blue Cross of California made back to the home office in Indianapolis. The California Dept. of Managed Care says it is looking into whether the size of that payment violated the merger agreement WellPoint signed with the department when it acquired Blue Cross in 2003.

The second, coming within a week of the announcement about the investigation, was the forced resignation of WellPoint's chief financial officer for unspecified violations of the company's personal conduct policy. An internal investigation led to the departure of David Colby, who was WellPoint's most public face on Wall Street, and was expected to keep investors happy while new CEO Angela Braly got up to speed.

Braly replaced Larry Glasscock, who retired after building Anthem from a Midwest-focused mutual insurer to one of the two most powerful for-profit health plans (along with United HealthGroup) in the nation. Braly formerly was WellPoint's executive vice president, general counsel and chief public affairs officer.

The California Medical Assn. says WellPoint's first headache actually is more hurtful to physicians and patients. The association testified against the WellPoint-Blue Cross merger when it was proposed.

"One of our chief concerns then, and still is, the continuing pattern of Blue Cross/WellPoint putting profits before patients," said CMA spokeswoman Karen Nikos. "This dividend situation reported in the media is yet another example of their patient-unfriendly business practices."

Blue Cross of California spokesman Nick Garcia says the company was never notified of an investigation, and that it worked closely with the Dept. of Managed Health Care in 2006 when formulating the dividend amount.

But Lynn Randolph, DMHC deputy director of communications, says the company should be aware of the investigation, because the department has asked it to provide several documents related to the probe.

Randolph confirmed the company did work with the department, which oversees HMOs in the state, as it formulated the dividend amount, but said the department had issues when Blue Cross of California came up with the $950 million figure.

"When we did calculations we found the allowable amount under the merger agreement should have been about $140 million," Randolph said. "They told us there would be some recalculations and reclassification of some assets, which allowed them to declare that amount."

But Garcia claims the amount was agreed upon, and "we never changed our accounting practices or business practices to come up with that dividend amount."

Part of the merger agreement was that the company has to invest some of its revenue back into the state's health care system. Since the merger, the company has paid $170 million toward a $200 million commitment to the Investment in a Healthy California initiative; $35 million for health care clinics in communities around California; and $15 million toward funds to help train 2,500 new nurses, according to Garcia. Randolph said the charitable contributions "don't seem to be an issue."

Jerry Flanagan, a spokesman for the Calif.-based Foundation for Taxpayer and Consumer Rights, which also opposed the merger, likened the dividend to an offshore investment. By sending the money to WellPoint, "state regulators [in California] lose control of that money," he said.

Flanagan spoke to AMNews by cell phone from the state's capitol where he was attending a hearing on the governor's proposed health reform plan. Flanagan and members of the his group were there protesting Blue Cross of California's opposition to the plan, which would require coverage of anyone, regardless of medical history. He said he finds it appalling that the company is claiming it can't afford that while the parent company collects dividends near a billion dollars.

Meanwhile, WellPoint's investors, at least initially, have been more worried about Braly's second headache -- the loss of the plan's CFO.

Colby, the company claims, was asked to resign when an investigation found a violation of the company's code of ethics. The violations were not business-related, and the company is declining comment, said WellPoint spokesman Jim Kappel.

However, according to various media reports, the resignation occurred the same day a subpoena was delivered to WellPoint related to a lawsuit brought against Colby by a California woman.

The woman -- who identified herself as Colby's fiancée, and who was identified as such in an engagement announcement The Indianapolis Star printed last year -- is suing Colby for ownership of a house in California. Colby has been involved in divorce proceedings since 2004, and another woman in Indiana told various daily newspapers that she is engaged to Colby, and that the California woman's claim is a "hoax." Colby has not responded publicly to the allegations.

WellPoint immediately promoted Wayne DeVeydt, its senior vice president, chief accounting officer and chief of staff, to replace Colby as CEO.

On May 31, the day Colby's resignation was announced, WellPoint's stock fell nearly $3 per share, or 4%, to $81.41 from $84.40 in heavy trading. The stock has sat at about that level ever since.

During a May 31 conference call with Braly, Glasscock and other WellPoint executives, analysts called Colby "well-loved" and "well-respected," and wondered if he could get a second chance. WellPoint declined, and also would not explain to analysts the reasons behind Colby's departure.

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