While Wall Street continues to cheer last week's highly successful initial public offering by Anthem, one of the nation's largest operators of Blue Cross and Blue Shield plans, some providers and consumer groups are lamenting what they see as a huge blow to traditional community healthcare.
With competition in the health insurance industry growing fierce, Blues plans have been merging and shedding their not-for-profit status to become stronger contenders. Generally, mergers create economies of scale, while selling stock to the public generates funds that the plans can use to invest in technology and expand their businesses.
But D. Ted Lewers, M.D., chairman of the American Medical Association's board of trustees, said Anthem's for-profit conversion signals a new era for Blues plans-one that could ultimately mean higher premiums and fewer services for consumers.
Anthem's IPO "is part of a growing trend in the current marketplace that looks to bolster profits and emphasize consolidation, all at the expense of America's patients and physicians," Lewers said. "Satisfying shareholder expectations places emphasis on maximizing profits and dominating markets rather than on patient care."
On Oct. 29, Indianapolis-based Anthem completed the largest IPO by a health insurer since the HMO boom of the early 1990s-raking in $1.73 billion through the sale of 48 million shares at $36 apiece. The company also received $200 million from a convertible-stock offering of 4 million units.
Anthem had earlier planned to sell just 28.6 million shares but made two last-minute increases to meet strong demand. The company now trades on the New York Stock Exchange under the symbol ATH.
In addition to the shares sold in the offering, roughly 54.9 million shares of common stock were distributed to about 1 million eligible policyholders, mostly in Connecticut, Indiana, Kentucky and Ohio. The plan, which was overwhelmingly approved by voting policyholders on Oct. 29, called for those members eligible under Indiana law to receive a payment for their portion of the company's fair market value.
With more than 100 million shares outstanding after the offering, Anthem has a market value of about $4 billion. The company is now the nation's fifth-largest publicly traded managed-care insurer behind Aetna, UnitedHealth Group, Cigna Corp. and WellPoint Health Networks.
Fuel for new acquisitions
The offering was the final step in Anthem's conversion from a mutual insurance company owned by policyholders to a public company owned by investors. Anthem, which announced its conversion plan early this year, says its new status as a stock company will give it greater access to capital and hence greater financial firepower to buy more Blues plans.
"We are in an industry that is heavily regulated and where technology is expensive. The IPO will give us more flexibility as we fund our growth," said Anthem spokeswoman Lauren Green Caldwell. "The trend in the industry is toward consolidation, and the funds will help with acquisitions."
Anthem, formerly Blue Cross and Blue Shield of Indiana, has been on an eight-year buying binge. It's now one of the nation's largest health insurers, serving 7.8 million Blues members in Colorado, Connecticut, Indiana, Kentucky, Maine, Nevada, New Hampshire and Ohio. And it's seeking regulatory approval to acquire 715,000-member Blue Cross and Blue Shield of Kansas, the state's largest insurer, for $370 million.
For the first nine months of 2001, Anthem's net income jumped 66% to $254.5 million from $153.8 million in the year-ago period. Operating revenue rose 21% to $7.5 billion.
Anthem's main competitor is publicly traded WellPoint, another voracious consolidator that owns Blues plans in California and Georgia. The Thousand Oaks, Calif.-based insurer agreed last month to pay $1.3 billion for St. Louis-based Right Choice Managed Care, Missouri's largest Blues plan with 2.8 million members. WellPoint has been rumored to be eyeing Cobalt Corp., another for-profit Blues plan created this year through the merger of the Wisconsin Blues and United Wisconsin Services.
Blues plans were traditionally not-for-profit, but the national Blue Cross and Blue Shield Association allowed them to become publicly traded in 1994.
A jump in public Blues plans
With Anthem's offering, 20% of the nation's 81.5 million Blues members are now served by publicly traded companies. That number could jump considerably if Empire Blue Cross and Blue Shield, which covers 4.3 million people in New York, wins regulatory approval to become a publicly traded company. The 2.1 million-member North Carolina Blues is also exploring a conversion.
Indeed, being a stock company has its financial advantages. Publicly traded Blues plans, such as WellPoint, Right Choice and Richmond, Va.-based Trigon Healthcare, have enjoyed net profit margins in the 3.5% to 7% range, compared with an average of 2.5% for their not-for-profit counterparts.
But consumer advocates fear that, as a for-profit company, Anthem will owe its allegiance to shareholders rather than enrollees.
Boston-based Community Catalyst and other consumer groups in eight states sent Anthem a letter in September requesting that the insurer guarantee good conduct by signing a "Pledge of Corporate Responsibility." The pledge involved several commitments, including maintaining adequate provider networks, requiring a public process for making any major changes to coverage, offering products that would benefit more vulnerable populations, maintaining employment levels and including community representatives on its board.
Although Anthem refused to sign the pledge, it sent the group a response reiterating its emphasis on social responsibility and its reputation as a "good corporate citizen."
"That sounds good, but what concrete assurances do we have that policyholders won't get hurt if Anthem decides to raise premiums and reduce coverage in order to maximize its return on investment," said Dawn Touzin, project director for Community Catalyst. "What we're getting are nice sentiments but no specifics."
Touzin also asserts that Anthem's "bigger is better" philosophy jeopardizes patients' rights by stripping Blues plans of their local control. Once a plan is acquired by Anthem, it falls under Indiana jurisdiction, she says.
"Sure, Anthem will tell you that it has local management teams. But the local voice will have to sing off the same page as the corporate parent," Touzin said. "As Anthem grows and acquires more states, who looks after those (local citizens') interests with any real clout?"
Analysts expect consolidation among Blues plans to continue at a steady rate. According to a recent study by Hartford, Conn.-based research and consulting firm Conning & Co., the number of Blues plans has fallen to 44 from 72 in 1990, and may drop to as low as 20 or 25 within five years.