With its doomed engagement to Maryland's largest health insurer barely behind it, WellPoint Health Networks already is looking to tie the knot with a smaller yet potentially more compatible partner.
WellPoint, Thousand Oaks, Calif., last week agreed to acquire Wisconsin Blues operator Cobalt Corp. for $906 million in cash and stock. The deal comes less than three months after Maryland officials blocked WellPoint's planned $1.37 billion merger with Owings Mills, Md.-based Blues insurer CareFirst.
The merger reflects a trend among Blues plans, which are rapidly joining forces to be more competitive. Completion of the deal would cut the number of independent Blues plans nationwide to 41, down from 72 in 1990.
The addition of 809,000-member Cobalt would solidify WellPoint's position as the nation's second-largest health insurer by enrollment and bring it within striking distance of its main Blues rival, Indianapolis-based Anthem. Post-merger, WellPoint would have 14.3 million members, 11.1 million of them in Blues plans. Anthem currently covers 11.5 million Blues members.
The deal would strengthen WellPoint's foothold in the Midwest, upping its membership in the region by 35%, to 3.5 million enrollees. WellPoint has long targeted the Midwest as part of its 7-year-old acquisition strategy because of the region's concentrated population, which eases the task of creating extensive provider networks, said WellPoint spokesman Ken Ferber. "We see a big upside because Cobalt is already the leading insurer in Wisconsin and their market share is only in the high teens," Ferber said. "There's no dominant player, so there's a lot of potential for us to increase our market share there."
Most Blues plans command 30% to 60% of their respective markets, analysts say.
Under the deal, Cobalt shareholders would get $10.25 in cash and 0.1233 of a share of WellPoint stock for each Cobalt share. The transaction requires approval from Cobalt's shareholders, as well as from state and federal regulators.
WellPoint said it expects the transaction to be completed by year-end, but analysts project the deal could close as early as September. The acquisition raises no antitrust issues because it doesn't involve any market overlap, according to Joshua Raskin, healthcare analyst at Lehman Bros., New York.
Cobalt's for-profit status likely will eliminate many of the regulatory and legislative landmines that derailed WellPoint's acquisition of not-for-profit CareFirst. Maryland officials blocked the merger largely because it would have required the conversion of CareFirst, a move that former state Insurance Commissioner Steven Larsen and others argued would lead to higher premiums and excessive compensation for CareFirst executives.
Wisconsin United for Health Foundation, a charitable fund created when Cobalt converted to for-profit status in March 2001, has agreed to support the deal. The foundation, which owns about 25 million shares of Cobalt, or about 60% of the insurer's stock, would receive about $256 million in cash and 3.1 million WellPoint shares.
Cobalt has been working to turn its fortunes around after posting a $65.3 million loss in 2000, partly because of a problem-plagued computer system conversion that caused it to miscalculate its rates. The insurer since has shed unprofitable product lines, cut its medical and administrative costs, and posted accelerating net income of $1.4 million and $73.9 million in 2001 and 2002, respectively.
Wellpoint expects the merger to generate cost savings of $5 million next year and up to $30 million annually in 2007 and beyond. By contrast, WellPoint enjoyed $30 million in cost savings in its first year after its 2002 purchase of Missouri Blues plan RightChoice Managed Care.
Cobalt, however, expects the merger to speed up its turnaround. "They have the size and resources to get us there faster than we could have done alone," Cobalt Chief Financial Officer Gail Hanson said.