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WellPoint's iron fist
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February 10, 1998: 12:10 p.m. ET
Leonard Schaffer's negotiating skills have turned around health-care firm
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NEW YORK (CNNfn) - When Leonard Schaffer arrived at Blue Cross of California in 1986, the non-profit health-care concern didn't exactly have a clean bill of health.
So, with an acute focus on customer service, the one-time U.S. Department of Health and Human Services official began to transform the money-losing operation into a profitable managed-care company.
Now, the Woodland Hills, Calif., company (which still is known as Blue Cross in its home state) operates as WellPoint Health Networks Inc. and is one of the nation's largest of its kind in the field of managed care. And observers say Schaffer's tough negotiating skills made all the difference.
"He is a good negotiator with doctors and hospitals" in locking in long-term provider contracts, said Kenneth Abramowitz, analyst at Sanford Bernstein.
"He certainly has made some strides in terms of negotiating some fair deals in his hospital negotiations," said Gary Frazier, analyst at Bear Stearns.
However, during an interview with CNNfn, Schaffer attributed only part of WellPoint's success to the networks that he has helped build. The other main factor -- market share -- was strengthened primarily by that service-oriented focus that WellPoint has adopted.
"In the small-group market for instance, when we offer people an annual choice whether they want to be in an HMO or PPO, the companies are down to two employees. So what you have is a very small company getting the same kind of choice you get at a very big company, and people feel good about that," Schaffer said.
And that focus on the small-group market, analysts added, certainly has helped increase market share. WellPoint is now the largest managed care in California with an estimated 29 percent of the market.
"WellPoint stands out...others have backed off the small-group PPO market," said Joseph France, analyst at CS First Boston.
The Greatest Challenge
To be sure, WellPoint's success in its home state only serves to highlight the greatest challenge facing the managed-care industry in general. While most Californians now accept managed care as a fact of life, acceptance has come slower in the rest of the U.S.
"The biggest challenge the company faces is most of its enrollment is in California. How are they going to grow outside of their market?" France said.
Through its various managed-care products, WellPoint tries to offer its customers a greater choice of services. For example, through its Prudent Buyer plan, members are enrolled into a preferred provider organization in which they can choose more than one physician.
"Nationally, there has been a movement by employers to push their employees into HMO's whether they like it or not. It's led to a backlash. We never push people into plans that they don't want. We always offer choice," Schaffer said.
Yet, the choice still can boil down to a selection of managed-care services. "So far, no one has been successful expanding [managed-care] outside of California," France said.
Schaffer acknowledged that no road is paved perfectly smooth. But WellPoint has taken steps to convince the financial community that the company is aware of the challenges that await.
"In California, we have networks, market share and proprietary products. Outside of California, we're building the networks but you have to get market share," Schaffer said.
Schaffer, a wimp?
And in this area, Schaffer's tough negotiating skills again have come in handy. Last year, WellPoint acquired the health insurance operations of Massachusetts Mutual Life Insurance Co. and John Hancock Mutual Life Insurance Co., spending no more than $500 million for both transactions.
Around the same time that WellPoint was examining the properties, Health Systems International acquired Foundation Health and PacifiCare Health Systems bought FHP International, both in a multi-billion-dollar transactions.
"They've had their fair share of difficulties with both integrating difficulties and discovering problems. I was considered quite a wimp a year ago. Now all of the sudden I'm a man of great wisdom," he said.
To some analysts' credit, Schaffer was able to capitalize on the lower valuations for indemnity assets at a time that many competitors were buying HMOs.
"He's more of a believer in buying a company that has a significant indemnity business with the hope of making them managed care," Bear Stearns' Frazier said.
For example, when Aetna bought U.S. Healthcare for $8.9 billion, the insurer paid a valuation that was equivalent to $3,000 per member.
"We paid $87 per member for John Hancock," Schaffer said.
Most recently, WellPoint examined the books of Prudential Insurance Co. of America's unprofitable health-care business. The insurance giant reportedly wanted between $1.3 billion and $1.5 billion for the properties and is believed to be unwilling to break up the assets.
"I don't think we can, under our confidentiality agreement, confirm or deny anything about interactions with Prudential. But we've looked at every major property that has sold or have been rumors about sale in the last several years," Schaffer said.
"We are always interested in opportunities that allow us to build shareholder value. But for us that means real price discipline. So we analyze a property from the perspective of how it will help us create value. And we arrive at what we think it's worth. Now, other people may have other points of view and other people may be willing to pay more money, but we arrive at that [value] and we stick to that," he said.
-- by staff writer Robert Liu
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WellPoint
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