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Sacramento Bee

Deal in works to form largest U.S. health plan

by Lisa Rapaport, Bee Staff Writer
October 28, 2003

Anthem Inc. announced plans Monday to buy WellPoint Health Networks Inc., a move that would create the largest health plan in the country - one big enough, perhaps, to force a drop in drug, doctor and hospital costs in many regions.

In the deal, Anthem would acquire WellPoint for roughly $14.1 billion in stock and cash, forging an affiliation of Blue Cross/Blue Shield plans that would insure 26 million patients nationwide. The merger, subject to shareholder and state and federal government approval, is expected to close by mid-2004.

If the company proves large enough to command price concessions from hospitals and prescription drug makers, many in the industry hope the result will be lower health insurance premiums. Savings are less likely in Sacramento, where three big hospital chains dominate the marketplace.

The Anthem-WellPoint deal would relegate UnitedHealth Group to No. 2 in the insurance market, despite its own plan - announced Monday - to buy Mid Atlantic Medical Services for $2.95 billion in cash and stock. That deal would give United about 2 million new members, for a total of 20 million nationwide.

Steep health insurance premium increases in recent years have been spurred by mergers in the pharmaceutical and hospital industries that reduced competition. The new outsized health plans may be well-positioned to curb the cost of medicine by pressing hospital and drug companies to lower their prices, said many health industry experts.

"I wouldn't say that somebody is going to get cheaper care out of this," said Paul Fronstin, a health analyst with the Employee Benefits Research Institute, a nonpartisan think tank in Washington, D.C. "But it may be we see premiums go up only 10 or 13 percent instead of the 15 (percent) people were expecting."

Most industry experts agree that the merged companies will save money due to their size.

"Anything you can do nationally to increase market share as a health plan helps you drive down your costs for medical supplies, technology and prescription drugs," said Ken Thorpe, a professor of health policy at Emory University in Atlanta. "In any local markets where plans have a big presence, you can also gain some control over hospital costs."

But savings - at least on hospital bills - likely would be slim in Sacramento. Here, even WellPoint subsidiary Blue Cross of California, the state's biggest insurer, of late has been no match for the huge hospital chains: Sutter Health, Catholic Healthcare West and the University of California.

In California, WellPoint has 6.7 million members. But because Anthem has virtually no members in the state, its merger with WellPoint won't give the new company much additional clout here, said Nabil Musallam, the executive at UC Davis Medical Center in Sacramento who negotiates contracts with insurers.

"WellPoint has been big in this market for a long time, so I don't see the merger changing rates in Sacramento," Musallam said.

It will be years before the effects of this massive merger are fully known because it does not change Blue Cross of California's current contracts with hospitals, pharmaceutical companies, or with the employers who buy insurance for most patients who have private coverage.

Even in markets where the newly merged health plan would get an upper hand in negotiations with hospitals, doctors and drug companies, it does not necessarily mean that insurance premiums would decrease or consumers would pay less for care, said Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights, an advocacy group based in Los Angeles.

"I think in theory there are parts of the country outside California where hospital costs might go down because of this merger, but in practice consumers may not see even a penny of the savings," said Court. "When you have fewer health plans controlling more of the market, it's easier for them to cheat rather than compete and raise premiums in tandem."

Leaders of both insurance giants pledged to use their combined might in the marketplace to give patients better medicine for their money.

"Our vision is to redefine the industry by providing more value to our constituents through innovative, choice-based products, significant service enhancements, simplified transactions, and better access to information for quality care," said Leonard Shaeffer, chairman and chief executive of WellPoint.

Employers were not immediately sure if the planned mergers would do much, if anything, to lower what they pay for workers' health insurance.

"It would be premature to speculate on how this might affect us," said CalPERS spokesman Clark McKinley. The California Public Employees' Retirement System is one of WellPoint's biggest clients in California, with 300,000 using the Blue Cross network of hospitals and doctors.

Much of the long-term impact on employers and consumers will depend on how other health plans react to the mergers, said Glenn Melnick, a health economist at the University of Southern California.

"These mergers will have every other health plan quivering," he said. "There will be a spate of mergers in reaction to these deals, and health insurers will emerge with a lot more leverage in the marketplace."
The Bee's Lisa Rapaport can be reached at (916) 321-1005 or [email protected]

Health insurance costs
Average annual premium costs for covered workers, single and family coverage, in 2003.
Worker contribution
CONVENTIONAL Single: $381 Family: $2,374
HMO Single: $502 Family: $2,145
PPO Single: $527 Family: $2,515
POS Single: $488 Family: $2,469 ALL PLANS Single: $508 Family: $2,412
Employer contribution
CONVENTIONAL Single: $3,195 Family: $6,426
HMO Single: $2,652 Family: $6,369
PPO Single: $2,978 Family: $6,802
POS Single: $2,780 Family: $6,665 ALL PLANS Single: $2,875 Family: $6,656
CONVENTIONAL Single: $3,576 Family: $8,800
HMO Single: $3,154 Family: $8,514
PPO Single: $3,505 Family: $9,317
POS Single: $3,268 Family: $9,134 ALL PLANS Single: $3,383 Family: $9,068
Note: Family coverage is defined as health coverage for a family of four.
Source: Kaiser / HRET Survey of Employer-Sponsored Health Benefits, 2003

Health plan membership Anthem Inc. plans to buy WellPoint Health Networks,
combining Anthem's 12 million members and WellPoint's 14 million members to
create the largest health plan in the country with 26 million members.
Anthem: 12
Cigna: 12
Aetna: 13
WellPoint: 14
United-Health*: 20
Anthem plus WellPoint: 26
*Includes 2 million members to be acquired in a planned merger with a Maryland HMO
Source: Latest company filings as of Sept. 30 or June 30