Giant HMOs go separate ways after failed merger.

Employees more confident jobs will be retained

The potential merger between Health Systems International Inc. and WellPoint Health Networks Inc. managed to be both the biggest story and non-story of 1995.

Announced in early spring, the deal would have created the largest publicly traded health plan in California and one of the largest in the country.

However, it unraveled late in the year as each firm accused the other of various misdeeds.

"It was a story of two people who couldn't get their egos in the same room," said one veteran industry observer, referring to Blue Cross/WellPoint's Chairman and CEO Leonard D. Schaeffer and Health Systems' Chairman and CEO Malik M. Hasan.

Schaeffer denied that an ego clash was the case. "I'm very disappointed it didn't go through; I thought it made very good sense for the company, would have enhanced shareholder value," he said.

That story has launched a new one: what direction the two big Woodland Hills-based health plans will take now that merging has been ruled out.

One thing is certain: employees at both firms are far more certain they will keep their jobs for the long run. Had WellPoint and Health Systems merged, Wall Street analysts estimated they would have been able to cut costs by about $200 million a year. That would have included plans to cut several hundred jobs.

"We're breathing a sigh of relief here," said one Health Systems employee.

Schaeffer also was given a boost; the Blue Cross board of directors at a Jan. 7 meeting gave him a unanimous vote of confidence, just days after media reports that two directors would have attempted to oust him if they could garner the support.

In the meantime, both WellPoint and Health Systems have their various plans.

Health Systems' plan is fairly straightforward. Hasan said he intends to do a management reorganization over the next Several months. The company would then likely pursue more business deals under the plan, although he would not provide specifics.

WellPoint/Blue Cross' plans for the short term are more widespread and urgent. As part of the merger, it had submitted a plan, which was approved by the Department of Corporations, to endow two charitable foundations to the tune of $3.2 billion. Most of the value was to come from WellPoint stock (Blue Cross of California, WellPoint's parent company, owns 80 percent of the outstanding shares).

Blue Cross spun off WellPoint as a for-profit venture in 1993. California law requires such transactions to include considerable public compensation. The rationale is to repay the state for the years a nonprofit built up equity as it operated without tax liabilities.

However, with the deal off, a new plan must be submitted to the DOC for approval. Schaeffer said that new plan will be submitted in a matter of weeks. Indeed, a new plan was formulated at the Jan. 7 board meeting, but has not yet been revealed.

Consumer organizations, such as the Consumers Union, want assurance that the new Blue Cross/WellPoint plan will keep the companies completely separate from whatever structure is proposed. Prior to the merger collapsing, Schaeffer was accused by Health Systems' officials of attempting to influence who would be appointed to the board of directors of the two foundations.

Meanwhile, with the delay in implementation, there is spreading worry about when the money will actually begin to reach the community at large.

"There is a lot of concern about the future of those charitable dollars. A lot of organizations are depending on them," said David Langness, vice president of communications for the Healthcare Association of Southern California, a trade organization representing local hospitals.

As for future deals on the Blue Cross/WellPoint end, Schaeffer said the company will be seeking further expansion outside of California.

Earlier this month, WellPoint entered into an agreement to acquire the group life and health subsidiary of Massachusetts Mutual Life Insurance Co. of Springfield, Mass. for $380 million. The pending deal would give WellPoint a toehold in several eastern states where the subsidiary does business - New York, Illinois and Massachusetts among them - and would add another 200,000 plan enrollees in California to WellPoint's local business base.

WellPoint also acquired a small preferred provider organization, AHI Healthcare, in Houston last year, and was recently licensed by Texas authorities to operate a health maintenance organization.

"We intend to become a national organization," Schaeffer said. "We've been talking to both fee-for-service and managed care organizations, and we think there are opportunities for ... acquisitions and strategic alliances."

Citing confidentiality agreements, Schaeffer would not give any specifics about possible deals.

As for the immediate future, analysts expressed mixed expectations for Health Systems and WellPoint. However, there was a nearly unanimous belief among several analysts interviewed that both companies will Continue through the 1990s with brisk profit growth.

Robert Hoehn, an analyst with New York-based brokerage firm Salomon Brothers, projected only moderate profit growth for WellPoint this year, pending the results of the charitable foundation spinoff. He projected net income will grow from $2.21 a share in 1995 to $2.25 a share in 1996. However, he said he believes WellPoint will rebound considerably in 1997, with earnings of $2.60 per share.

Ed Keaney, an analyst with San Francisco securities firm Volpe, Welty & Co., projected Health Systems' net income per share would grow from $2.07 in 1995 to $2.40 this year and to $2.85 in 1997.