Local philanthropic foundation elicits high praise.

HMO conversion provides $300 million endowment

Born out of Health Net's controversial conversion from a nonprofit health maintenance organization to a for-profit HMO, the California Wellness Foundation is making its mark in public health.

A year and a half after it opened, the Woodlands Hills-based foundation, endowed with $300 million, is considered one of the state's leading philanthropic health foundations, said health care observers.

The widely applaud the foundation's $24 million grant, called the Violence Prevention Initiative, to fund violence-prevention programs throughout the state for five years.

"The wellness foundation is putting more money into violence (prevention) than anyone -- including the federal government -- has ever before," said Billie Weiss, director of the Injury Prevention Project for the Los Angeles County Department of Health Services. "This is unprecedented."

She called violence an enormous public health issue that has been mainly dealth with through law enforcement, not prevention. Unfortunately, that strategy has not worked because the number of people killed by violence has continued to grow.

Violence is the leading cause of death and disability for all L.A. County residents between the ages of one and 44, Weiss said. Last year, 2,500 people died of violent causes in L.A. County, she said.

The foundation's grant money is being awarded to community leaders, such as ministers and gang-prevention workers, to support their ongoing efforts to reduce violence. The money is also being used to help community leaders identify and mentor potential youth leaders and to fund academic fellowships in violence prevention.

Some money is also going to support the Pacific Center for Violence Prevention, the state's central source of training and information on the prevention of youth violence. The center is based in San Francisco General Hospital.

With a number of high-profile grants in the past year, such as the $24 million Violence Prevention Initiative, the reputation of the California Wellness Foundation has grown exponentially, said Program Director Gary Yates.

"Every time we issue a release, our staff is on the phone for over a week dealing with reporters," he said.

Since the foundation opened in February 1992, it has awarded 95 grants totaling $15.4 million, according to foundation records.

The grants, which ranged from $5,000 to $1 million apiece, have been awarded to address a wide range of health issues affecting the children and families of California.

The funding was made possible as the result of Woodland Hills-based Health Net's conversion to for-profit status. As required by state law, Health Net, which grew for years with the help of its tax-free nonprofit status, needed to donate a sum equal to the value of the company's fair value to charity when it switched to a for-profit status.

A controversy sprang up over how much Health Net was worth. In the end, California Department of Corporations Commissioner Thomas S. Sayles decided on $300 million.

Health Net, therfore, agreed to endow the California Wellness Foundation with $75 million in cash and an additional $225 million over the ensuing 15 years. The foundation also owns about 73 percent of Health Net's non-voting Class B stock.

Under the proposed merger between Health Net and its long-time rival, QualMed Inc. of Pueblo, Colo., the Wellness Foundation stands to fare even better.

Under the merger, which still needs to be approved by the California Department of Corporations, each share of Health Net stock would be converted into 3.34 shares of the new company's stock, giving the Wellness Foundation a 52 percent equity stake in the merged company. Although the foundation's shares in the merged company would also be non-voting, those shares would be converted to voting shares if the foundation ever sold them to a third party.

Based on QualMed's closing stock price of $15.50 a share on Aug. 30, the day the merger agreement was announced, the new company would have a market value of about $750 million.

The merger would create a managed-care company with 1.2 million customers and $1.8 billion in annual revenue.

The foundation operates independent of Health Net and could remain in operation indefinitely, as long as the stock market does well and its investments turn out, said Yates.

Yates said the foundation was "flooded" with grant applications a month after it opened. He said a staff of five program assistants sift through some 30 to 40 letters a month from those inquiring about funding.

Only about 10 to 15 percent of those inquirers end up receiving a grant, he said.

The ultimate decisions about which proposals get funded are made by eight board members who meet four times a year and operate on consensus, Yates said. The board members, originally chosen by Health Net Chairman Roger Greaves, are all experts in health care, according to their biographies.

Yates said three to six months typically pass between the time a letter of inquiry is received by the foundation and when the board finally makes a decision on whether or not to fund the project.

He said getting a project funded is a "rigorous process" that involves submitting quarterly or biannual reports, undergoing on-site visits by foundation staffers, and establishing specific goals, objectives and criteria upon which the project would be evaluated.

Although the Wellness Foundation has yet to build up a track record of success, Dr. Robert E. Tranquada, a professor of medicine and public policy at the USC School of Medicine, said he is fairly impressed with the foundation.

"I feel very good about what they are doing and their ability to create change," he said. "They have substantial resources, and there are enormous needs in those areas."

He said the challenge of any foundation is to make sure its money really can make a difference.

Yates said the foundation's board members "strongly believe in evaluating the projects it funds and knowing whether a project makes a difference."

For large projects, the foundation hires an outside agency to do the evaluation. For instance, it granted $4 million to Johns Hopkins University to evaluate its Violence Prevention Initiative for four years.

And when the foundation granted $1 million to distribute an 80-page health care guide developed by researchers at the University of California at Berkeley's School of Public Health, a rigorous evaluation process was set up to gauge the project's impact.

The "Wellness Guide" is originally being distributed to 100,000 women participating in California's Women, Infants and Children Supplemental Food Program, which provides assistance to low-income women who are pregnant or who have children under the age of five.

Once the guides are distributed, some 800 recipients will be interviewed to determine whether or not the literature was helpful. If the guides are determined to be of sufficient value, then they will be distributed to 10 million households throughout the state.