Technical and contractual snags delay HSI, WellPoint marriage.

Undisclosed difficulties have caused delays in completing the merger between Health Systems International Inc. and WellPoint Health Networks Inc., officials said.

Malik Hasan, who is chairman of HSI and slated to be chairman of the merged health plans, last week told a group of financial analysts, "We have hit a number of vexing technical questions, and additionally, there are a number of contractual questions that remain to be answered and cleared by the (Securities and Exchange Commission) and by the (National) Blue Cross and Blue Shield Association.

"You must remember, we are combining three and not two organizations," Hasan noted, referring to WellPoint's parent company, Blue Cross of California, which is to be spun off into two separate charitable foundations.

Hasan later said he was optimistic a merger proxy statement would be completed before Thanksgiving.

HSI and WellPoint announced their intentions to merge last April. The combined entity would be one of the largest publicly held health care firms in the U.S., with annual revenues approaching $6 billion and membership exceeding 4 million.

Is lawsuit key?

Hasan declined to discuss the cause of the problems. Sources have said a federal lawsuit Blue Cross' CaliforniaCare health plan filed last month against the National Committee for Quality Assurance has become a major sticking point.

CaliforniaCare sued the NCQA after the Washington-based organization denied the health plan its accreditation, a blow industry observers predicted could hurt the plan's standing in the health care community. CaliforniaCare is claiming in its suit that the NCQA's accreditation process is biased and inconsistent.

Meanwhile, both WellPoint and HSI reported healthy earnings for the third quarter ended Sept. 30.

Net income gains

HSI's net income increased 9 percent, to $24.3 million, or 50 cents per share, including $1.5 million in merger related expenses. That's compared to net income of $22.4 million, or 45 cents per share, a year before. Revenues increased 21 percent to $702.9 million from $580.8 million.

For the first nine months of the year, net income was up 3 percent, to $66.2 million, or $1.35 a share, a figure that included $8.9 million in merger-related expenses. That's compared to net income of $64.2 million, or $1.29 per share, a year earlier. Revenues increased 16 percent to $2 billion from $1.7 billion.

HSI's third-quarter medical plan enrollment increased 19.3 percent to 1.71 million from 1.44 million a year earlier.

For WellPoint, net income was $51.8 million, or 52 cents per share, up 4 percent from the year-earlier $49.8 million, or 50 cents per share. WellPoint did not break out merger-related expenses.

Revenues increased 11 percent to $771.8 million from $697.8 million a year before.

Nine-month revenues were up 12 percent to $2.3 billion from $2.1 billion a year before.

WellPoint's medical plan enrollment increased 7.2 percent to 2.77 million from 2.59 million a year before.