The Health Care M&A Monthly: Blue Cross and Blue Shield Plans: More Acquisitions to Come?

Last month’s issue featured Anthem’s (NYSE: ATH) pro-
posed $3.8 billion acquisition of Trigon Healthcare (NYSE: TGH), the Blue Cross Blue Shield licensee in Virginia. News of this deal has rattled some cages in other states where Blues plans are contemplating conversion to for-profit status, with all the benefits and challenges such a change implies. One result of conversion is that such a plan is more likely to participate in the acquisition market.
Blues plans are clearly attractive candidates. Total systemwide revenue of the 43 independent Blues plans for 2001 was $143.2 billion, a 13.5% increase over the previous year. In 2001, combined total membership increased 3% to 82.6 million, representing one of every four Americans. Membership now stands at its highest level in 20 years, indicating that the Blues may be gaining on other managed care entities.
One way to tap into these impressive numbers is through the acquisition market. But as this discussion indicates, the conversion process is being met with a wide variety of reactions. Battles to acquire Blues plans will be fought state by state. The map on page 3 shows where certain plans now operate as publicly traded organizations, where some deals are being pursued and where some conversions are being mooted. (It should be noted that this map doesn’t cover all the operations of the publicly traded Blues; for example, WellPoint Health Network (NYSE: WLP) has other HMO operations in Illinois and Texas, as well as PPO and specialty operations in additional states.)
Recent experience with plans that have converted suggests that they operate more efficiently as publicly traded companies, if efficiency is measured in financial terms. Take Cobalt Corporation (NYSE: CBZ), the Wisconsin licensee of the Chicago-based BlueCross BlueShield Association. A year ago and shortly after going public, Cobalt became an acquisition target of unidentified Blues plans, and hired Bear, Stearns & Co. to help it sift through those offers. None of them panned out.
However, with its bottom line dramatically improving, we expect that Cobalt will again become an acquisition target in the future. Two of the obvious suitors would surely include Anthem and WellPoint.
With its improved finances, Cobalt may be in a position to raise the bar. At the end of the year, the company will get a new CEO, one with an appetite to acquire additional health insurers in the state. With 500,000 enrollees and healthy finances, Cobalt is well placed to build up its member and revenue bases. This would, in turn, command a higher price if the company ever becomes an acquisition target again.
Anthem’s plan to acquire Blue Cross Blue Shield of Kansas Blues for $190 million is crawling through the court system. A judge recently overturned an order from the state’s Insurance Commissioner blocking the sale of the state’s largest insurer to for-profit Anthem. The court ruled that the commissioner’s ruling was based on "speculation and suspicion which are not supported by substantial evidence." In essence, the Commissioner’s claim that the deal would result in premium increases of $248 million over five years, as projected by Kansas Insurance Department lawyers, was viewed as faulty because it was based on projections that could not be realized. The Commissioner took just four days to appeal the ruling to the state’s Supreme Court. At the time of the Commissioner’s appeal, the Kansas Supreme Court had recessed for the summer. The Court will resume in September, just in time to have it thrashed out as an election issue in that state.
As noted in previous issues, the proposed conversion and $1.3 billion acquisition of CareFirst BlueCross Blue Shield by WellPoint faces a prolonged battle since opposition can be raised in the three jurisdictions where it operates. To date, most of the brouhaha has focused on Maryland, but now the District of Columbia has joined the fray. The first hearings on the proposed conversion in DC resulted in a chorus of opposition to the plan. And we have yet to hear from Delaware.