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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-13803
WELLPOINT HEALTH NETWORKS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4635504
(State of incorporation) (I.R.S. Employer Identification No.)
1 WELLPOINT WAY
THOUSAND OAKS, CA 91362
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 234-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 16, 2001: $5,830,412,304 (based on the last
reported sale price of $93.01 per share on March 16, 2001, on the New York Stock
Exchange).
Common Stock, $0.01 par value of Registrant outstanding as of March 16,
2001: 63,096,476 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's definitive proxy statement for its 2001 Annual
Meeting of Stockholders.
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WELLPOINT HEALTH NETWORKS INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 27
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43
Item 8. Financial Statements and Supplementary Data................. 46
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 47
SIGNATURES............................................................. 52
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
PART I
ITEM 1. BUSINESS
GENERAL
WellPoint Health Networks Inc. (the "Company" or "WellPoint") is one of the
nation's largest publicly traded managed health care companies. As of
December 31, 2000, WellPoint had approximately 7.9 million medical members and
approximately 40.3 million specialty members. As a result of the March 2001
completion of the Company's acquisition of Cerulean Companies, Inc.
("Cerulean"), the Company's medical membership has increased to approximately
9.7 million medical members. The Company offers a broad spectrum of quality
network-based managed care plans. WellPoint provides these plans to the large
and small employer, individual, Medicaid and senior markets. The Company's
managed care plans include preferred provider organizations ("PPOs"), health
maintenance organizations ("HMOs") and point-of-service ("POS") and other hybrid
plans and traditional indemnity plans. In addition, the Company offers managed
care services, including underwriting, actuarial services, network access,
medical cost management and claims processing. The Company also provides a broad
array of specialty and other products, including pharmacy, dental, utilization
management, life insurance, preventive care, disability insurance, behavioral
health, COBRA and flexible benefits account administration.
The Company markets its products in California primarily under the name Blue
Cross of California, in Georgia primarily under the name Blue Cross Blue Shield
of Georgia and in other states primarily under the name UNICARE. Historically,
the Company's primary market for its managed care products has been California.
On March 15, 2001, the Company completed its acquisition of Cerulean, the parent
company of Blue Cross and Blue Shield of Georgia, Inc. ("Georgia Blue"), which
served approximately 1.8 million medical members in the state of Georgia as of
December 31, 2000. The Company holds the exclusive right in California to market
its products under the Blue Cross name and mark and in Georgia to market its
products under the Blue Cross Blue Shield name and mark. The Company's customer
base is diversified, with extensive membership among large and small employer
groups and individuals and a growing presence in the Medicare and Medicaid
markets.
In 1996, the Company began pursuing a nationwide expansion strategy through
selective acquisitions and start-up activities in key geographic areas. With the
acquisitions in March 1996 of the Life & Health Benefits Management division
("MMHD") of Massachusetts Mutual Life Insurance Company (the "MMHD Acquisition")
and in March 1997 of certain portions of the health and related life group
benefit operations (the "GBO") of John Hancock Mutual Life Insurance Company
(the "GBO Acquisition"), the Company has significantly expanded its operations
outside of California. One element of the Company's acquisition strategy has
been large employer group plans that offer indemnity and other health insurance
products that are less intensively managed than the Company's products in
California. Since 1987, the Company has transitioned substantially all of its
California indemnity insurance customers to managed care products. An element of
the Company's geographic expansion strategy is to replicate its experience in
California in motivating traditional indemnity members to transition to the
Company's broad range of managed care products.
In addition, the Company focuses on acquiring businesses that provide
significant concentrations of members in strategic locations outside of
California. In connection with this strategy, in March 2001 the Company
completed its acquisition of Cerulean. In March 2000 the Company acquired Rush
Prudential Health Plans, which offers HMO and other medical products in
Illinois, primarily in the greater Chicago area.
As of December 31, 2000, the Company's primary internal business divisions
were focused on large employer group business, individual and small employer
group business, and senior and specialty business. Revenues (with sales to
external customers and sales or transfers to other segments shown
1
separately), operating profit or loss and identifiable assets attributable to
each of the Company's reportable segments are set forth in Note 20 to the
Consolidated Financial Statements, which are included elsewhere in this Annual
Report on Form 10-K. As the Company begins its integration of the Georgia Blue
operations, it will assess the effect of the transaction on its reportable
business segments.
RECENT TRANSACTIONS
ACQUISITION OF CERULEAN
On March 15, 2001, the Company completed its acquisition of Cerulean.
WellPoint and Cerulean had originally entered into an Agreement and Plan of
Merger (as later amended and restated, the "Merger Agreement"). The Merger
Agreement provided for the merger (the "Merger") of Water Polo Acquisition
Corp., a wholly owned subsidiary of WellPoint, with and into Cerulean. As a
result of the Merger, Cerulean has now become a wholly owned subsidiary of
WellPoint. WellPoint now holds the exclusive license to use the Blue Cross and
Blue Shield names and marks in the state of Georgia. At the effective time of
the Merger, the shareholders of Cerulean became entitled to receive aggregate
cash consideration of $700 million. As of December 31, 2000, Cerulean, through
Georgia Blue and its various other subsidiaries, served approximately
1.8 million medical members in the state of Georgia.
The Company intends to continue to explore opportunities to work with other
Blue Cross Blue Shield entities. The Company currently provides pharmacy
benefits management services to certain Blue Cross Blue Shield entities and may
market additional specialty products to and pursue additional relationships with
other Blue Cross Blue Shield plans in the future.
ACQUISITION OF RUSH PRUDENTIAL HEALTH PLANS
On December 9, 1999, WellPoint entered into a Purchase Agreement (the
"Purchase Agreement") with The Prudential Insurance Company of America and
Rush-Presbyterian-St. Luke's Medical Center to acquire Rush Prudential Health
Plans. WellPoint completed this transaction on March 1, 2000. The purchase price
for the acquisition was approximately $204 million, subject to certain
post-closing adjustments. As of December 31, 1999, Rush Prudential Health Plans
served approximately 300,000 medical members, primarily in the Chicago area.
MANAGED HEALTH CARE OVERVIEW
An increasing focus on costs by employers and consumers over the last decade
has spurred the growth of HMO, PPO, POS and other forms of managed care plans as
alternatives to traditional indemnity health insurance. Typically, HMOs and
PPOs, as well as hybrid plans incorporating features of each (such as POS
plans), develop health care provider networks by entering into contracts with
hospitals, physicians and other health care professionals to deliver health care
at favorable rates that incorporate health care utilization management and other
measures that encourage the delivery of medically necessary care as well as
network credentialing and quality assurance. HMO, PPO and POS members generally
are charged periodic, prepaid premiums, and copayments or deductibles. PPOs, POS
plans and a number of HMOs allow out-of-network usage, typically at
substantially higher out-of-pocket costs to members. HMO members generally
select one primary care physician from a network who is responsible for
coordinating health care services for the member, while PPOs and other "open
access" plans generally allow members to select physicians without coordination
through a primary care physician. Hybrid plans, such as POS plans, typically
involve the selection of primary care physicians similar to HMOs, but allow
members to choose non-network physicians at higher out-of-pocket costs similar
to PPOs.
THE CALIFORNIA MARKET. The desire of California-based employers for a range
of health care choices that promote effective cost controls and quality care has
contributed to substantial market acceptance of managed health care in
California, where the total penetration of managed health care
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companies is generally higher than the national average. Initial developments in
California with respect to managed care were focused on HMOs and other tightly
controlled plans. Over the last few years, this emphasis has decreased as
consumers and media scrutiny have generally criticized the reduced choice
typical of HMO plans and as greater regulatory restrictions have been placed on
HMO offerings. The Company believes that this movement towards PPOs and other
open access plans will continue in the future.
OTHER STATES. Outside of California, the past decade has seen significant
transformations in the health care sector. Although market acceptance of the
array of managed health care plans continues to grow throughout the United
States, it still varies widely from state to state. In some states, especially
larger population centers, members are offered health care choices focused on
HMO or other closed-access plans. In other states, members are typically offered
a spectrum of health care choices which are more focused on PPOs or traditional
indemnity health models than in California. Indemnity insurance usually allows
members substantial freedom of choice in selecting health care providers but
without significant financial incentives or cost-control measures typical of
managed care plans. Indemnity insurance plans typically require annual
deductible obligations of members. Upon satisfaction of the deductible, the
member is reimbursed for health care expenses on a full or partial basis of the
indicated charges. Health plan reimbursement is often limited to the health
plan's assessment of the reasonable and customary charges prevailing in a region
for the particular health care procedure. As in California, initial developments
in managed care in other states have generally focused on more restrictive
plans. More recently, consumer and general public sentiment has shifted towards
open access plans.
CUSTOMER SEGMENTATION
WellPoint's products are developed and marketed with an emphasis on the
differing needs of various customer segments. In particular, the Company's
product development and marketing efforts take into account the differing
characteristics between the various customer groups served by the Company,
including individuals and small employers, large employers (generally with 51 or
more employees), seniors and Medicaid recipients, as well as the unique needs of
educational and public entities, federal employee health and benefit programs,
national employers and state-run programs servicing high-risk and under-served
markets. Individual business units are responsible for enrolling, underwriting
and servicing customers in specific segments. The Company believes that one of
the keys to its success has been its focus on distinct customer groups defined
generally by employer size and geographic region, which better enables the
Company to develop benefit plans and services that meet the needs of these
distinct markets. Although the Company has experienced increased competition
over the last several years, the Company has long been a market leader in the
California individual and small employer group market.
INDIVIDUAL AND SMALL GROUP BUSINESSES
MARKETING
Sales representatives are generally assigned to a specific geographic region
to allow WellPoint to tailor its marketing efforts to the particular health care
needs of each regional market. Individual and small employer group products are
marketed in California primarily through independent agents and brokers, who are
overseen by WellPoint's sales departments, and through sales managers in
Comprehensive Integrated Marketing Services, Inc. ("CIMS"), a wholly owned
indirect subsidiary of the Company. UNICARE's individual and small employer
group products are generally distributed on a regional basis by independent
sales agents in the various localized markets in which UNICARE operates. The
Company's Blue Cross and Blue Shield of Georgia products are also distributed by
independent sales agents working in conjunction with the Company's internal
sales staff. The Company expects that, over time, the development of
Internet-based distribution methods may affect the sales and marketing process
in the individual and small employer group market. In this regard, in 1999 the
3
Company entered into sales distribution arrangements with certain Internet-based
sales agents and introduced its Agent Connect program, which allows individual
agents and brokers to create customized Internet websites and incorporate basic
information regarding the Company's health plan offerings.
PRODUCTS
PPO AND OTHER PLANS. The Company's PPO products, which are generally
marketed in California under the name "Prudent Buyer," in Georgia under the name
"Blue Choice PPO" and elsewhere under the name "UNICARE," are designed to
address the specific needs of different customer segments. The Company's PPO
plans require periodic, prepaid premiums and may have copayment obligations for
services rendered by network providers that are often similar to the copayment
obligations of its HMO plans. Unlike WellPoint's HMO and other "closed-access"
plans, members are not required to select a primary care physician who is
responsible for coordinating their care and may be subject to annual deductible
requirements. PPO members have the option to receive health care services from
non-network health care professionals, typically at substantially higher
out-of-pocket costs to members. Among the Company's various PPO plans are its
Prudent Buyer and UNICARE Co-Pay products, which replace annual deductible
obligations with HMO-like co-payments while maintaining the member choice
typical of PPO plans, and high-deductible health plans intended for use with
medical savings accounts ("MSAs"). In 1998, the Company introduced its unique
Employee Elect product, which allows small employers to offer their employees a
menu of PPO and HMO options. In January 2001, the Company introduced its
PlanScape family of individual PPO plans in California. The PlanScape plans are
marketed towards purchasers with varying price preferences and offer a variety
of coverage options and premium amounts.
Georgia Blue introduced its first PPO in Georgia in the mid-1980s and began
offering the Blue Choice PPO product in 1995. Georgia Blue introduced its first
PPO for the individual market in February 1999. Georgia Blue also offers a
traditional fee-for-service product for both individual and small employer
groups. Traditional indemnity products may also use the statewide networks that
Georgia Blue has established for physicians, hospitals and pharmacies. An
important component of the Company's growth strategy is to introduce new
products aimed for the individual and small employer group markets in Georgia.
Outside of California and Georgia, the Company offers PPO and other open
access products (using proprietary networks and third-party provider networks),
as well as traditional fee-for-service products. As WellPoint continues to
develop or acquire proprietary provider network systems in key geographic areas,
the Company intends to offer more intensively managed products to the existing
members of acquired businesses and to new individual, small group and senior
customers outside of California.
The Company believes that an important growth opportunity in the individual
market lies in the development of products that are priced attractively for
previously uninsured people. In 2000, the Company introduced its PPO Saver
product in California and selected other locations. The PPO Saver product offers
significantly lower premiums in exchange for certain limited benefits that still
offer primary care physician visits and preventive care benefits and provide
catastrophic coverage.
HMO PLANS. The Company offers a variety of HMO products to the members of
its California HMO, CaliforniaCare. CaliforniaCare members are generally charged
periodic, prepaid premiums that do not vary based on the amount of services
rendered, as well as modest co-payments (small per-visit charges). Members
choose a primary care physician from the HMO network who is responsible for
coordinating health care services for the member. Certain plans permit members
to receive services from health care professionals that are not a part of the
Company's HMO network at a substantial out-of-pocket cost to members which
includes a deductible and higher copayment obligations. To enhance the
marketability of its plans, in 1996 the Company introduced its CaliforniaCare
Saver HMO
4
product, which has deductible obligations for certain hospital and outpatient
benefits. In response to consumer demand for easier access to specialists, in
1997 the Company introduced the Ready Access program in its CaliforniaCare HMO.
The program expedites the referral process to specialists within a member's
participating medical group ("PMG"). In addition, the program also allows
members of certain PMGs to self-refer to designated frequently used specialists.
Upon completion of the Cerulean acquisition, the Company now offers HMO
products in the state of Georgia. As of December 31, 2000, Georgia Blue (through
its affiliate Blue Cross Blue Shield Healthcare Plan of Georgia, Inc.) had
approximately 606,000 HMO members, primarily in the greater Atlanta area. Since
1993, Georgia Blue's HMO and point-of-service products have been Georgia Blue's
fastest-growing products. Georgia Blue is licensed and operational as an HMO in
eight separate locations in Georgia, including Atlanta, Augusta, Columbus and
Savannah. As result of the Rush Prudential acquisition, the Company also offers
HMO products in the greater Chicago area. An element of the Company's expansion
strategy with respect to this business is to introduce a greater variety of
products similar to those offered to CaliforniaCare members.
LARGE GROUP BUSINESSES
During the last several years, WellPoint's large employer group business has
experienced considerable growth. The Company attributes this growth primarily to
the strength of the California economy as well as the enhancement of the
Company's reputation for customer service and value especially among large,
established companies.
MARKETING AND PRODUCTS
WellPoint's managed health care plans to large employers are generally sold
by WellPoint sales personnel, in conjunction with an employer's broker or
consultant, to develop a package of managed health care benefits specifically
tailored to meet the employer's needs. WellPoint believes that a key component
of its success in this market segment is the Company's strength in developing
complex, highly customized benefits packages that respond to the diverse needs
of larger employers and their employee population. In 1999, the Company
introduced its Blue Cross Preferred PPO product in California, which provides
certain enhanced benefits desired by high-technology companies in competitive
labor markets.
Many of WellPoint's HMO and PPO products offered to individuals and small
employer groups are also offered to large employer groups. In addition to
competitive pricing and exemplary customary service, a key competitive factor in
the sale of large employer group products is the ability to offer a spectrum of
health plan choices. With the completion of the Company's acquisitions of
Cerulean and Rush Prudential, the Company is able to offer a mix of products,
including HMO and PPO products, to customers in Georgia and the greater Chicago
area. One component of the Company's expansion strategy outside of California is
to evaluate acquisition opportunities that will allow the Company to complement
its product offerings in selected target areas.
MANAGEMENT SERVICES
In addition to fully insured products, WellPoint provides administrative
services to large group employers that maintain self-funded health plans. In
California, the Company often has been able to capitalize on this relationship
by subsequently introducing WellPoint's underwritten managed care products. The
Company's managed care services revenues have expanded considerably during the
last five years as a result of the MMHD, GBO and Cerulean acquisitions. These
businesses are comprised of a higher percentage of administrative services
business than the Company's traditional California business. Georgia Blue
currently provides administrative services for several accounts sponsored by the
state of Georgia. These accounts comprise in excess of 25% of Georgia Blue's
membership.
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WellPoint offers managed care services, including underwriting, actuarial
services, medical cost management, claims processing and administrative services
for self-funded employers. WellPoint also enables employers with self-funded
health plans to use WellPoint's provider networks and to realize savings through
WellPoint's favorable provider arrangements, while allowing employers the
ability to design certain health benefit plans in accordance with their own
requirements and objectives. As of December 31, 2000, WellPoint served
self-insured health plans covering approximately 2.5 million medical members.
SENIOR PLANS
WellPoint offers numerous Medicare supplement plans, which typically pay the
difference between health care costs incurred by a beneficiary and amounts paid
by Medicare. One such product is Medicare Select, a PPO-based product that
offers supplemental Medicare coverage. WellPoint also offers Medicare Select II,
a hybrid product which allows seniors over the age of 65 to maintain their full
Medicare benefits for any out-of-network benefits while enrolled in a
supplemental plan that allows them to choose their own physician with a
copayment. As of December 31, 2000, these Medicare supplemental plans served
approximately 194,000 members. WellPoint also offers Blue Cross Senior Secure,
an HMO plan operating in defined geographic areas, under a Medicare + Choice
contract with the Health Care Financing Administration ("HCFA"). This contract
entitles WellPoint to a fixed per-member premium from HCFA which is subject to
adjustment annually by HCFA based on certain demographic information relating to
the Medicare population and the cost of providing health care in a particular
geographic area. In addition to physician care, hospitalization and other
benefits covered by Medicare, the benefits under this plan (which vary by
county) typically include prescription drugs, routine physical exams, hearing
tests, immunizations, eye examinations, counseling and health education
services. As of December 31, 2000 Blue Cross Senior Secure HMO plans served over
37,000 members. Georgia Blue also has a Medicare + Choice contract with HCFA,
which allows it to offer an HMO plan in nine Georgia counties in the greater
Atlanta area. This product, "Blue Choice Platinum," became operational in April
1997 and had approximately 26,000 members as of December 31, 2000.
MEDICAID PLANS AND OTHER STATE-SPONSORED PROGRAMS
The California Department of Health Services ("DHS") administers Medi-Cal,
California's Medicaid program. WellPoint has been awarded contracts to offer
Medi-Cal managed care programs in various California counties. Under these
programs, WellPoint provides health care coverage to Medi-Cal program members
and DHS (or a delegated local agency) pays WellPoint a fixed payment per member
per month. As of December 31, 2000, approximately 753,000 members were enrolled
in WellPoint's Medi-Cal managed care programs in various California counties and
in other state-sponsored programs. In 2000, the Company formed a newly licensed
health maintenance organization, UNICARE Health Plan of Oklahoma, Inc., which
has obtained a contract with the Oklahoma Health Care Authority to cover
SoonerCare Plus Medicaid members in central Oklahoma, primarily the Oklahoma
City area. Operations began on July 1, 2000 and as of December 31, 2000, the
plan had approximately 18,000 Oklahoma Medicaid SoonerCare Plus members. In
2000, the Company entered into a joint venture with Medical Card Systems, Inc.,
a Puerto Rico-based group health and life insurer, to pursue contracts under the
Health Reform Program in Puerto Rico.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
While the Company's product development and marketing efforts are organized
by distinct customer segments, the Company believes that its interactions with
hospitals and physicians are best facilitated through a single coordinated
effort handled by the Company's Health Care Quality Assurance Division. Because
of the different market positions of the Company's Blue Cross of
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California and UNICARE tradenames, the Company's health care networks and
provider relations are different in California than other states.
BLUE CROSS OF CALIFORNIA
WellPoint's extensive managed health care provider networks in California
include its HMO, PPO and specialty managed care networks. WellPoint uses its
large California membership to negotiate physician contracts at favorable rates
that promote delivery of quality care and encourage effective utilization
management. Under these contracts, physicians are paid either a fixed per member
monthly amount (known as a capitation payment) or on the basis of a fixed fee
schedule. In selecting physicians for its networks, WellPoint uses its
credentialing programs to evaluate the applicant's professional qualifications
and experience, including license status, malpractice claims history and
hospital affiliations.
The following is a more detailed description of the principal features of
WellPoint's California PPO and HMO networks.
PPO NETWORK. There were approximately 3.4 million members (including
administrative services members) enrolled in WellPoint's California PPO health
care plans as of December 31, 2000, approximately 36% of whom were individuals
or employees of small groups.
WellPoint endeavors to manage and control costs for its PPO plans by
negotiating favorable arrangements with physicians, hospitals and other health
care professionals, and requiring participation in the Company's various medical
management programs. In addition, WellPoint manages costs through pricing and
product design decisions intended to influence the behavior of both members and
health care professionals.
WellPoint's California PPO plans provide for the delivery of specified
health care services to members by contracting with physicians, hospitals and
other health care professionals. Hospital contracts are on a nonexclusive basis
and generally provide for per diem payments (a fixed fee schedule where the
daily rate is based on the type of service) that provide for rates that are
below the hospitals' standard billing rates. Physician contracts are also on a
nonexclusive basis and specify fixed fee schedules that are below standard
billing rates. WellPoint is able to obtain prices for hospitals and physician
services below standard billing rates because of the volume of business it
offers to health care professionals that are part of its network. Rates are
generally negotiated on an annual or multi-year basis with hospitals. Rates for
physicians in the Company's PPO network are set from time to time by the
Company.
HMO NETWORK. Membership in CaliforniaCare was approximately 2.2 million
members as of December 31, 2000.
The physician network of PMGs is comprised of both multi-specialty medical
group practices and individual practice associations ("IPAs"). Substantially all
primary care physicians or PMGs in the Company's California HMO network are
reimbursed on a capitated basis. These arrangements specify fixed per member per
month payments to providers and may result in a marginally higher medical loss
ratio than a non-capitated arrangement, but significantly reduce risk to
WellPoint. Generally, HMO network hospital contracts are on a nonexclusive basis
and provide for a per diem payment, which is below the hospitals' standard
billing rates.
Contractual arrangements with PMGs typically include provisions under which
WellPoint provides limited stop-loss protection. If the PMG's actual charges for
medical services provided to a member exceed an agreed-upon threshold amount,
WellPoint will pay the group a portion of the excess amount. Rates are generally
negotiated with PMGs and hospitals on an annual or multi-year basis. To
encourage PMGs to contain costs for claims for non-capitated services such as
inpatient hospital, outpatient surgery, hemodialysis, emergency room, skilled
nursing facility, ambulance, home health and alternative
7
birthing center services, WellPoint's PMG agreements provide for a settlement
payment to the PMG based upon the PMG's effective utilization of such
non-capitated services. PMGs are also eligible for additional incentive payments
based upon their satisfaction of quality criteria and management of outpatient
prescription drugs.
BLUE CROSS BLUE SHIELD OF GEORGIA
In 1995, Cerulean began using jointly owned integrated delivery systems for
managed healthcare products, with community health partnership networks
("CHPNs") as the cornerstone of this strategy. CHPNs are locally based equity
ventures between Georgia Blue and a local physician group or hospital. The
physician or hospital joint ventures, as well as other health care professionals
with which the CHPN maintains contracts, provide clinical services. Georgia Blue
provides sales, management and administrative services, including information
systems and data management services. Georgia Blue's HMO affiliate collects
premium and fee revenues from subscribers and retains a flat percentage for
administration and as a contribution to surplus. After deduction of premium
taxes, the CHPN uses remaining premium revenue for payment of medical expenses
and contributions to its retained earnings. As of December 31, 2000, two CHPNs
were active and operational, one in the greater Atlanta area and one in the
Augusta market. The HMO membership in the CHPNs accounts for significant
percentage of Georgia Blue's HMO membership.
Outside of Atlanta and Augusta, Georgia Blue has developed extensive
physician and hospital networks that serve Georgia Blue's PPO Plans and certain
of its indemnity products. For these products, Georgia Blue uses a variety of
reimbursement methods, including per diem payments, maximum allowable charge,
case rates, discounted fee-for-service and fee schedules.
UNICARE
Due to the more recent development of the Company's national operations, the
Company's relations with health care professionals outside of California are
more varied than in California. During 2000, the Company continued its UNICARE
network development efforts in various states, including Georgia, Illinois,
Indiana, Maryland, Ohio, Texas and Virginia. Some of these network development
activities involved start-up activities, while others involved supplementing
existing networks acquired in the MMHD and GBO acquisitions. As a result of the
Company's extensive efforts, UNICARE's proprietary networks in Georgia and Texas
are substantially completed.
As a result of the Rush Prudential acquisition completed in March 2000,
UNICARE has now added Rush Prudential's existing networks to its proprietary
networks in the greater Chicago area. As part of the MMHD acquisition, the
Company also acquired a majority ownership interest in a PPO entity, UNICARE
National Capital Preferred Provider Organization ("UNICARE NCPPO"), which
operates in the Maryland/Virginia area and is a joint venture with local health
care providers.
A large number of UNICARE members are currently served by third-party
provider networks, which generally lack the selectivity and discounts typical of
the Company's proprietary networks. One of the Company's strategies for the
expansion of its UNICARE operations is to continue building and acquiring
proprietary network systems in certain geographies similar to the Company's
networks in California and Texas, which provide a continuum of managed care
products to various customer segments. As the Company expands its out-of-state
operations, it intends to build or acquire such network operations and, as
appropriate, to replace or supplement the current third-party network
arrangements. Additionally, the Company has begun a process to consolidate its
third-party network relationships in an effort to further contain its
administrative expenses.
8
ANCILLARY NETWORKS
WellPoint evaluates current and emerging high volume or high cost services
to determine whether developing an ancillary service network will yield cost
control benefits. In establishing these ancillary service networks, WellPoint
seeks to enter into capitation or fixed-fee arrangements with providers of these
services. WellPoint regularly collects and analyzes industry data on high cost
or high volume unmanaged services to identify the need for specialty managed
care networks. For example, WellPoint has created Centers of Expertise for
certain transplant services.
UTILIZATION MANAGEMENT
In order to better manage quality in its proprietary provider networks,
WellPoint adopts utilization management processes and guidelines that are
intended to reduce unnecessary procedures, admissions and other medical costs.
The utilization management systems seek to provide quality care to WellPoint's
members by ensuring that medical services provided are based on medical
necessity and that all final decisions are made by physicians. In its California
HMO, WellPoint permits PMGs to oversee most utilization management for their
particular medical group under WellPoint's guidelines. Currently, substantially
all of the PMGs in WellPoint's California HMO network have established
committees to oversee utilization management. For its California PPO network,
WellPoint uses treatment guidelines, requires pre-admission approvals of
hospital stays and concurrent review of all admissions and retrospectively
reviews physician practice patterns. Utilization management also includes an
outpatient program, with pre-authorization and retrospective review, ongoing
supervision of inpatient and outpatient care of members, case management and
discharge planning capacity. Review of practice patterns may result in
modifications and refinements to the PPO plan offerings and network contractual
arrangements. In addition, WellPoint manages health care costs by periodically
reviewing cost and utilization trends within its provider networks. Cases are
reviewed in the aggregate to identify a high volume of a particular type of
service to identify the most effective method of treatment while more
effectively managing costs. In addition, the Company reviews high-cost
procedures in an effort to provide new quality, cost-effective treatment by
utilizing new technologies or by creating additional networks, such as its
networks of home health agencies.
For the Company's UNICARE managed care health plans, utilization management
is provided by UNICARE through the Company's subsidiary CostCare, Inc. ("CCI").
As part of the GBO acquisition, the Company acquired CCI, which provides medical
management services. The Company has integrated CCI's traditional utilization
management and case management services into UNICARE offerings. CCI products
include a disease state management program, a high-risk pregnancy identification
and management program and a nurse health information line. Certain of the
Company's plans in California also feature similar programs. In September 1999,
CCI (which operates as UNICARE/Cost Care) received a two-year accreditation for
its utilization management program from the Utilization Review Accreditation
Commission ("URAC"), a private organization providing voluntary accreditation of
utilization review entities. Additionally, in February 2000, CCI received a
two-year accreditation from URAC for its health information line program.
In 2000, the National Committee for Quality Assurance ("NCQA") awarded Blue
Cross Blue Shield Healthcare Plan of Georgia, Inc. its second full, three-year
accreditation. Georgia Blue's PPO organization was the first PPO in Georgia to
receive accreditation from URAC.
UNDERWRITING
In establishing premium rates for its health care plans, WellPoint uses
underwriting criteria based upon its accumulated actuarial data, with
adjustments for factors such as claims experience, member mix and industry
differences to evaluate anticipated health care costs. WellPoint's underwriting
practices in the individual and small group market are subject to legislation in
California, Georgia and
9
other states affecting the individual and small employer group market. Because
UNICARE's members are in every state, the Company's underwriting practices,
especially in the individual and small group market, are subject to a variety of
legislative and regulatory requirements and restrictions. See "Government
Regulation."
QUALITY MANAGEMENT
Quality management for most of the Company's business is overseen by the
Company's Quality Management Department and is designed to ensure that necessary
care is provided by qualified personnel. Depending on the local markets, quality
management encompasses plan level quality performance, provider credentialing,
provider and member grievance monitoring and resolution, medical group auditing,
monitoring medical group compliance with Company standards for medical records
and medical offices, physician peer review and a quality management committee.
SPECIALTY MANAGED HEALTH CARE AND OTHER PLANS AND SERVICES
WellPoint offers a variety of specialty managed health care and other
services. WellPoint believes that these specialty networks and plans complement
and facilitate the marketing of WellPoint's medical plans and help in attracting
employer groups and other members that are increasingly seeking a wider variety
of options and services. WellPoint also markets these specialty products on a
stand-alone basis to other health plans and other payors.
PHARMACY PRODUCTS
WellPoint offers pharmacy services and pharmacy benefit management services
to its members. WellPoint's pharmacy services incorporate features such as drug
formularies (a WellPoint-developed listing of preferred, cost-effective drugs),
a pharmacy network and maintenance of a prescription drug database and mail
order capabilities. Pharmacy benefit management services provided by WellPoint
include management of drug utilization through outpatient prescription drug
formularies, retrospective review and drug education for physicians, pharmacists
and members. In December 2000, the Company completed its acquisition of a
mail-order pharmacy facility, which now operates under the name PrecisionRx. The
Company believes that PrecisionRx will enhance the competitiveness of its
pharmacy benefit management services. As of December 31, 2000, WellPoint had
approximately 29 million risk and non-risk pharmacy members and approximately
54,000 participating pharmacies.
DENTAL PLANS
WellPoint's California dental plans include Dental Net, its California
dental HMO, and Blue Cross Dental Select HMO, a hybrid plan, a dental PPO, and
traditional indemnity plans. The Company's dental products outside of California
currently include a dental PPO in Texas, Georgia and almost all of the other
states in which the Company operates. As a result of the MMHD and GBO
acquisitions, the Company has acquired significant additional dental membership
outside of California. The Company's dental plans provide primary and specialty
dental services, including orthodontic services, and as of December 31, 2000,
served approximately 2.2 million dental members.
LIFE INSURANCE
The Company offers primarily term-life and accidental death and
dismemberment ("AD&D") insurance to employers, generally in conjunction with the
Company's health plans. The MMHD, GBO and Cerulean acquisitions have expanded
the Company's life insurance business both inside and outside of California. As
of December 31, 2000, the Company provided life insurance products to
approximately 2.0 million persons.
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MENTAL HEALTH PLANS
WellPoint offers specialized mental health and substance abuse programs. The
plans cover mental health and substance abuse treatment services on both an
inpatient and an outpatient basis. In addition, approximately 307 employee
assistance and behavioral managed care programs have been implemented for a wide
variety of businesses throughout the United States. As of December 31, 2000,
there were approximately 4.4 million members covered under WellPoint's mental
health plans. The Company believes the implementation of new mental health
parity laws (described in "Government Regulation") will provide a growth
opportunity for the Company because many plans currently provide for limited
mental health benefits.
UTILIZATION MANAGEMENT
In connection with the GBO acquisition, the Company acquired CCI. CCI, which
now operates under the trade name UNICARE/CostCare, provides stand-alone
utilization management and other medical management services to other health
plans and self-funded employers. CCI utilization management services are also
integrated into UNICARE product offerings. As of December 31, 2000, the Company
had approximately 2.1 million utilization management members.
DISABILITY PLANS
The Company offers short- and long-term disability programs, usually in
conjunction with the Company's health plans. As of December 31, 2000, the
Company provided long-term or short-term disability coverage to approximately
569,000 individuals.
LONG-TERM CARE INSURANCE
In November 1997, the Company began offering a group of long-term care
insurance products to its California members through its indirect wholly owned
subsidiary BC Life & Health Insurance Company ("BC Life"). These plans, which
are marketed under the Blue Cross Long Term Care trade name, involve six
different products. The Company's long-term care products include tax-qualified
and non-tax qualified versions of a skilled nursing home care plan and
comprehensive policies covering skilled, intermediate and custodial long-term
care and home health care services.
WORKERS' COMPENSATION MANAGED CARE SERVICES
In California, the Company offers workers' compensation managed care
services, including bill review, network access, medical cost management and
utilization management, to employers who self-insure their workers' compensation
coverage, as well as to workers' compensation carriers.
MARKET RESEARCH AND ADVERTISING
WellPoint conducts market research and advertising programs to develop
products and marketing techniques tailored specifically to customer segments.
WellPoint uses print and broadcast advertising to promote its health care plans.
In addition, the Company engages in promotional activities with agents, brokers
and consultants. WellPoint incurred costs of approximately $61.8 million,
$40.8 million and $43.3 million on advertising for the years ended December 31,
2000, 1999 and 1998, respectively.
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COMPETITION
The managed health care industry in California is competitive on both a
regional and statewide basis. In addition, in recent years there has been a
trend of increasing consolidation among both national and California-based
health care companies, which may further increase competitive pressures.
WellPoint competes with other companies that offer similar managed health care
plans, some of which have greater resources than WellPoint. In addition, the
development and growth of companies offering Internet-based connections between
health care professionals, employers and members, along with a variety of
services, may create additional competitors. Currently, WellPoint is a market
leader in offering managed health care plans to individuals and small employer
groups in California. The medical loss ratio attributable to WellPoint's
individual and small group business has historically been lower than that for
its large employer group business. As a result, a larger portion of WellPoint's
profitability on a per-member basis is due to the individual and small group
business. WellPoint has experienced increased competition in this market over
the last several years, which could adversely affect its medical loss ratio and
future financial condition, cash flows or results of operations. See "Factors
That May Affect Future Results of Operations."
The markets in which the Company operates outside of California are also
highly competitive. Because of the many different markets in which the Company
now serves members, the Company faces unique competitive pressures in regional
markets as well as on a national basis. The Company competes with other
companies that offer managed health care plans as well as traditional indemnity
insurance products. Many of these companies have greater financial and other
resources than the Company and greater market share on either a regional or
national basis. As the Company continues to geographically expand its
operations, it will be subject to national competitive factors as well as unique
competitive conditions that may affect the more localized markets in which the
Company operates.
WellPoint believes that significant factors in the selection of a managed
health care plan by employers and individual members include price, the extent
and depth of provider networks, flexibility and scope of benefits, quality of
services, market presence, reputation (which may be affected by public rankings
or accreditation by voluntary organizations such as NCQA and URAC) and financial
stability. WellPoint believes that it competes effectively against other health
care industry participants.
GOVERNMENT REGULATION
CALIFORNIA
DOC AND DOI REGULATION. WellPoint offers its managed health care services
in California principally through its wholly owned indirect subsidiary Blue
Cross of California, which is currently subject to regulation by the California
Department of Managed Health Care (the "DMHC") under the Knox-Keene Health Care
Service Plan Act of 1975 (the "Knox-Keene Act"). The insurance business
conducted by the Company's subsidiary BC Life & Health Insurance Company ("BC
Life") is regulated by the California Department of Insurance (the "California
DOI"). Each entity is subject to various minimum capital and other requirements,
such as restrictions on the payment of dividends or the issuance of capital
stock, established by its respective regulatory authority. Blue Cross of
California's managed health care programs are also subject to extensive DMHC
regulation regarding benefit and coverage levels, relationships with health care
providers, administrative capacity, marketing and advertising, procedures for
quality assurance and subscriber and enrollee grievance resolution. Any material
modifications to the organization or operations of Blue Cross of California are
subject to prior review and approval by the DMHC. BC Life must obtain approval
from the California DOI for all of its group insurance policies and certain
aspects of its individual policies prior to issuing those policies, as well as
certain other material actions which BC Life may propose to take. The failure to
comply
12
with applicable regulations can subject BCC or BC Life to various penalties,
including fines or the imposition of restrictions on the conduct of its
operations.
RECENT CALIFORNIA HEALTH CARE LEGISLATION
In September 1999, the California Legislature enacted a number of health
care reform measures. The following is a summary of the material terms of the
most significant of these new laws.
The Managed Health Care Insurance Accountability Act of 1999 ("SB 21"),
which became effective for health care services rendered after January 1, 2001,
establishes an explicit duty on managed care entities to exercise ordinary care
in arranging for the provision of medically necessary health care services to
their subscribers and imposes liability for all harm legally caused by the
failure to exercise such ordinary care. Managed care entities may be held liable
if their failure to exercise ordinary care results in the denial, delay or
modification of a health care service recommended for or furnished to the
subscriber and the subscriber suffers "substantial harm." For purposes of the
statute, "substantial harm" is defined as the loss of life, loss of or
significant impairment of a limb or bodily function, significant disfigurement,
severe and chronic pain or significant financial loss. Liability may be
established for health care services regardless of whether the recommending
health care provider is a contracting provider with the managed care entity.
Managed care plans may not seek indemnity from a health care provider for the
liability imposed by the statute. A cause of action may not be maintained under
the statute against a managed care entity unless the subscriber has exhausted
independent medical review procedures, except in instances where substantial
harm has occurred or will imminently occur prior to the completion of the
independent medical review.
Assembly Bill 55 ("AB 55") establishes an independent medical review system
effective as of January 1, 2001. Every health plan enrollee, whether currently
under the regulatory supervision of the DMHC or the California DOI, must be
provided with an opportunity to seek an independent medical review whenever
health care services have been denied, modified or delayed by a managed care
entity or one of its contracting physicians, if this decision was based on a
finding that the proposed services are not medically necessary. Under AB 55,
there is no minimum dollar level for claims to be subject to the independent
review process and the enrollee will not have any responsibility for the payment
of any application or processing fee. An enrollee's provider may assist and
advocate in the review. All health plan contracts issued or renewed after
January 1, 2000 must provide an opportunity to seek an independent review
effective as of January 1, 2001. The statute does not apply to decisions by a
health plan that health care services are not covered under the plan issued to
the subscriber. Under the statute, the DMHC was instructed to contract with one
or more medical review organizations by January 1, 2001.
Assembly Bill 88 ("AB 88") requires that any health care service plan
contract or disability insurance policy issued or renewed on or after July 1,
2000 must provide coverage for the diagnosis and medically necessary treatment
of severe mental illness under the same terms and conditions applied to other
medical conditions.
Assembly Bill 78 ("AB 78") provides for the creation of the DMHC into which
has been transferred the health care service plan operations of the DOC. The
DMHC is advised by an advisory committee consisting of 22 members, 11 of whom
are appointed by the Governor, 10 of whom are appointed by the joint
recommendation of the Governor, the Speaker of the California Assembly and the
California Senate Committee on Rules and one of whom is the Director of the
Department (who is appointed by the Governor). This advisory committee will
issue an annual report, which will include a report card issued to the public on
the comparative performance of managed care organizations. This bill also
establishes an Office of Patient Advocate, who will be appointed by the
California Governor, to represent the interest of enrollees. The Office of
Patient Advocate will be charged with the responsibility of helping enrollees
secure health care services and will have access to the records of the
13
DMHC. Under the legislation, the new DMHC has been granted expanded powers,
including the ability to order the discontinuance of "unsafe or injurious
practices."
Senate Bill 260 ("SB 260") establishes a Financial Solvency Standards Board
(the "Board") comprised of the Director of the Department of Managed Care (the
"Director") and seven members appointed by the Director. The Board will review
financial solvency matters affecting the delivery of health care services and
recommend financial solvency requirements relating to plan operations,
plan-affiliate operations and transactions, plan-provider contractual
relationships and provider-affiliate operations and transactions. Effective
January 1, 2001, every contract between a health care service plan and a
risk-bearing organization (i.e., any provider group that provides services in
exchange for fixed capitation payments) must include a requirement that the
risk-bearing organization furnish financial information to the health care
service plan. In addition, the health care service plan must disclose
information to the risk-bearing organization that enables the organization to be
informed regarding its financial risk. Plans must provide payment of all risk
arrangements, excluding capitation payments, within 180 days after the close of
each fiscal year. On or before June 30, 2000, the Director must adopt
regulations providing for a process of reviewing and grading risk-bearing
organizations based on criteria regarding financial responsibility, estimates
for incurred but not reported claims ("IBNR"), tangible net equity and level of
working capital. The DMHC has issued emergency regulations. Risk-bearing
organizations may not be at financial risk for the provision of health care
services unless a particular contract provision allocating such risk has first
been negotiated and agreed to between the health care service plan and the
risk-bearing organization. In addition, no contract between a health care
service plan and a risk-bearing organization may include any provision that
requires a health care provider to accept rates or methods of payments unless
the provisions have first has been negotiated and agreed to between the plan and
the risk-bearing organization.
Senate Bill 559 ("SB 559"), which became effective July 1, 2000, imposes
certain disclosure obligations and other limitations on health care plans, such
as the Company, that make their networks of contracted providers available to
other entities. Under SB 559, health care plans must disclose to contracting
providers that they intend to make their health care networks, and the
negotiated discounts, available to other payors such as self-insured employers
or workers' compensation insurance companies. Providers may decline to be
included in any list of contracted providers made available to any payor entity
that does not provide financial incentives to, or otherwise actively encourage,
the payor's members to use the list of contracting providers when obtaining
medical care.
The California Legislature has also adopted new legislation that imposes
restrictions on the categories of persons that may be involved in medical
management activities and on the conduct of such activities. Various other newly
adopted bills mandate coverage for certain benefits, such as the provision of
oral contraceptives, and place further limitations on health plan operations.
Although it is too early to determine the effects of the recently enacted
legislation, the Company expects that this legislation and any other legislation
adopted in the future will increase the Company's cost of operations and may
have the effect of increasing the Company's loss ratio or decreasing the
affordability of its products. As a result, this legislation could have a
material adverse effect on the Company's results of operations, financial
condition and cash flows.
FEDERAL
RECENT FEDERAL HEALTH CARE LEGISLATION. In August 1997, President Clinton
signed into law the Balanced Budget Act of 1997 (the "Balanced Budget Act"). The
Balanced Budget Act included a number of measures affecting the provision of
health care. The act placed restrictions on the variation in Medicare
reimbursement amounts (so-called "risk adjusters") between counties. HCFA has
released proposed risk adjusters, which are currently expected to be implemented
in phases through the year 2005. In addition, the Balanced Budget Act ostensibly
expanded the managed health plan options available to Medicare enrollees to
include PPO, POS and high deductible health plans intended for
14
MSAs. Regulations regarding these changes were adopted in June 1998. Finally,
the Balanced Budget Act implemented certain changes with respect to Medicare
supplement programs, including guaranteed coverage issues. Certain of the
changes under the Balanced Budget Act could have the result of increasing the
Company's costs.
In November 1997, the Advisory Commission on Consumer Protection and Quality
in the Health Care Industry (the "Clinton Quality Commission"), which had been
appointed by President Clinton to formulate recommendations regarding health
care quality and the protection of consumers, released a "Consumer Bill of
Rights and Responsibilities" containing a number of general and specific
recommendations regarding the provision of health care in the United States. No
legislation has been adopted as a result of its recommendations. In
February 1998, President Clinton issued an executive order to the government
administrators of each of the government-sponsored health programs directing
them to take appropriate actions to insure compliance with some or all of the
recommendations made in the Consumer Bill of Rights by various dates on or
before December 31, 1999. Compliance with the President's executive order is
likely to increase health plan costs associated with these government-sponsored
programs. In 1998, the Department of Labor also issued proposed regulations
regarding a mandated health plan grievance and appeal process. These regulations
would apply to all plans subject to the Employee Retirement and Income Security
Act of 1974 ("ERISA"), including employer-funded plans. Final regulations have
now been issued. These regulations could have the effect of increasing the
Company's expenses.
On August 21, 1996, President Clinton signed into law the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). HIPAA and the implementing
regulations that have thus far been adopted impose new obligations for issuers
of health insurance coverage and health benefit plan sponsors. HIPAA requires
certain guaranteed issuance and renewability of health coverage for individuals
and small groups (generally 50 or fewer employees) and limits exclusions based
on preexisting conditions. Most of the insurance reform provisions of HIPAA
became effective for "plan years" beginning July 1, 1997.
HIPAA also establishes new requirements regarding the confidentiality of
patient health information and regarding standard formats for the transmission
of health care data. In December 2000, the Department of Health and Human
Services promulgated final regulations regarding the privacy of "protected
health information." The rules would, among other things, require that health
plans give patients a clear written explanation of how they intend to use, keep
and disclose patient health information, prohibit health plans from conditioning
payment or coverage on a patient's agreement to disclose health information for
other purposes, and create federal criminal penalties for health plans,
providers and claims clearinghouses that knowingly and improperly disclose
information or obtain information under false pretenses. Final regulations
regarding the standard formats for the transmission of health care information
have also been released, with an effective date of October 2002. The privacy and
standardization regulations could have the effect of increasing the Company's
expenses.
Maternity length of stay and mental health parity benefits measures became
effective for plan years beginning January 1, 1998. The maternity stay provision
requires health plans to cover the cost of a 48-hour hospital stay (96 hours
following a Caesarian section). This measure does not mandate the length of
hospital stays but requires that longer stays be covered if deemed necessary by
the mother or her physician (in consultation with the mother). Although many
states already guarantee minimum hospital stays for mothers and newborns, these
measures have further increased WellPoint's claims expense.
MEDICARE LEGISLATION. WellPoint's health benefits programs include products
that are marketed to Medicare beneficiaries as a supplement to their Medicare
coverage. These products are subject to Federal regulations intended to provide
Medicare supplement customers with standard minimum
15
benefits and levels of coverage and full disclosure of coverage terms and assure
that fair sales practices are employed in the marketing of Medicare supplement
coverage.
In California and Georgia, WellPoint provides a senior plan product under a
Medicare + Choice contract that is subject to regulation by HCFA. Under this
contract and HCFA regulations, if WellPoint's premiums received for
Medicare-covered health care services provided to senior plan Medicare members
are more than the Company's projected costs associated with the provision of
health care services provided to senior plan members, then WellPoint must
provide its senior plan members with additional benefits beyond those required
by Medicare or reduce its premiums, or deductibles or co-payments, if any. HCFA
has the right to audit HMOs operating under Medicare contracts to determine the
quality of care being rendered and the degree of compliance with HCFA's
contracts and regulations.
FUTURE HEALTH CARE REFORM. A number of legislative proposals have been made
at the Federal and state levels over the past several years. These proposals
would, among other things, mandate benefits with respect to certain diseases or
medical procedures, require plans to offer an independent external review of
certain coverage decisions or establish health plan liability in a manner
similar to the California legislation discussed above or the Georgia and Texas
legislation discussed in the following section. The United States Congress is
currently considering a number of alternative health care reform measures that
would, among other things, mandate external review of treatment denial
decisions, provide for managed care liability and allow for collective
bargaining by unaffiliated physicians groups. There have also been proposals
made at the Federal level to implement greater restrictions on employer-funded
health plans, which are generally exempted from state regulation by ERISA.
WellPoint is unable to evaluate what legislation may be proposed and when or
whether any legislation will be enacted and implemented. However, many of the
proposals, if adopted, could have a material adverse effect on WellPoint's
financial condition, cash flows or results of operations, while others, if
adopted, could potentially benefit WellPoint's business.
OTHER STATES
The Company's activities in other states are subject to state regulation
applicable to the provision of managed health care services and the sale of
traditional health indemnity insurance. As a result of the MMHD, GBO, Rush
Prudential and Cerulean acquisitions, the Company and certain of its
subsidiaries are also subject to regulation by the DOI in Delaware (which is the
state of incorporation and domicile of UNICARE Life & Health Insurance Company,
one of the Company's principal operating subsidiaries outside of California),
Georgia, Illinois, Indiana and in all other states. As the Company expands its
offering of managed care products in new geographic locations, it will be
subject to additional regulation by governmental agencies applicable to the
provision of health care services. The Company believes it is in compliance in
all material respects with all current state regulatory requirements applicable
to its business as presently conducted. However, changes in government
regulations could affect the level of services which the Company is required to
provide or the rates which the Company can charge for its health care products
and services.
As the Company continues to expand its operations outside of California, new
legislative and regulatory developments in Delaware, Georgia, Illinois, Texas
and various other states will have greater potential effect on the Company's
financial condition, cash flows or results of operations. In 1999 the Georgia
Legislature adopted several new bills, including one that requires managed care
plans to offer coverage for services rendered by out-of-network providers and
one that establishes a Consumers' Insurance Advocate with authority to review
and comment upon matters pending before the Department of Insurance
Commissioner. Over the past few years, there has also been an increase in other
states in proposed legislation regarding, among other things, mandated benefits,
health plan liability, third-party review of health plan coverage determinations
and health plan relationships with
16
providers. The Company expects that this trend of increased legislation will
continue. These laws may have the effect of increasing the Company's claims
expense.
In 1997, the Texas legislature adopted SB 386 which, among other things,
purports to make managed care organizations ("MCOs") such as the Company liable
for the failure by the MCO, its employees or agents to exercise ordinary care
when making "health care treatment decisions" (as defined in the legislation).
The legislation was effective as of September 1, 1997. In September 1998, the
United States District Court for the Southern District of Texas ruled, in part,
that the MCO liability provisions of SB 386 are not preempted by ERISA. To date,
this legislation has not adversely affected the Company's results of operations.
However, although the Company maintains insurance covering such liabilities, to
the extent that this legislation (or similar legislation that may be
subsequently adopted at the Federal or state level) effectively expands the
scope of liability of MCOs, such as the Company, it may have a material adverse
effect on the Company's results of operations, financial condition and cash
flows. Even if the Company is not held liable under any litigation, the
existence of potential MCO liability may cause the Company to incur greater
costs in defending such litigation.
In connection with the GBO acquisition, the Company has entered into a
reinsurance arrangement, on a 100% coinsurance basis, of the insured business of
the GBO. This business includes a small number of insured persons in Canada
covered by group policies issued to U.S.-based employers. As a result, the
Company may be subject to certain rules and regulations of applicable Canadian
regulatory agencies.
SERVICE MARKS
WellPoint and its subsidiaries have filed for registration of and maintain
several service marks, trademarks and trade names at the Federal level and in
California, including "Prudent Buyer Plan," "CaliforniaCare" and "UNICARE."
WellPoint, Blue Cross of California, BC Life, Georgia Blue, Blue Cross Blue
Shield Healthcare Plan of Georgia, Inc. and Greater Georgia Life Insurance
Company are currently parties to license agreements with the Blue Cross Blue
Shield Association (the "BCBSA") which allow them to use the Blue Cross name and
mark in California (the Blue Cross and Blue Shield name and mark in Georgia)
with respect to WellPoint's HMO and PPO network-based plans. The BCBSA is a
national trade association of Blue Cross and Blue Shield licensees, the primary
function of which is to promote the Blue Cross and Blue Shield names. Each
licensee is an independent legal organization and is not responsible for the
obligations of other BCBSA member organizations. A Blue Cross or Blue Shield
license requires payment of a fee to the BCBSA and compliance with various
requirements established by the BCBSA, including the maintenance of specified
minimum capital. The failure to meet such capital requirements can subject the
Company to certain corrective action, while the failure to meet a lower
specified level of capital can result in termination of the Company's license
agreement with the BCBSA. WellPoint considers the licensed Blue Cross name and
its registered service marks, trademarks and trade names important in the
operation of its business.
EMPLOYEES
At December 31, 2000, WellPoint and its subsidiaries employed approximately
10,900 persons. Approximately 140 of the Company's employees are presently
covered by a collective bargaining agreement with the Office and Professional
Employees International Union, Local 29. Approximately 174 of the Company's
office clerical employees in the greater Detroit area are presently covered by a
collective bargaining agreement with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America, Local No. 614. As of
December 31, 2000, Cerulean and its subsidiaries employed approximately 2,900
persons. WellPoint believes that its relations with its employees are good, and
it has not experienced any work stoppages.
17
EXECUTIVE OFFICERS
Leonard D. Schaeffer, age 55, has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since August 1992. Mr. Schaeffer has
also been Chief Executive Officer of BCC since 1986 and Chairman of the Board of
Directors since 1989. From 1982 to 1986, Mr. Schaeffer served as President of
Group Health, Inc., an HMO in the midwestern United States. Prior to joining
Group Health, Inc., Mr. Schaeffer was the Executive Vice President and Chief
Operating Officer of the Student Loan Marketing Association, a financial
institution that provides a secondary market for student loans, from 1980 to
1981. From 1978 to 1980, Mr. Schaeffer was the Administrator of HCFA. HCFA
administers the Federal Medicare, Medicaid and Peer Review Organization
programs. Mr. Schaeffer serves as a director of Allergan, Inc. and Providian
Financial Corporation.
D. Mark Weinberg, age 48, has been Executive Vice President, Individual and
Small Group Division of the Company since April 1999. From October 1995 until
March 1999, he served as Executive Vice President, UNICARE Businesses of the
Company. From August 1992 until May 1996, Mr. Weinberg served as a director of
the Company. From February 1993 to October 1995, Mr. Weinberg was Executive Vice
President, Consumer and Specialty Services of the Company. Prior to
February 1993, Mr. Weinberg was Executive Vice President of BCC's Consumer
Services Group from December 1989 to February 1993 and was Senior Vice President
of Individual and Senior Services of BCC from April 1987 to December 1989. From
1981 to 1987, Mr. Weinberg held a variety of positions at Touche Ross & Co. From
1976 to 1981, Mr. Weinberg was general manager for the CTX Products Division of
PET, Inc.
Joan E. Herman, age 47, joined the Company in June 1998 as Executive Vice
President, Specialty Division. From April 1999 until March 2000, Ms. Herman was
Executive Vice President, Senior and Specialty Businesses. Since March 2000,
Ms. Herman has been Executive Vice President, Senior Specialty and
State-Sponsored Programs Division. From 1982 until joining the Company,
Ms. Herman was with Phoenix Home Life Mutual Insurance Company, a mutual
insurance company, most recently serving as Senior Vice President. Ms. Herman is
a member of the Society of Actuaries and American Academy of Actuaries.
David S. Helwig, age 44, has been Executive Vice President, Large Group
Division of the Company since March 2001. From May 2000 until March 2001,
Mr. Helwig was Senior Vice President, Western Region, Large Group Businesses of
the Company and from March 1999 until May 2000, Mr. Helwig served as Senior Vice
President and Chief Actuary for the Company. From 1995 until March 1999,
Mr. Helwig served as Senior Vice President of Individual and Small Group
Services for the Company and from May 1994 until 1995, Mr. Helwig was Senior
Vice President of Consumer Services for CaliforniaCare Health Plans, a
subsidiary of the Company. From 1991 to May 1994, Mr. Helwig was Senior Vice
President and Chief Actuary of Blue Cross of California and from February 1993
until May 1994, Mr. Helwig also served as Chief Financial Officer and Treasurer
of Blue Cross of California.
Rebecca Kapustay, age 49, has been Executive Vice President, Blue Cross and
Blue Shield of Georgia since March 2001. From 1979 until 1992, Ms. Kapustay held
various positions with Blue Cross of California of increasing responsibility in
both operations and data processing. From 1993 until April 1994, Ms. Kapustay
was General Manager of the Company and from May 1994 until 2000, Ms. Kapustay
held various positions with the Company including Senior Vice President,
California Operations and more recently Senior Vice President, Large Group
Services.
David C. Colby, age 47, joined the Company in September 1997 as Executive
Vice President and Chief Financial Officer. From April 1996 until joining the
Company, Mr. Colby was Executive Vice President, Chief Financial Officer and
Director of American Medical Response, Inc., a health care services company
focusing on ambulance services and emergency physician practice management. From
July 1988 until March 1996, Mr. Colby was with Columbia/HCA Healthcare
Corporation, most recently
18
serving as Senior Vice President and Treasurer. From September 1983 until
July 1988, Mr. Colby was Senior Vice President and Chief Financial Officer of
The Methodist Hospital in Houston, Texas.
Thomas C. Geiser, age 50, has been Executive Vice President, General Counsel
and Secretary of the Company since May 1996. From July 1993 until May 1996,
Mr. Geiser held the position of Senior Vice President, General Counsel and
Secretary. Prior to joining the Company, he was a partner in the law firm of
Brobeck, Phleger & Harrison from June 1990 to June 1993 and a partner in the law
firm of Epstein Becker Stromberg & Green from May 1985 to May 1990. Mr. Geiser
joined the law firm of Hanson, Bridgett, Marcus, Vlahos & Stromberg as an
associate in March 1979 and became a partner in the firm, leaving in May 1985.
Woodrow A. Myers, Jr., M.D., age 47, has been Executive Vice President,
Chief Medical Officer of the Company since September 2000. From 1995 until
September 2000, he served as Director, Healthcare Management of Ford Motor
Company. From 1991 until 1995, Dr. Myers served as Senior Vice President and
Corporate Medical Director of The Associated Group (now known as Anthem Blue
Cross Blue Shield). From 1990 to 1991, Dr. Myers was the Commissioner of Health
for the City of New York. Dr. Myers serves as a director of Somnus Medical
Technologies.
MAY 1996 RECAPITALIZATION AND RESTRICTIONS ON OWNERSHIP AND TRANSFER OF
SECURITIES
The Company's predecessor, WellPoint Health Networks Inc., a Delaware
corporation ("Old WellPoint"), was organized in 1992 as a public for-profit
subsidiary of Blue Cross of California ("BCC"), to own and operate substantially
all of the managed health care businesses of BCC. In order to fulfill BCC's
public benefit obligations to the State of California arising out of the
creation of Old WellPoint, BCC and Old WellPoint undertook a recapitalization
(the "Recapitalization") which was concluded on May 20, 1996. As a result of the
Recapitalization, among other things, Old WellPoint merged into BCC, a special
dividend of $995.0 million was made to the shareholders of Old WellPoint and the
California HealthCare Foundation (the "Foundation") became the holder of
53,360,000 shares, or approximately 80%, of the surviving WellPoint entity. As
of January 2001, the Foundation ceased to own any shares of WellPoint Common
Stock.
In connection with the Recapitalization, BCC relinquished its rights under
the Blue Cross License Agreement dated January 1, 1991, between Blue Cross of
California and the BCBSA. The BCBSA and the Company entered into a new License
Agreement (the "License Agreement"), pursuant to which the Company became the
exclusive licensee for the right to use the Blue Cross name and related service
marks in California and became a member of the BCBSA. See "Service Marks."
At the time of the Recapitalization, pursuant to an agreement with the
BCBSA, the Company's Certificate of Incorporation included an "OwnershipLimit"
with respect to the Company's voting securities. At such time, the "Ownership
Limit" was established as one share less than 5% of the Company's outstanding
voting securities. In December 1997, the Company and the BCBSA, in accordance
with the provisions of Article VII, Section 14(f)(2) of the Company's
Certificate of Incorporation, agreed to modify the Ownership Limit to the
following: (i) for any "Institutional Investor," one share less than 10% of the
Company's outstanding voting securities; and (ii) for any "Noninstitutional
Investor," other than the Foundation, one share less than 5% of the Company's
outstanding voting securities. For these purposes, "Institutional Investor"
means any person if (but only if) such person is (1) a broker or dealer
registered under Section 15 of the Securities Exchange Act of 1934 (the
"Exchange Act"), (2) a bank as defined in Section 3(a)(6) of the Exchange Act,
(3) an insurance company as defined in Section 3(a)(19) of the Exchange Act,
(4) an investment company registered under Section 8 of the Investment Company
Act of 1940, (5) an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, (6) an employee benefit plan, or pension fund
which is subject to the provisions of the Employee Retirement Income Security
Act of 1974 or an endowment fund, (7) a parent holding company, provided the
aggregate amount held
19
directly by the parent, and directly and indirectly by its subsidiaries which
are not persons specified in paragraphs (1) through (6), does not exceed one
percent of the securities of the subject class, or (8) a group, provided that
all the members are persons specified in paragraphs (1) through (7). In
addition, every filing made by such person with the SEC under Regulation 13D-G
(or any successor Regulation) under the Exchange Act with respect to such
person's beneficial ownership must contain a certification (or a substantially
similar one) that the WellPoint Common Stock acquired by such person was
acquired in the ordinary course of business and was not acquired for the purpose
of and does not have the effect of changing or influencing the control of
WellPoint and was not acquired in connection with or as a participant in any
transaction having such purpose or effect. For such purposes, "Noninstitutional
Investor" means any person that is not an Institutional Investor.
In December 1997, the Company and the BCBSA also agreed that the License
Agreement would be subject to termination in the event that any entity other
than the Foundation became the beneficial owner of 20% or more of WellPoint's
then-outstanding Common Stock or other equity securities which (either by
themselves or in combination) represented an ownership interest of 20% or
greater. WellPoint also agreed that it would not issue any class or series of
securities other than shares of Common Stock, non-voting, non-convertible debt
securities or such other securities as WellPoint may approve, provided that
WellPoint will provide the BCBSA with at least 30 days advance notice of the
issuance of such securities and the BCBSA will have the authority to determining
how such securities will be treated for purposes of determine a particular
holder's beneficial ownership of Common Stock.
In July 1999, WellPoint issued an aggregate of $299 million in principal
amount at maturity of Zero Coupon Convertible Subordinated Debentures Due 2019
(the "Debentures"). The BCBSA has determined that it will treat a holder of
Debentures at a particular time as beneficially owning shares of Common Stock
equal to the greater of (i) the number of shares into which the Debentures could
be converted upon exercise of the conversion right of the Debentures at such
time, and (ii) the number of shares of Common Stock which the holder would
receive if WellPoint paid the holder in shares of Common Stock upon exercise of
the holder's redemption right (assuming redemption of the Debentures at a price
equal to the original issue price plus then-accrued original issue discount and
based on the then-current market price of the Common Stock). This deemed
beneficial ownership will be aggregated with a Debentureholder's other
beneficial ownership of Common Stock for purposes of determining if the
Ownership Limit provisions have been violated. Any Debentureholder's deemed
beneficial ownership of Common Stock will fluctuate as a result of changes in
the market price of the Common Stock.
In connection with the Recapitalization, BCC also received a ruling from the
IRS that, among other things, the conversion of BCC from a nonprofit public
benefit corporation to a for-profit entity (the "BCC Conversion") qualified as a
tax-free transaction and that no gain or loss was recognized by BCC for Federal
income tax purposes. The Foundation and the Company have entered into an
Indemnification Agreement which provides, with certain exceptions, that the
Foundation will indemnify WellPoint against the net tax liability as a result of
a revocation or modification, in whole or in part, of the ruling by the IRS or a
determination by the IRS that the BCC Conversion constitutes a taxable
transaction for Federal income tax purposes.
In August 1997, pursuant to approval by the stockholders at the Company's
1997 Annual Meeting, the Company reincorporated in the state of Delaware. Each
of the material agreements (other than the Indemnification Agreement) entered
into in connection with the Recapitalization was amended and restated on
substantially similar terms at the time of the reincorporation.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Certain statements contained in "Item 1. Business," such as statements
concerning the Company's geographic expansion and other business strategies, the
effect of recent health care reform legislation,
20
changes in the competitive environment and small group membership growth and
other statements contained herein regarding matters that are not historical
facts, are forward-looking statements (as such term is defined in the Securities
Exchange Act of 1934). Such statements involve a number of risks and
uncertainties that may cause actual results to differ from those projected.
Factors that can cause actual results to differ materially include, but are not
limited to, those discussed below. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
FEDERAL AND STATE HEALTH CARE REGULATION; LEGISLATIVE REFORM; ACTIVITIES AS
GOVERNMENT CONTRACTOR
WellPoint's operations are subject to substantial regulation by Federal,
state and local agencies. As a result of the MMHD, GBO and Cerulean
acquisitions, WellPoint is now subject to the authority of state regulatory
agencies in all 50 states. Such regulation may either relate to the Company's
business operations or to the financial condition of regulated subsidiaries.
With regard to the former, regulation typically covers prescribed benefits,
relationships with providers, marketing, advertising, quality assurance and
member grievance resolution. With regard to the latter, regulation typically
governs the amount of capital required to be retained in regulated subsidiaries
and the ability of such subsidiaries to pay dividends. From time to time, the
Company and its subsidiaries receive requests for information from regulatory
agencies or are notified that such agencies or other officials are conducting
reviews, investigations or other proceedings with respect to certain of the
Company's activities. There can be no assurance that any past or future
regulatory action by any such agencies will not have a material adverse effect
on the profitability or marketability of WellPoint's health plans, the Company's
ability to access capital from the operations of its regulated subsidiaries or
on its financial condition, cash flows or result of operations.
In addition to capital requirements imposed by the DMHC and certain
Departments of Insurance, the Company and its BCBSA-licensed affiliates are
required to maintain certain levels of capital to satisfy BCBSA requirements.
During 1998, the National Association of Insurance Commissioners (the "NAIC"),
the trade association representing state insurance regulators, adopted a
risk-based capital formula for licensed managed care organizations called
Managed Care Organization Risk-Based Capital ("MCORBC"). The NAIC also approved
an accompanying Risk-Based Capital for Health Organizations Model Act (the
"Model Act"), which will serve as a model for states considering enacting new
legislation. The BCBSA adopted the MCORBC formula effective as of December 31,
1999. If adopted by states, the minimum capital requirements under the Model Act
are not expected to have a material impact on the Company, although there can be
no assurances that new minimum capital requirements will not increase the
Company's capital requirements in the future.
The health care industry has become the subject of greater legislative and
media scrutiny in recent years. In 1999, California adopted a considerable
number of health care reform measures, including legislation providing for
health plan liability and independent review of health plan decisions. See
"Government Regulation." An increasing number of proposals are being considered
by the United States Congress and state legislatures relating to health care
reform and the Company expects that some of such proposals will be enacted.
There can be no assurance that compliance with recently enacted or future
legislation will not have a material adverse impact on WellPoint's claims
expense, financial condition, cash flows or results of operations.
The Company provides insurance products to Medi-Cal beneficiaries in various
California counties under contracts with the DHS (or a delegated local agency).
The Company also provides administrative services for HCFA in various
capacities, including certain Medicare programs and under its Blue Cross Senior
Secure plan. There can be no assurance that acting as a government contractor in
these circumstances will not increase the risk of heightened scrutiny by such
government agencies, or that the profitability from this business will not be
adversely affected through inadequate premium rate
21
increases due to governmental budgetary issues. Future actions by any regulatory
agencies may have a material adverse effect on the Company's business.
As a result of the Precision Rx transaction completed in December 2000, one
of the Company's subsidiaries conducts business as a mail order pharmacy. The
pharmacy business is subject to extensive federal, state and local regulations
which are in many instances different from those under which the Company's
traditional health care businesses operate. The failure to properly adhere to
these and other applicable regulations could result in the imposition of civil
and criminal penalties, which could adversely affect the Company's result of
operations or financial condition. In addition, pharmacies are exposed to risks
inherent in the packaging and distribution of pharmaceuticals and other health
care products. Although the Company intends to maintain professional liability
insurance, there can be no assurances that the coverage limits under such
insurance programs will be adequate to protect against future claims or that the
Company will be able to maintain insurance on acceptable terms in the future.
INDEBTEDNESS FROM CERULEAN ACQUISITION
In connection with the Cerulean transaction, the Company incurred
significant additional indebtedness to fund the cash payments made to Cerulean
shareholders. This new indebtedness may result in a significant percentage of
the Company's cash flow being applied to the payment of interest, and there can
be no assurance that the Company's operations will generate sufficient future
cash flow to service this indebtedness. This indebtedness, as well as any
indebtedness that the Company may incur in the future (such as indebtedness
incurred to fund repurchases of its Common Stock), may adversely affect the
Company's ability to finance its operations and could limit the Company's
ability to pursue business opportunities that may be in the best interests of
the Company and its stockholders.
CLASS ACTION LAWSUITS AND OTHER EVOLVING THEORIES OF RECOVERY
From time to time, the Company and certain of its subsidiaries are parties
to various legal proceedings, many of which involve claims for coverage
encountered in the ordinary course of business. The Company, like HMOs and
health insurers generally, excludes certain health care services from coverage
under its HMO, PPO and other plans. The Company is, in the ordinary course of
business, subject to the claims of its enrollees arising out of decisions to
restrict treatment or reimbursement for certain services. The loss of even one
such claim, if it results in a significant punitive damage award, could have a
material adverse effect on the Company. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims.
In June 2000, the California Medical Association filed a lawsuit in U.S.
district court in San Francisco against BCC. The lawsuit alleges that BCC
violated the RICO Act through various misrepresentations to and inappropriate
actions against health care providers. In late 1999, a number of class-action
lawsuits were brought against several of the Company's competitors alleging,
among other things, various misrepresentations regarding their health plans and
breaches of fiduciary obligations to health plan members. In August 2000, the
Company was added as a party to SHANE V. HUMANA, ET AL., a class-action lawsuit
brought on behalf of health care providers nationwide. In addition to the RICO
claims brought in the California Medical Association lawsuit, this lawsuit also
alleges violations of ERISA, federal and state "prompt pay" regulations and
certain common law claims. In October 2000, the federal Judicial Panel on
Multidistrict Litigation issued an order consolidating the California Medical
Association lawsuit, the SHANE lawsuit and various other pending managed care
class-action lawsuits against other companies before District Court Judge
Federico Moreno in the Southern District of Florida for purposes of the pretrial
proceedings. In March 2001, Judge Moreno dismissed the plaintiffs' claims based
on violation of the RICO Act, although the dismissal was made without prejudice
to the plaintiffs' ability to subsequently refile their claims. Judge Moreno
also dismissed, with prejudice, the plaintiffs' federal prompt pay law claims.
The Company currently expects that a hearing
22
on the plaintiffs' motion to certify a class will be held in early May 2001. On
March 26, 2001, the California Medical Association filed an amended complaint in
its lawsuit, alleging, among other things, revised RICO claims and violations of
California law. The financial and operational impact that these and other
evolving theories of recovery will have on the managed care industry generally,
or the Company in particular, is at present unknown.
HEALTH CARE COSTS AND PREMIUM PRICING PRESSURES
WellPoint's future profitability will depend in part on accurately
predicting health care costs and on its ability to control future health care
costs through underwriting criteria, utilization management, product design and
negotiation of favorable provider and hospital contracts. Changes in utilization
rates, demographic characteristics, the regulatory environment, health care
practices, inflation, new technologies, clusters of high-cost cases, continued
consolidation of physician, hospital and other provider groups and numerous
other factors affecting health care costs may adversely affect WellPoint's
ability to predict and control health care costs as well as WellPoint's
financial condition, results of operations or cash flows. Periodic
renegotiations of hospital and other provider contracts, coupled with continued
consolidation of physician, hospital and other provider groups, may result in
increased health care costs or limit the Company's ability to negotiate
favorable rates. In the past few years, large physician practice management
companies have experienced extreme financial difficulties (including
bankruptcy), which may subject the Company to increased credit risk related to
provider groups and cause the Company to incur duplicative claims expense.
In addition to the challenge of controlling health care costs, the Company
faces competitive pressure to contain premium prices. While health plans compete
on the basis of many factors, including service and the quality and depth of
provider networks, the Company expects that price will continue to be a
significant basis of competition. In connection with the introduction of its
PlanScape individual PPO plans in California, the Company has announced that it
will not raise premiums to certain members during portions of 2001. Fiscal
concerns regarding the continued viability of programs such as Medicare and
Medicaid may cause decreasing reimbursement rates for government-sponsored
programs. WellPoint's financial condition or results of operations would be
adversely affected by significant premium decreases by any of its major
competitors or by any limitation on the Company's ability to increase or
maintain its premium levels.
INTEGRATION OF ACQUISITIONS; GEOGRAPHIC EXPANSION STRATEGY; FUTURE ACQUISITIONS
One component of the Company's business strategy has been to diversify into
new geographic markets, particularly through strategic acquisitions. The Company
completed the MMHD acquisition in March 1996, the GBO acquisition in
March 1997, the Rush Prudential acquisition in March 2000 and the Cerulean
acqusition in March 2001. Since the relevant dates of acquisition, the Company
has worked extensively on the integration of the acquired MMHD and GBO
businesses, including consolidating existing operations sites and converting
certain accounts to the Company's information systems. The Company has also
completed significant work on the integration of the Rush Prudential businesses.
The Company expects to begin its integration of Cerulean during the remainder of
2001. The Company is continuing the consolidation of these acquired operations
into its operations, which will require considerable expenditures and a
significant amount of management time. Due to the complex nature of the merger
integration process, particularly the information systems designed to serve
these businesses, the Company may temporarily experience increases in claims
inventory or other service-related issues that may negatively affect the
Company's relationship with its customers and contribute to increased attrition
of such customers. The success of these acquisitions will, among other things,
also require the integration of a significant number of the employees into the
Company's existing operations and the completion of the integration of separate
information systems. No
23
assurances can be given regarding the ultimate success of the integration of
these acquisitions into the Company's business.
As the Company pursues its geographic expansion strategy, the Company's
market share in new markets will not be as significant, and its provider
networks not as extensive, as in California and Georgia, and the Company will
not have the benefit of the Blue Cross mark which are important components of
its success in California. The Company no longer has the benefit of the
MassMutual, John Hancock or Rush Prudential trade names. There can be no
assurance that the absence of one or more of these elements will not adversely
affect the success of the Company's geographic expansion strategy.
The Company actively considers acquisition opportunities on a regular basis,
both in connection with its geographic expansion strategy and its California
operations. The Company currently has no existing agreements or commitments to
effect any material acquisition. Accordingly, there can be no assurance that the
Company will be able to identify additional acquisition candidates available for
sale at reasonable prices or consummate any acquisition or that any discussions
will result in an acquisition. Any such acquisitions may require significant
additional capital resources and there can be no assurance that the Company will
have access to adequate capital resources to effect such future acquisitions. To
the extent that the Company consummates acquisitions, there can be no assurance
that such acquisitions will be successfully integrated into the Company or that
such acquisitions will not adversely affect the Company's results of operations,
cash flows and financial condition.
Prior to the Company's acquisition of the GBO, John Hancock Mutual Life
Insurance Company ("John Hancock") entered into a number of reinsurance
arrangements with respect to personal accident insurance and the occupational
accident component of workers' compensation insurance, a portion of which was
originated through a pool managed by Unicover Managers, Inc. Under these
arrangements, John Hancock assumed risks as a reinsurer and transferred certain
of such risks to other companies. These arrangements have become the subject of
disputes, including a number of legal proceedings to which John Hancock is a
party. The Company believes that it has a number of defenses to avoid any
ultimate liability with respect to these matters and believes that such
liabilities were not transferred to the Company as part of the GBO acquisition.
However, if the Company were to become subject to such liabilities, the Company
could suffer losses that might have a material adverse effect on its financial
condition, results of operations or cash flows.
COMPETITION
Managed health care organizations operate in a highly competitive
environment that is subject to significant change from legislative reform,
business consolidations, new strategic alliances, aggressive marketing practices
by other managed health care organizations, the development of companies
offering Internet-based connections between providers, employers and members and
other market pressures. A significant portion of the Company's operations are in
California, where the managed health care industry is especially competitive. In
addition, the managed health care industry in California has undergone
significant changes in recent years, including substantial consolidation.
Outside of California, the Company faces competition from other regional and
national companies, many of which have (or due to future consolidation, may
have) significantly greater financial and other resources and market share than
the Company. If competition were to further increase in any of its markets,
WellPoint's financial condition, cash flows or results of operations could be
materially adversely affected.
A substantial portion of WellPoint's California business is in the
individual and small employer group market, where the loss ratio is
significantly lower than in the large employer group market. The individual and
small employer group business constituted approximately 35% of WellPoint's total
premium revenue for the year ended December 31, 2000. WellPoint has experienced
increasing
24
competition in the individual and small employer group market over the past
several years, which could adversely affect WellPoint's loss ratio and future
financial condition or results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CALIFORNIA ENERGY CRISIS AND EFFECT ON CALIFORNIA ECONOMY
As a result of various factors, including the deregulation of certain parts
of the California energy market, certain locations in California have recently
experienced sporadic periods of electricity outages. This condition is expected
to continue into the future and may worsen during periods of peak energy
consumption in summer months. As part of the Company's disaster-recovery
planning, the Company has installed backup power generators for certain of its
facilities and will continue to evaluate the need for backup power supplies for
other facilities. Any prolonged interruption in power supplied to the Company's
facilities could affect the Company's ability to conduct its normal operations
(including the processing of claims) and could have a material adverse effect on
the Company's results of operations, cash flows or financial condition. The
California energy crisis could result in, or exacerbate, a downturn in the
overall California economy. Because the Company's business remains concentrated
in California (even after the Cerulean acquisition), any disruptions in the
California economy could have a material adverse effect on the Company's results
of operations, cash flows or financial condition.
DEPENDENCE ON INDEPENDENT AGENTS AND BROKERS
The Company is dependent on the services of independent agents and brokers
in the marketing of its health care plans, particularly with respect to
individuals, seniors and small employer group members. Such independent agents
and brokers are typically not exclusively dedicated to the Company and may
frequently also market health care plans of the Company's competitors. The
Company faces intense competition for the services and allegiance of independent
agents and brokers.
EMPLOYEE MATTERS
The Company is dependent on retaining existing employees and attracting and
retaining additional qualified employees to meet its future needs. The Company
faces intense competition for qualified employees, particularly during the
present economic environment of low unemployment, and there can be no assurance
that the Company will be able to attract and retain such employees or that such
competition among potential employers will not result in increasing salaries.
There can be no assurance that an inability to retain existing employees or
attract additional employees will not have a material adverse effect on the
results of operations of the Company. The Company is especially dependent on
attracting and retaining qualified information technology personnel and other
skilled professionals.
TAX ISSUES RELATING TO THE RECAPITALIZATION
In connection with the Recapitalization, BCC received a ruling from the IRS
that, among other things, the BCC Conversion qualified as a tax-free transaction
and that no gain or loss was recognized by BCC for Federal income tax purposes.
If the ruling were subsequently revoked, modified or not honored by the IRS (due
to a change in law or for any other reason), WellPoint, as the successor to BCC,
could be subject to Federal income tax on the difference between the value of
BCC at the time of the BCC Conversion and BCC's tax basis in its assets at the
time of the BCC Conversion. The potential tax liability to WellPoint if the BCC
Conversion is treated as a taxable transaction is currently estimated to be
approximately $696 million, plus interest (and possibly penalties). BCC and the
Foundation entered into an Indemnification Agreement that provides, with certain
exceptions, that the Foundation will indemnify WellPoint against the net tax
liability as a result of a revocation or modification, in whole or in part, of
the ruling by the IRS or a determination by the IRS that the BCC Conversion
constitutes a taxable transaction for Federal income tax purposes. In the event
a tax liability should arise against which the Foundation has agreed to
indemnify WellPoint, there can be no
25
assurance that the Foundation will have sufficient assets to satisfy the
liability in full, in which case WellPoint would bear all or a portion of the
cost of the liability, which could have a material adverse effect on WellPoint's
financial condition.
ITEM 2. PROPERTIES.
Effective as of January 1, 1996, the Company entered into a lease for Blue
Cross of California's Woodland Hills, California headquarters facility, which
provides for a term expiring in December 2019 with two options to extend the
term for up to two additional five-year terms. In 1997, the Company entered into
a lease, which expires in December 2019, for a new facility located in Thousand
Oaks, California housing certain corporate and specialty services. This facility
was completed in January 1999. The Company and its subsidiaries have additional
offices in the greater Los Angeles and Ventura County area. As a result of the
Company's continuing national expansion efforts, the Company maintains offices
in various other locations, including Atlanta and Columbus, Georgia;
Springfield, Massachusetts; Charlestown, Massachusetts; the greater Chicago,
Illinois area; Dearborn, Michigan; and Plano, Texas. As a result of the
PrecisionRx acquisition, the Company now owns an approximately 79,000 square
foot mail-order pharmacy distribution facility in the greater Fort Worth, Texas
area.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company and certain of its subsidiaries are parties
to various legal proceedings, many of which involve claims for coverage
encountered in the ordinary course of business. The Company, like HMOs and
health insurers generally, excludes certain health care services from coverage
under its HMO, PPO and other plans. The Company is, in the ordinary course of
business, subject to the claims of its enrollees arising out of decisions to
restrict treatment or reimbursement for certain services. The loss of even one
such claim, if it results in a significant punitive damage award, could have a
material adverse effect on the Company. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims.
In June 2000, the California Medical Association filed a lawsuit in U.S.
district court in San Francisco against BCC. The lawsuit alleges that BCC
violated the RICO Act through various misrepresentations to and inappropriate
actions against health care providers. In late 1999, a number of class-action
lawsuits were brought against several of the Company's competitors alleging,
among other things, various misrepresentations regarding their health plans and
breaches of fiduciary obligations to health plan members. In August 2000, the
Company was added as a party to SHANE V. HUMANA, ET. AL., a class-action lawsuit
brought on behalf of health care providers nationwide. In addition to the RICO
claims brought in the California Medical Association lawsuit, this lawsuit also
alleges violations of ERISA, federal and state "prompt pay" regulations and
certain common law claims. In October 2000, the federal Judicial Panel on
Multidistrict Litigation issued an order consolidating the California Medical
Association lawsuit, the SHANE lawsuit and various other pending managed care
class-action lawsuits against other companies before District Court Judge
Federico Moreno in the Southern District of Florida for purposes of the pretrial
proceedings. In March 2001, Judge Moreno dismissed the plaintiffs' claims based
on violation of the RICO Act, although the dismissal was made without prejudice
to the plaintiffs' ability to subsequently refile their claims. Judge Moreno
also dismissed, with prejudice, the plaintiffs' federal prompt pay law claims.
The Company currently expects that a hearing on the plaintiffs' motion to
certify a class will be held in early May 2001. On March 26, 2001, the
California Medical Association filed an amended complaint in its lawsuit,
alleging, among other things, revised RICO claims and violations of California
law. The financial and operational impact that these and other evolving theories
of recovery will have on the managed care industry generally, or the Company in
particular, is at present unknown.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "WLP" since the Company's initial public offering on
January 27, 1993. The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock.
HIGH LOW
------------- ------------
Year Ended December 31, 1999
First Quarter............................................. 87 13/16 69 3/8
Second Quarter............................................ 97 66 13/16
Third Quarter............................................. 86 11/16 54 3/4
Fourth Quarter............................................ 67 5/8 48 1/4
Year Ended December 31, 2000
First Quarter............................................. 78 1/2 56 15/16
Second Quarter............................................ 79 7/8 66 3/4
Third Quarter............................................. 96 3/8 70 3/8
Fourth Quarter............................................ 121 1/2 91 9/16
On March 16, 2001 the closing price on the New York Stock Exchange for the
Company's Common Stock was $93.01 per share. As of March 16, 2001, there were
approximately 660 holders of record of Common Stock.
The Company did not pay any dividends on its Common Stock in 1999 or 2000.
Management currently expects that all of WellPoint's future income will be used
to expand and develop its business. The Board of Directors currently intends to
retain the Company's net earnings during 2001.
27
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA, MEMBERSHIP DATA AND
OPERATING STATISTICS)
CONSOLIDATED INCOME STATEMENTS(A)(B)
Revenues:
Premium revenue......................................... $8,583,663 $6,896,857 $5,934,812 $5,068,947 $3,699,337
Management services revenue............................. 451,847 429,336 433,960 377,138 147,911
Investment income....................................... 193,448 159,234 109,578 196,153 123,584
---------- ---------- ---------- ---------- ----------
9,228,958 7,485,427 6,478,350 5,642,238 3,970,832
Operating Expenses:
Health care services and other benefits................. 6,935,398 5,533,068 4,776,345 4,087,420 2,825,914
Selling expense......................................... 394,217 328,619 280,078 249,389 202,318
General and administrative expense...................... 1,265,155 1,075,449 975,099 836,581 543,541
Nonrecurring costs...................................... -- -- -- 14,535 --
---------- ---------- ---------- ---------- ----------
8,594,770 6,937,136 6,031,522 5,187,925 3,571,773
---------- ---------- ---------- ----------