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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, 1997
/ / 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
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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.)
21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 703-4000
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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 13, 1998: $2,661,288,721 (based on the last
reported sale price of $66 5/8 per share on March 13, 1998, on the New York
Stock Exchange).
Common Stock, $0.01 par value of Registrant outstanding as of March 13,
1998: 69,971,937 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 1998 Annual
Meeting of Stockholders.
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WELLPOINT HEALTH NETWORKS INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 21
Item 3. Legal Proceedings.............................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................................ 22
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 23
Item 6. Selected Financial Data........................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 25
Item 8. Financial Statements and Supplementary Data.................................................... 37
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.............. 37
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 38
Item 11. Executive Compensation......................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 38
Item 13. Certain Relationships and Related Transactions................................................. 38
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K............................... 38
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
i
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 with
approximately 6.6 million medical members and approximately 22 million specialty
members as of December 31, 1997. The Company offers a broad spectrum of
network-based managed care products, including preferred provider organizations
("PPOs"), health maintenance organizations ("HMOs") and point-of-service ("POS")
and other hybrid plans and indemnity plans to the large and small employer,
individual and senior markets. In addition, the Company offers managed care
services for self-funded employers, including underwriting, actuarial services,
network access, medical cost management and claims processing. The Company
offers a continuum of managed health care plans while providing incentives to
members and employers to select more intensively managed plans. Such plans are
typically offered at a lower cost in exchange for additional cost-control
measures, such as limited flexibility in choosing non-network providers. The
Company believes that it is better able to predict and control its health care
costs as its members select more intensively managed health care plans. The
Company also provides a broad array of specialty and other products and
services, including pharmacy, dental, utilization management, life, integrated
workers' compensation, preventive care, disability, behavioral health, COBRA and
flexible benefits account administration.
The Company markets its products in California primarily under the name Blue
Cross of California and outside of California primarily under the name UNICARE.
Historically, the Company's primary market for its managed care products has
been California. The Company holds the exclusive right in California to market
its products under the Blue Cross name and mark. The Company is diversified in
its California customer base, 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. The Company's acquisition strategy to date has focused on
large employer group plans that offer indemnity and other health insurance
products that are less intensively managed than the Company's current products
in California. Over the past decade, 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. The
Company believes that its current UNICARE medical membership provides its
UNICARE operations with sufficient scale to begin development of proprietary
provider network systems in key geographic areas which will enable the Company
over time to begin offering a broader range of managed care products. The
Company intends to use these new networks to introduce individual, small group
and senior products in these markets. The Company has developed or is actively
developing proprietary networks in Texas, Georgia, Illinois, Indiana, Michigan,
Maryland and Virginia and has introduced new managed care products in, among
other states, Texas, Georgia and Illinois.
The Company also intends 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.
1
MANAGED HEALTH CARE INDUSTRY OVERVIEW
An increasing focus on costs by employers and consumers 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 providers to deliver health care at favorable rates that incorporate
health care utilization management and other cost-control measures as well as
network credentialing and quality assurance. HMO, PPO and POS members generally
are charged periodic, prepaid premiums, and co-payments 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 or 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 providers 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 companies is
higher than the national average. The Company is a market leader in offering
managed health care plans to individuals and small employer groups in
California, but has experienced increased competition in this market over the
last several years. WellPoint's large group business, which historically lagged
the performance of its small group and individual business, has experienced
considerable growth since 1994 with the rebound of the California economy and
the enhancement of the Company's reputation for customer service and value,
especially among established companies.
OTHER STATES. Although market acceptance of managed health care continues
to grow throughout the United States, it currently varies widely from state to
state. In some states, members are typically offered a spectrum of health care
choices which are more focused on traditional indemnity health insurance 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. Health care
providers are reimbursed on a retrospective basis and there are few, if any,
incentives or measures to control health care costs. 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. PPO coverage
offered by health plans outside of California is often typified by broad-based,
third-party provider networks which do not incorporate the cost-control measures
or discounts typical of the Company's proprietary provider networks in
California. The Company believes the higher costs generally associated with such
third-party PPO networks and traditional indemnity health insurance will
continue to cause employers and members to seek out managed health care
solutions similar to those offered by the Company in California.
BLUE CROSS OF CALIFORNIA
Prior to the MMHD and GBO Acquisitions, the Company's significant operations
were primarily confined to the State of California. Most of the Company's
California operations are conducted under the trade name Blue Cross of
California.
MARKETING AND PRODUCTS
WellPoint's Blue Cross of California products are developed and marketed in
California with an emphasis on four distinct customer groups: large employers
with 51 or more employees, individuals and
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small employers, seniors and Medi-Cal recipients. Medi-Cal is California's
Medicaid program. In addition, the Company's products are marketed to
educational and public entities, federal employee health and benefit programs
and national employers and in conjunction with state-run programs servicing
high-risk and underserved markets. Individual business units are responsible for
enrolling, underwriting and servicing customers in specific segments. Sales
representatives are generally assigned to a specific geographic region of
California to allow WellPoint to tailor its marketing efforts to the particular
health care needs of each regional market. Individual business units also use
advertising, public relations, promotion and marketing research to support their
efforts. The Company believes that one of the keys to its success in California
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. WellPoint's
managed health care plans to large employers in California are generally sold in
conjunction with a broker or consultant to develop a package of managed health
care benefits specifically tailored to meet the employer's needs. Individual and
small employer group products are marketed in California primarily through sales
managers in both Comprehensive Integrated Marketing Services, Inc. ("CIMS"), a
wholly owned subsidiary of the Company, and WellPoint's sales department, who
oversee independent agents and brokers.
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 copayments (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 health care services from providers 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 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.
PPO PLANS. The Company's PPO products, which are generally marketed under
the name "Prudent Buyer," are designed to address the specific needs of
different customer segments. The Company's PPO plans require periodic, prepaid
premiums and 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 providers, typically at
substantially higher out-of-pocket costs to members. To improve the
attractiveness of its PPO plans to small groups and individual buyers, in 1996
the Company introduced its Prudent Buyer Co-Pay product, which replaces annual
deductible obligations with HMO-like co-payments while maintaining the member
choice typical of PPO plans. In March 1997, the Company introduced new
high-deductible health plans intended for use with medical savings accounts
("MSAs").
MEDICAID PLANS. The California Department of Health Services ("DHS")
administers Medi-Cal, California's Medicaid program. WellPoint has been awarded
contracts to administer Medi-Cal managed care programs in various California
counties. Under these programs, WellPoint provides health care coverage to
Medi-Cal program members and DHS pays WellPoint a fixed payment per member per
month. As of December 31, 1997, approximately 284,000 members were enrolled in
WellPoint's Medi-Cal managed care programs in Los Angeles, Sacramento, Orange,
Riverside, San Bernardino, San Francisco, Alameda, Santa Clara, Fresno, Kern and
Stanislaus counties.
3
SENIOR PLANS. WellPoint offers numerous Medicare supplemental plans, which
typically pay the difference between health care costs incurred and amounts paid
by Medicare, using existing PPO and HMO provider networks. 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, 1997, the
Medicare supplemental plans served approximately 166,000 members. WellPoint also
offers Blue Cross Senior Secure, an HMO plan operating in defined geographic
areas, under a Medicare risk 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 include prescription drugs, routine physical exams,
hearing tests, immunizations, eye examinations, counseling and health education
services. As of December 31, 1997, Blue Cross Senior Secure HMO plans served
over 10,000 members.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
WellPoint's extensive managed health care provider networks in California
include its HMO, PPO and specialty managed care networks. These provider
relationships are monitored regularly in order to control the cost of health
care while providing access to quality providers. As a result of this
network-monitoring process as well as member and provider financial incentives,
WellPoint reduces or eliminates the need to use out-of-network providers that
are not subject to WellPoint's cost and performance controls.
WellPoint uses its large California membership to negotiate provider
contracts at favorable rates that require utilization management and other
cost-control measures. Pursuant to these contracts, physician providers 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 providers 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 HMO and PPO networks.
HMO NETWORK. Membership in CaliforniaCare has grown to approximately 1.4
million members as of December 31, 1997 from 123,000 members as of December 31,
1987. As of December 31, 1997, the HMO network included approximately 28,000
primary care and specialist physicians and approximately 430 hospitals
throughout California. 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 that incorporates
financial incentives to control health care costs. 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 provider contracts are
on a nonexclusive basis and provide for a per diem payment (a fixed fee schedule
where the daily rate is based on the type of service), 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. Provider 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 birthing
4
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 management of outpatient prescription drugs and satisfaction of quality
criteria.
PPO NETWORK. The California PPO network included approximately 42,000
physicians and 440 hospitals throughout California as of December 31, 1997.
There were approximately 2.8 million members (including administrative services
members) enrolled in WellPoint's California PPO health care plans as of such
date, approximately 47% 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
providers, which include utilization management and other cost-control measures.
In addition, WellPoint manages costs through pricing and product design
decisions intended to influence the behavior of both providers and members.
Like WellPoint's HMO plans, WellPoint's California PPO plans provide for the
delivery of specified health care services to members by contracting with
physicians, hospitals and other providers. Hospital provider contracts are on a
nonexclusive basis and are generally paid per diem amounts that provide for
rates that are below the hospitals' standard billing rates. Physician provider
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 providers that are part of its
network. Provider rates are generally negotiated on an annual or multi-year
basis with hospitals. In 1996, the Company concluded an extensive recontracting
process with hospitals in its provider network, whereby certain hospitals that
demonstrated designated quality and other criteria were given a preferred status
in exchange for, among other things, lower negotiated rates. Provider rates for
physicians in the Company's PPO network are set from time to time by the
Company.
UTILIZATION MANAGEMENT. In order to better manage quality in its
proprietary provider networks WellPoint adopts utilization management systems
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 HMO, WellPoint permits PMGs to oversee most utilization
management for their particular medical group under these guidelines. Currently,
substantially all of the PMGs in WellPoint's California HMO network have
established committees to oversee utilization management. For its 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, treatment guidelines
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.
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 California
legislation affecting the individual and small employer group market. See
"--Government Regulation."
5
QUALITY MANAGEMENT. Quality management for most of the Company's California
business is overseen by the Company's Quality Management Department and is
designed to ensure that necessary care is provided by qualified personnel.
Quality management encompasses plan level quality performance, physician
credentialing, provider and member grievance monitoring and resolution, medical
group auditing, monitoring medical group compliance with Blue Cross of
California standards for medical records and medical offices, physician peer
review and a quality management committee.
UNICARE
In 1996, the Company began pursuing a nationwide expansion strategy through
selective acquisitions and start-up activities in key geographic areas. The
Company believes that its success in the highly competitive California managed
care market is attributable to its broad range of managed care products that
target the differing needs of specific market segments. The Company's
acquisition strategy to date has focused on large employer group plans that
offer indemnity and other health care products that are less intensively managed
than the Company's current products. In addition, the Company has focused on
acquiring businesses that provide significant concentrations of members in
strategic locations outside of California. As of December 31, 1997, the Company
had approximately 2.4 million members covered under its UNICARE health plans
(including approximately 57,000 members in California). Approximately 55% of
UNICARE medical membership as of such date was concentrated in eight states:
Illinois, Texas, Massachusetts, Ohio, Michigan, New York, Georgia and Indiana.
Most of the Company's non-California business is conducted by the Company's
wholly owned subsidiary UNICARE Life & Health Insurance Company.
MARKETING AND PRODUCTS
Similar to the Company's Blue Cross of California products, WellPoint's
UNICARE products are developed and marketed outside of California with a focus
on specific customer groups. The large employer group businesses that were
previously part of the MMHD and GBO operations have a national focus as a result
of the multi-state needs of such employers. UNICARE's individual and smaller
employer group and senior products are marketed on a more regional basis as a
result of the more localized nature of these customer segments and the agent and
broker communities that serve them. Similar to the Company's Blue Cross of
California business units, individual UNICARE business units are responsible for
marketing, enrolling, underwriting and servicing their respective customers.
Outside of California, the Company offers HMO products in Texas and 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 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 offers managed health care
products and services in Texas through certain subsidiaries including UNICARE of
Texas Health Plans, Inc., which is currently licensed as an HMO in the Houston,
Dallas/ Forth Worth and Austin areas. Although the regulatory requirements vary
from state to state, many states require that HMO products be offered by an
entity incorporated and domiciled in that state.
MANAGED HEALTH CARE NETWORKS AND PROVIDER RELATIONS
Due to the more recent development of the Company's national operations, the
Company's relations with health care providers outside of California are more
varied than in California. During 1997, the Company undertook significant
network development efforts in various states, including Georgia, Illinois,
Indiana, 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 of December 31, 1997,
UNICARE's proprietary networks included approximately 42,000 primary and
specialist physicians and 350 hospitals. These networks included approximately
15,000 primary care and specialist physicians and 150 hospitals in the Company's
Texas HMO network.
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As part of the MMHD Acquisition, the Company also acquired majority
ownership interests in a start-up HMO, National Capital Health Plan ("NCHP"),
and an existing PPO entity, National Capital Preferred Provider Organization
("NCPPO"). Both entities operate in the Maryland/Virginia area and are joint
ventures with local health care providers. The NCPPO network included
approximately 6,700 primary care and specialist physicians and 50 hospitals as
of December 31, 1997.
A large number of UNICARE members are currently served by third-party
provider networks, which generally lack the provider selectivity and discounts
typical of the Company's California proprietary networks. One of the Company's
strategies for the expansion of its UNICARE operations is to continue building
proprietary provider network systems similar to the Company's networks in
California, 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.
UTILIZATION MANAGEMENT. For the Company's UNICARE managed care health
plans, utilization management is provided both by UNICARE and third-party
provider networks. As part of the GBO Acquisition, the Company also acquired
CostCare, Inc. ("CCI"), which provides medical management services. The Company
has integrated CCI utilization management services into UNICARE offerings. In
December 1997, CCI (which operates as UNICARE/Cost Care) received a two-year
accreditation from the Utilization Review Accreditation Commission ("URAC"), a
private organization providing voluntary accreditation of utilization review
entities.
UNDERWRITING. As with the Company's Blue Cross of California operations,
the UNICARE underwriting activities use criteria based upon accumulated
actuarial data, with adjustments for factors such as claims experience, member
mix and industry differences to evaluate anticipated health care costs. Because
a significant portion of UNICARE's business is the provision of administrative
services to self-funded employer plans, most of the UNICARE business involves no
underwriting risk to the Company. 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."
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. Moreover, 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. As of December 31, 1997, WellPoint had more than 12.3
million risk and non-risk members and approximately 49,000 participating
pharmacies.
DENTAL PLANS
WellPoint's California dental plans include Dental Net, its California
dental HMO, with a provider network of approximately 2,000 dentists reimbursed
on a capitated basis, a dental PPO, with a network of approximately 11,000
dentists, and traditional indemnity plans. As part of the Company's national
expansion efforts, the Company has developed or is developing dental provider
networks in 40 states
7
outside of California. As of December 31, 1997, the Company's dental networks
outside of California included 18,900 dentists. The Company's dental products
outside of California currently include a dental PPO in Texas and Georgia. 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, 1997, served approximately 3.2 million dental members.
LIFE INSURANCE
The Company offers primarily term-life insurance to employers, generally in
conjunction with the Company's health plans. As of December 31, 1997, the
Company provided life insurance products to approximately 1.8 million persons.
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, through a network of approximately 3,800
contracting providers. In addition, approximately 280 employee assistance and
behavioral managed care programs have been implemented for a wide variety of
businesses throughout the United States. As of December 31, 1997, there were
approximately 700,000 members covered under WellPoint's mental health plans.
WORKERS' COMPENSATION
One of the Company's operating subsidiaries, UNICARE Insurance Company
("UIC"), underwrites workers' compensation insurance primarily in California and
is also licensed in 33 other states. UIC historically focused on insuring large
accounts, working with a select group of large property and casualty insurance
brokers. In August 1994, the Company introduced "UNICARE Integrated," an
integrated managed care product for workers' compensation and medical benefits.
Under UNICARE Integrated, WellPoint has combined its existing HMO and PPO
networks with a workers' compensation occupational medical network of physicians
and clinics. UNICARE Integrated offers single point-of-service and account
management for the employer and provides employees access to existing HMO and
PPO networks. WellPoint believes that, by integrating managed care and workers'
compensation, medical treatment costs and workers' compensation costs can be
reduced. As of December 31, 1997, approximately 275,000 members were covered
under WellPoint's workers' compensation programs.
UTILIZATION MANAGEMENT
In connection with the GBO Acquisition, the Company acquired CCI, a wholly
owned subsidiary of John Hancock. CCI, which now operates under the trade name
UNICARE/Cost Care, 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. In December 1997, CCI received a two-year accreditation from URAC. As
of December 31, 1997, the Company had approximately 2.8 million utilization
management members.
DISABILITY PLANS
As of December 31, 1997, the Company provided long-term and/or short-term
disability coverage to approximately 1.1 million 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 Advantage Blue trade name, involve three
8
different products. The Company's long-term care products include both a skilled
nursing home care plan and comprehensive policies covering skilled, intermediate
and custodial long-term care.
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.
MANAGEMENT SERVICES
WellPoint provides administrative services to large group employers that
maintain self-funded health plans. In California, the Company often has been
able to transition these customers into other lines of business by subsequently
introducing WellPoint's underwritten managed care products. 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 California PPO and HMO 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, 1997, WellPoint serviced
self-insured health plans covering approximately 2.7 million medical members.
Management services revenue for these services was $383.2 million, $147.9
million and $61.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company's managed care services revenues have expanded
considerably during the last two years as a result of the MMHD and GBO
Acquisitions.
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 $36.6 million, $34.8
million and $21.2 million on advertising for the years ended December 31, 1997,
1996 and 1995 respectively.
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. 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 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 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
9
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 the National Committee for
Quality Assurance ("NCQA") and the Utilization Review Accreditation Commission
("URAC")) and financial stability. WellPoint believes that it competes
effectively against other health care industry participants.
GOVERNMENT REGULATION
CALIFORNIA
DOC REGULATION. WellPoint offers its managed health care services in
California through Blue Cross of California which is subject to regulation
principally by the California Department of Corporations (the "DOC") under the
Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act"). Under
the Knox-Keene Act, Blue Cross of California is subject to various minimum
tangible net equity ("TNE"), deposit and other financial requirements. The DOC
also regulates the ability of Blue Cross of California to issue capital stock or
to pay dividends, and of its subsidiaries to pay dividends or to diversify and
implement changes in their products, and the ability to effect intercompany
transactions. Blue Cross of California's managed health care programs are also
subject to extensive DOC regulation regarding minimum benefit and coverage
levels, Blue Cross of California's contractual and business relationships with
health care providers, administrative capacity, marketing and advertising,
procedures for quality assurance and subscriber and enrollee grievance
resolution. Blue Cross of California must file periodic financial reports with
the DOC and is subject to periodic reviews of those activities by the DOC. In
addition, the DOC must approve all forms of individual and group subscriber
contracts. Any material modifications to the organization or operations of Blue
Cross of California are subject to prior review and approval by the DOC. The
approval process can be lengthy and there is no certainty of approval by the
DOC. The failure to comply with DOC regulations can subject the Company to
various penalties, including fines or the imposition of restrictions on the
conduct of its operations. In 1997, the DOC conducted a triennial medical survey
of the Company and each of its subsidiaries licensed under the Knox-Keene Act.
The Company has received preliminary reports from the DOC with respect to three
surveys and is currently in the process of responding to the preliminary
reports. Prior to the Company's August 1997 reincorporation in Delaware, the
Company and two subsidiaries other than Blue Cross of California were Knox-Keene
licensees.
DOI REGULATION. The California Department of Insurance (the "California
DOI") regulates the insurance business, including the managed care services and
workers' compensation activities, conducted by BC Life and UIC. BC Life and UIC
are subject to various capital reserve and other financial requirements
established by the California DOI. The DOI also regulates the ability of the
Company's subsidiaries to issue capital stock, to pay dividends, to diversify
and implement changes in their products, and the ability to effect intercompany
transactions. BC Life and UIC must also file periodic reports regarding their
activities regulated by the California DOI and are subject to periodic reviews
of those activities by the California DOI. BC Life must also 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. CIMS, which
operates a general insurance agency, is also subject to regulation by the
California DOI. There can be no assurance that any future regulatory action by
the California DOI will not have an adverse impact on the ability of BC Life,
UIC and CIMS to conduct their business profitably.
CALIFORNIA HEALTH CARE LEGISLATION. From time to time, new California
legislation is enacted and regulatory interpretations are adopted that adversely
affect WellPoint. For example, California's various
10
small group reforms require that coverage be offered to certain small groups,
limit rate increases and exclusions based on pre-existing conditions, limit
waivers (temporary exclusion for individuals with specifically identified
preexisting conditions) and impose other requirements designed to increase the
availability of coverage for small groups. This legislation has resulted in
increased claims expense for the Company. In addition, in 1996 WellPoint
voluntarily removed certain temporary exclusions, including a temporary
exclusion for maternity services, which has resulted in increased claims expense
for the Company. Further California legislation addresses the practice of
"freezing," or discontinuing the offering of certain benefit plans, by health
care service plans and insurance carriers. There can be no assurance that
compliance with the legislation discussed above will not adversely affect
WellPoint's financial condition or results of operations. The legislation
described above and any similar legislation in California or other states may
result in increased claims expense.
In 1997, the California Legislature established the Managed Health Care
Improvement Task Force to study and make recommendations regarding managed
health care issues in the state of California. The task force deliberated in
1997 and issued a preliminary report in January 1998. The task force was
comprised of appointees chosen by California Governor Pete Wilson and by the
Legislature and included representatives from health plans, employer groups,
consumer groups and health care providers. The task force's report includes a
broad range of recommendations to restructure managed health care in California,
including changes in patient confidentiality requirements, quality-of-care
issues, mandated benefit coverage and the restructuring of California regulatory
oversight of managed health care plans. The task force's recommendations have
been provided to Governor Wilson and the California Legislature. No legislation
has yet been implemented as a result of the task force's recommendations. While
it is still too early to determine if any additional legislation will be adopted
as a result of the task force's work, changes recommended by the task force, if
enacted into law, could have a material adverse affect on the Company's results
of operations and financial condition.
FEDERAL
RECENT FEDERAL HEALTH CARE LEGISLATION. In August 1997, the President
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 between counties. In addition, the Balanced Budget Act
expanded the managed health plan options available to Medicare enrollees to
include PPO, POS and high deductible health plans intended for MSAs. No
regulations regarding this change have yet been adopted. 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 March 1997, President Clinton appointed the Advisory Commission on
Consumer Protection and Quality in the Health Care Industry (the "Clinton
Quality Commission") to advise the President on changes occurring in the health
care system and to formulate recommendations regarding health care quality and
the protection of consumers. The commission is comprised of representatives from
government, consumer groups, business groups and health care providers. In
November 1997, the Clinton Quality Commission 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. The
Commission's recommendations have been put forth for consideration by the United
States Congress. No legislation has yet been adopted as a result of its
recommendations. In February 1998, the President 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.
11
On August 21, 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 (originally known in the Senate as
the Kennedy-Kassebaum bill) ("HIPAA"). HIPAA imposes new obligations for issuers
of health insurance coverage and health benefit plan sponsors. Most of the
insurance reform provisions of HIPAA become effective for "plan years" beginning
July 1, 1997.
HIPAA requires health plans in the small group market (generally 50 or fewer
employees) to accept every employer, employee and family member, subject to
certain prescribed exceptions. Plans must apply any restriction uniformly and
without regard to individual member health status. HIPAA also guarantees the
renewability of coverage, regardless of the health status of any member of a
group. Access to coverage in the individual market is guaranteed to people who
lose their group coverage (due to loss of employment, change of jobs or other
reasons), subject to certain limited exceptions. Alternatively, states may
develop programs to assure that comparable coverage is available to these
people. The coverage will be available without regard to health status, and
renewal will be guaranteed.
HIPAA further prohibits health plans in the small group market from
establishing enrollment eligibility rules or premiums based on specified "health
status" related factors. An exception to this policy of nondiscrimination is
provided with respect to premium discounts or rebates, or modified copayments
and deductibles related to health promotion and disease prevention programs.
HIPAA provides parameters for the use of pre-existing condition limits by
health plans. Plans may limit or exclude benefits for a pre-existing condition
only if the exclusion is limited to 12 months for conditions diagnosed or
treated in the previous six months. The pre-existing condition exclusion period
is reduced or credited for each month of prior continuous coverage. Insurers
cannot impose new pre-existing condition exclusions for workers with previous
coverage. Health plans only may use an affiliation period of up to two months.
On September 26, 1996, the President signed maternity length of stay and
mental health parity benefits measures into law. 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 are covered if deemed necessary by
the mother or her physician (in consultation with the mother). Health plans will
be barred from offering financial incentives for early discharges. The mental
health parity provision will require health plans that provide mental health
benefits to set the same level of yearly and lifetime coverage for mental health
benefits as for physical ones. The maternity length of stay and mental health
parity measures are effective for plan years beginning January 1, 1998.
Approximately 30 states already guarantee minimum hospital stays for mothers and
newborns. In many regions, the maternity length of stay provisions reflect the
existing average length of stay. As a result of these factors, it is unclear
what implications, if any, these measures will have on WellPoint's result of
operations.
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 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, WellPoint provides a senior plan product under a Medicare
risk 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. WellPoint's senior plan is not
permitted to account for more than one-half of WellPoint's total HMO members in
each of WellPoint's geographic markets in California, although this rule is
currently scheduled to be terminated on or before January 1, 1999. HCFA has the
right to audit HMOs operating under Medicare contracts to
12
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 five years. Certain of these
proposals would restrict coverage decisions or prohibit exclusions or denials of
coverage for pre-existing conditions and would provide for "community rating" of
risks. Certain of these proposals would impose new restrictions or standards on
health plans, including restrictions on incentive payments to providers, and
would require health plans to provide greater information and disclosure to
consumers. There have been proposals made at the Federal level to implement
greater restrictions on employer-funded health plans, which are generally
exempted from state regulation by the Employee Retirement Income Security Act of
1974 ("ERISA"). To control medical costs, proposed legislation may also set or
limit fees of health care providers, which may be established through a
governmental board.
WellPoint is unable to evaluate what legislation may be proposed and when or
whether any legislation will be enacted and implemented. However, certain of the
proposals, if adopted, could have a material adverse effect on WellPoint's
financial condition 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 and workers' compensation insurance. As a result of
the MMHD and GBO Acquisitions, the Company and certain of its subsidiaries are
also subject to regulation by the DOI in Delaware (which is the state of
incorporation of UNICARE Life & Health Insurance Company) and in all other
states. As the Company offers a broad range 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, Texas, Georgia and various other states will have
greater potential effect on the Company's financial condition or results of
operations. Over the past few years, there has been an increase throughout the
United States in proposed state legislation regarding, among other things,
mandated benefits, health plan liability, third-party review of health plan
coverage determinations and health plan relationships with providers. The
Company expects that this trend of increased legislation will continue.
In May 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. It is too early to
determine what effect, if any, this legislation will ultimately have on the
Company. However, 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 and financial
condition.
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 approximately 125 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.
13
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 and BC Life are currently parties to license
agreements with the BCBSA which allow them to use the Blue Cross name and mark
in California 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 license
requires payment of a fee to the BCBSA and compliance with various requirements
established by the BCBSA, including the maintenance of a specified base capital
requirements. 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, 1997, WellPoint and its subsidiaries employed approximately
10,100 people. Approximately 115 of the Company's employees are presently
covered by a collective bargaining agreement with the Office and Professional
Employees International Union, Local 29. As a result of the GBO Acquisition,
approximately 260 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. WellPoint believes that its relations with its employees
are good, and it has not experienced any work stoppages.
EXECUTIVE OFFICERS
Leonard D. Schaeffer, age 52, has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since August 1992. From 1989 until
May 1996, Mr. Schaeffer was also Chairman of the Board of Directors and, from
1986, Chief Executive Officer of BCC. 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 ("Sallie
Mae"), 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.
D. Mark Weinberg, age 45, has been Executive Vice President, UNICARE
Businesses of the Company since October 1995. 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.
Ronald A. Williams, age 48, has been Executive Vice President, Blue Cross of
California Businesses of the Company since October 1995. From August 1992 until
May 1996, Mr. Williams served as a director of the Company. From February 1993
to October 1995, Mr. Williams was Executive Vice President, Group and Network
Services of the Company. Prior to February 1993, Mr. Williams was Executive Vice
President of BCC's Group Services from May 1992 to February 1993. Prior to that
time, Mr. Williams served as
14
Executive Vice President of BCC's Health Services and Products Group from
December 1989 to May 1992 and as BCC's Senior Vice President of Marketing and
Related Products from November 1988 to December 1989. From May 1987 to November
1988 he was Vice President of Corporate Services of BCC. From July 1984 to May
1987 he was Senior Vice President of Vista Health Corporation, an alternative
delivery system for outpatient psychological and substance abuse services of
which he was also a co-founder.
David C. Colby, age 44, 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 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. Mr. Colby also
serves as a director of 2 Connect Express, Inc. and OMNIS Technology
Corporation.
Thomas C. Geiser, age 47, 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.
MAY 1996 RECAPITALIZATION AND AUGUST 1997 REINCORPORATION
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.
In connection with the Recapitalization, BCC relinquished its rights under
the Blue Cross License Agreement date 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."
The License Agreement required that the Foundation enter into a voting trust
agreement (the "Voting Trust Agreement"), pursuant to which the Foundation
deposited into a voting trust (the "Voting Trust") the number of shares of the
Company's Common Stock sufficient to reduce the Foundation's holdings outside
such Voting Trust to a level not in excess of 50% of the voting power of the
outstanding shares of the Company's Common Stock. The shares held by the trustee
under the Voting Trust Agreement (the "Voting Trust Shares") generally must be
voted (i) with respect to elections and removal of directors, calling of
shareholder meetings and amendment of the Company's Certificate of Incorporation
and Bylaws, where such actions are opposed by the Board of Directors, to support
the position of the Board of Directors, (ii) with certain exceptions, on matters
requiring a vote of at least an absolute majority of all outstanding shares of
Common Stock, as the majority of non-Voting Trust Shares vote, and (iii) on all
other matters, in the identical proportion in favor of or in opposition to such
matters as non-Voting Trust Shares
15
vote. In addition, the Voting Trust Agreement requires that the Foundation,
through sales (which may involve exercises of its registration rights discussed
below) or additional deposits into the Voting Trust, reduce its holdings outside
the Voting Trust to 20% and 5% of the outstanding Common Stock on and after
three and five years, respectively, from May 20, 1996. As a result of sales of
its Common Stock holdings, as of March 15, 1998, no shares held by the
Foundation were subject to the provisions of the Voting Trust Agreement. As of
March 15, 1998, the Foundation owned 29,910,000 shares of WellPoint Common
Stock, or approximately 42.7% of the outstanding Common Stock.
Pursuant to an addendum to the License Agreement, the Foundation's Board of
Directors was required to consist of a majority of persons that served as
directors of BCC on or before May 17, 1996 (the "Original Blue Cross
Directors"). In March 1998, the Company, the BCBSA and the Foundation
tentatively agreed to modify this restriction. Pursuant to a proposed amendment
to the Voting Trust Agreement (the "Amended Voting Trust Agreement"), in the
event that the number of Original Blue Cross Directors were to become equal to
the number of non-Original Blue Cross Directors (such occurrence being known as
the "Even Division Date"), the Foundation would be required to immediately make
deposits into the Voting Trust to reduce its holdings outside the Voting Trust
to 20% of the outstanding Common Stock and make additional deposits into the
Voting Trust within one year thereafter to reduce its holdings outside of the
Voting Trust to 5% of the outstanding Common Stock. The Foundation has indicated
to the Company that an Even Division Date may occur in April 1998. In order for
a change in composition of the Foundation Board to be permitted, the Foundation
must obtain the approval of the California Attorney General and the California
Department of Corporations. There can be no assurance that such approvals will
be obtained or that the Amended Voting Trust Agreement will be executed.
With respect to those shares held by the Foundation in excess of the
"Ownership Limit" (as defined in the Company's Certificate of Incorporation and
discussed further in the following paragraph) that are not subject to the Voting
Trust Agreement, the Foundation has also entered into a voting agreement (the
"Voting Agreement"). The Voting Agreement provides among other things, that the
Foundation, during the period that it continues to own in excess of the
Ownership Limit, will vote all shares of the Company's Common Stock owned by it
in excess of 5% of the outstanding shares (except those shares held pursuant to
the Voting Trust Agreement) in favor of each nominee to the Board of Directors
of the Company who has been nominated by the Nominating Committee of the Board
of Directors, or under certain circumstances, other subsets of the board, all as
set forth in the Company's Bylaws. With respect to the removal of directors,
calling of shareholder meetings and amendment of the Company's Articles of
Incorporation and Bylaws, where such actions are opposed by the Board of
Directors, the Foundation has also agreed under the Voting Agreement to support
the position of the Board of Directors.
At the time of the Recapitalization, 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 be 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
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
16
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 connection with the Recapitalization, the Company and the Foundation also
entered into a registration rights agreement (the "Registration Rights
Agreement") with respect to the shares of the Company held by the Foundation.
The Registration Rights Agreement grants the Foundation (and certain transferees
of the shares covered by the Registration Rights Agreement), certain demand and
"piggyback" registration rights. The undertakings made by Old WellPoint in order
to secure the DOC's approval of the Recapitalization required the Foundation to
make certain minimum annual distributions beginning in 1997. In order to fund
such required distributions, the Foundation may make sales from time to time of
shares of the Company's Common Stock pursuant to the exercise of its rights
under the Registration Rights Agreement.
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. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--General." 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 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, as amended). 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 and GBO 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. There can be
17
no assurance that any 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 or result
of operations.
In addition to capital requirements imposed by the California Department of
Corporations, the Company and its BCBSA-licensed affiliates are required to
maintain certain levels of capital to satisfy BCBSA requirements. The National
Association of Insurance Commissioners (the "NAIC") is currently considering
adopting new capital requirements for licensed HMOs called Health Organization
Risk Based Capital ("HORBC"). When and if adopted by the NAIC, the BCBSA may
adopt HORBC as the basis for its capital requirements. There can be no
assurances that such 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 1996, the President signed HIPAA into law as
well as maternity length of stay and mental health parity measures. The
maternity length of stay and mental health parity measures took effect as of
January 1, 1998. See "--Government Regulation." Various states have passed
similar legislation, some providing for more extensive benefits than those
required by HIPAA. An increasing number of proposals are being considered by the
United States Congress and state legislature 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, its financial
condition or results of operations.
The Company provides administrative services for Medi-Cal for the DHS in
various California counties. The Company also provides similar 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, particularly in light of governmental
concern with increasing health care costs. Further, there can be no assurance
any such heightened scrutiny will not have a material adverse effect on the
Company either through negative publicity about the Company or through an
adverse impact on the Company's results of operations.
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, health care practices, inflation, new
technologies, clusters of high-cost cases, continued consolidation of physician,
hospital and other provider groups, the regulatory environment 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 or results of operations. Periodic renegotiation of hospital
contracts and continued consolidation of physician, hospital and other provider
groups may result in increased health care costs or limit the Company's ability
to control such costs.
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. 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.
18
INTEGRATION OF RECENT 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 and the GBO acquisition in March
1997. During 1997, the Company worked extensively on the integration of these
acquired businesses (especially MMHD), including consolidating existing
operations sites and converting certain accounts to the Company's information
systems. The Company is continuing the consolidation of these recently 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 (especially the information systems designed to serve these
businesses), the Company may temporarily experience increases in claims
inventory, difficulties in determining member eligibility and service and other
issues. 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 assurances can be given regarding the ultimate success
of the integration of these acquisitions into the Company's business, due in
part to the large size and multi-state nature of their businesses.
Both the acquired MMHD operations and the GBO have some indemnity-based
insurance operations, with a significant number of members outside of
California. Each of these operations experienced varying profitability or losses
in recent periods. In addition, the Company has experienced and expects to
continue to experience material membership attrition as it pursues its strategy
of motivating traditional indemnity health insurance members to select managed
care products. There can be no assurances that a sufficient number of these
members will accept managed care health plans or that the Company will be able
to continue existing relationships with provider networks currently serving
those members or develop satisfactory proprietary provider networks in these
geographic areas. The development of such networks will require considerable
expenditures by the Company.
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 the Company will not have the
benefit of the Blue Cross mark, which are important components of its success in
California. After an initial transition period, the Company will also no longer
have the benefit of the MassMutual or John Hancock trade names under which these
acquired operations were previously conducted. 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 such acquisition. Accordingly, there can be no assurance that the
Company will be able to identify suitable 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
and financial condition.
COMPETITION
Managed health care organizations operate in a highly competitive
environment that is subject to significant change from business consolidations,
new strategic alliances, legislative reform, aggressive marketing practices by
other managed health care organizations 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
19
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 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 34% of WellPoint's total
premium revenue for the year ended December 31, 1997. WellPoint has experienced
increasing 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."
EVOLVING THEORIES OF RECOVERY
WellPoint, like HMOs and health insurers generally, excludes certain health
care services from coverage under its HMO, PPO and other plans. In the ordinary
course of business, WellPoint is subject to the claims of its members from
decisions to restrict reimbursement for certain treatments. The loss of even one
such claim, if it were to result in a significant punitive damage award, could
have a material adverse effect on WellPoint's financial condition or results of
operations. In addition, the risk of potential liability under punitive damage
theories may significantly increase the difficulty of obtaining reasonable
settlements of coverage claims. The financial and operational impact that such
evolving theories of recovery may have on the managed care industry generally,
or WellPoint in particular, is presently unknown. See "--Government Regulation."
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
individual 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 computer programmers. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
EFFECT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
The year 2000 presents a number of potential problems for computer systems
and applications, including significant processing errors or failures. In order
to address these problems for its systems and applications, the Company has
developed and is in the midst of executing a comprehensive plan designed to
address the year 2000 issue. During 1997, the Company completed a detailed risk
assessment of its various computer systems and applications, formulated a plan
for specific remediation efforts and began
20
certain of such remediation efforts. During 1998 and the first quarter of 1999,
the Company expects to continue and complete its remediation efforts and to
undertake internal testing of its systems and applications. In the second
quarter of 1999, the Company expects to undergo third-party testing of its
applications and systems. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000" for a more
comprehensive discussion of the year 2000 issue, the steps being taken by the
Company to address it and the potential effects on the Company's results of
operations and financial condition of this issue.
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 the 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 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. See "--May 1996
Recapitalization."
ITEM 2. PROPERTIES.
Effective as of January 1, 1996, the Company entered into a new lease for
its 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. Rent expense under the new lease was approximately
$7.8 million during 1997. In 1997, the Company entered into a lease, which
expires in December 2019, for a new facility to be located in Thousand Oaks,
California that will consolidate many corporate and UNICARE functions. The
Company and its subsidiaries have additional offices in the greater Los Angeles
and Ventura County area. As a result of the MMHD and GBO acquisitions and the
Company's continuing national expansion efforts, the Company maintains offices
in various other locations, including Springfield, Massachusetts; Charlestown,
Massachusetts; Schaumburg, Illinois; Dearborn, Michigan; and Plano, Texas.
ITEM 3. LEGAL PROCEEDINGS.
WellPoint and certain of its subsidiaries are parties to various legal
proceedings, many of which involve claims for coverage encountered in the
ordinary course of its business. WellPoint, like health plans generally,
excludes certain health care services from coverage under its HMO, PPO and other
plans. In the ordinary course of its business, WellPoint is subject to the
claims of its enrollees arising out of decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it resulted in a
significant punitive damage award, could have a material adverse effect on
WellPoint. In addition, the risk of potential liability under punitive damage
theories may increase significantly the difficulty of obtaining reasonable
settlements of coverage claims. However, the financial and operational impact
that such evolving theories of recovery will have on the managed care industry
generally, or WellPoint in particular, is at present unknown.
21
Certain of such legal proceedings are or may be covered under insurance
policies or indemnification agreements. Based upon information presently
available, the Company believes that the final outcome of all such proceedings
should not have a material adverse effect upon WellPoint's results of operations
or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
22
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. For periods prior to the consummation of
the Recapitalization on May 20, 1996, the information given below is with
respect to Old WellPoint Class A Common Stock, without adjustment for the
two-for-three exchange occurring as part of the Recapitalization. In connection
with the Recapitalization, Old WellPoint paid a special dividend of $10.00 per
share to its stockholders of record as of May 15, 1996.
HIGH LOW
------- -------
PRE-RECAPITALIZATION:
Year Ended December 31, 1996
First Quarter................................................................ $36 $31 7/8
Second Quarter (through May 20, 1996)........................................ 36 5/8 26
POST-RECAPITALIZATION:
Second Quarter (May 21, 1996 to June 30, 1996)............................... $39 1/8 $31 1/8
Third Quarter................................................................ 33 3/4 23 3/8
Fourth Quarter............................................................... 35 1/2 28 1/4
Year Ended December 31, 1997
First Quarter................................................................ $45 7/8 $32 7/8
Second Quarter............................................................... 51 37 3/4
Third Quarter................................................................ 60 1/2 46 1/4
Fourth Quarter............................................................... 58 13/16 38 13/16
On March 13, 1998 the closing price on the New York Stock Exchange for the
Company's Common Stock was $66 5/8 per share. As of March 13, 1998, there were
approximately 1,117 holders of record of Common Stock.
The Company did not pay any dividends on its Common Stock in 1996 or 1997,
other than the payment of the $995 million special dividend in connection with
the Recapitalization. Management currently expects that all of WellPoint's
future income will be used to expand and develop its business. The Board of
Directors has determined to retain its net earnings during 1998.
23
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA, MEMBERSHIP
DATA AND OPERATING STATISTICS)
CONSOLIDATED INCOME STATEMENTS
Revenues:
Premium revenue............................................. $5,227,904 $3,879,806 $2,910,622 $2,647,951 $2,355,980
Management services revenue................................. 383,238 147,948 61,151 36,274 18,121
Investment income........................................... 215,302 142,028 135,306 107,447 75,074
--------- --------- --------- --------- ---------
5,826,444 4,169,782 3,107,079 2,791,672 2,449,175
Operating Expenses:
Health care services and other benefits..................... 4,245,281 3,003,117 2,199,953 1,927,954 1,719,853
Selling expense............................................. 260,523 224,453 190,161 169,483 147,097
General and administrative expense.......................... 853,100 545,942 344,427 334,206 266,295
Nonrecurring costs.......................................... 14,535 -- 57,074 -- --
--------- --------- --------- --------- ---------
5,373,439 3,773,512 2,791,615 2,431,643 2,133,245
--------- --------- --------- --------- ---------
Operating Income.............................................. 453,005 396,270 315,464 360,029 315,930
Interest expense............................................ 36,658 36,628 -- -- --
Other expense, net.......................................... 34,147 20,134 12,677 8,008 2,901
--------- --------- --------- --------- ---------
Income before Provision for Income Taxes and Cumulative Effect
of Accounting Changes....................................... 382,200 339,508 302,787 352,021 313,029
Provision for income taxes.................................. 154,791 137,506 122,798 138,851 126,385
--------- --------- --------- --------- ---------
Income before Cumulative Effect of Accounting Changes......... 227,409 202,002 179,989 213,170 186,644
Cumulative Effect of Accounting Changes--Adoption of SFAS
Nos. 106 and 109.......................................... -- -- -- -- (21,260)
--------- --------- --------- --------- ---------
Net Income.................................................... $ 227,409 $ 202,002 $ 179,989 $ 213,170 $ 165,384
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per Share Data(A)(B)(C)
Income before Cumulative Effect of Accounting Changes:
Earnings Per Share.......................................... $ 3.30 $ 3.04 $ 2.71 $ 3.21 $ 2.81
Earnings Per Share Assuming Full Dilution................... $ 3.27 $ 3.04 $ 2.71 $ 3.21 $ 2.81
Cumulative Effect of Accounting Changes--Adoption of SFAS
Nos. 106 and 109:
Earnings Per Share.......................................... -- -- -- -- (0.32)
Earnings Per Share Assuming Full Dilution................... -- -- -- -- (0.32)
Net Income:
Earnings Per Share.......................................... $ 3.30 $ 3.04 $ 2.71 $ 3.21 $ 2.49
Earnings Per Share Assuming Full Dilution................... $ 3.27 $ 3.04 $ 2.71 $ 3.21 $ 2.49
OPERATING STATISTICS(D)
Loss ratio.................................................. 81.2% 77.4% 75.6% 72.8% 73.0%
Selling expense ratio....................................... 4.6% 5.6% 6.4% 6.3% 6.2%
General and administrative expense ratio.................... 15.2% 13.6% 11.6% 12.5% 11.2%
Net income ratio............................................ 4.1% 5.0% 6.1% 7.9% 7.0%
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA
Cash and investments.......................................... $2,939,445 $2,165,492 $2,257,269 $1,973,388 $1,779,495
Total assets.................................................. $4,533,415 $3,405,542 $2,679,257 $2,385,636 $1,921,832
Long-term debt................................................ $ 388,000 $ 625,000 -- -- --
Total equity.................................................. $1,223,169 $ 870,459 $1,670,226 $1,418,919 $1,233,190
Cash dividends declared per common share(E)................... -- $ 10.00 -- -- --
Medical Membership(F)......................................... 6,638,000 4,485,000 2,797,000 2,617,000 2,322,000
- ------------------------------
(A) Per share data for all periods presented prior to 1996 have been recomputed
using 66,366,500 shares, the number of shares outstanding immediately
following completion of the Recapitalization. Per share data for the year
ended December 31, 1996 has been calculated using such 66,366,500 shares,
plus the weighted average number of shares issued since the
Recapitalization.
(B) Per share data includes nonrecurring costs of $0.13 per share and $0.52 per
share for 1997 and 1995, respectively.
(C) Per share data for periods prior to 1997 has been restated to reflect the
adoption of SFAS No. 128, "Earnings Per Share."
(D) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue.
(E) The Company paid a $995.0 million special dividend in conjunction with the
Recapitalization which occurred on May 20, 1996. Management currently
expects that all of the Company's future income will be used to expand and
develop its business.
(F) Membership numbers are approximate and include some estimates based upon the
number of contracts at the relevant date and an actuarial estimate of the
number of members represented by each contract.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Factors That May Affect
Future Results of Operations."
GENERAL
The Company is one of the nation's largest publicly traded managed health
care companies with approximately 6.6 million medical members and approximately
22 million specialty members as of December 31, 1997. The Company offers a
diversified mix of managed care products, including health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), point of
service ("POS") plans, other hybrid plans and traditional indemnity products. In
addition, WellPoint offers managed care services for self-funded employers under
management services contracts, including claims processing, actuarial services,
network access, medical cost management and other administrative services. The
Company also offers a broad array of specialty and other products, including
pharmacy, dental, utilization management, life, integrated workers'
compensation, preventive care, disability, behavioral health, COBRA and flexible
benefits account administration.
RECENT ACQUISITIONS AND MAY 1996 RECAPITALIZATION
On March 1, 1997, the Company completed its acquisition of certain portions
of the health and related life group benefits operations (the "GBO") of the John
Hancock Life Insurance Company. The purchase price was $89.7 million, subject to
adjustment upon completion of a post-closing audit (which is still pending). The
purchase method of accounting has been used to account for the acquisition of
the GBO. The GBO, with an associated 1.3 million acquired members, targets large
employers with 5,000 or more employees and a majority of the medical members it
serves are in health plans that are self-funded by employers. The GBO offers
indemnity and PPO plans and also provides life, dental, pharmacy, utilization
management and disability coverage to a variety of employer groups. The GBO has
historically experienced a higher administrative expense ratio than the
Company's traditional California business due to the GBO's higher percentage of
management services business. The higher administrative expense ratio of the GBO
has contributed and may continue to contribute to an increase in the Company's
overall administrative expense ratio in current and future periods.
The Company expects to incur approximately $21 to $25 million of costs
relating to the GBO acquisition during 1998, a portion of which is expected to
be reflected in the Company's results of operations. At the time that the GBO
Acquisition was consummated, the Company expected that it would experience
material membership attrition of up to 30% as it integrated the GBO operations
and implemented its strategy of motivating traditional indemnity insurance
members to select managed care products through, among other things, product
design and premium increases. Premium increases implemented in the second and
third quarters of 1997 did not result in the expected membership attrition. The
Company is currently unable to determine if and to what extent the Company may
experience additional membership attrition as it continues to integrate this
acquired business.
On March 31, 1996, the Company acquired the Life and Health Benefits
Management Division ("MMHD") of Massachusetts Mutual Life Insurance Company (the
"MMHD Acquisition"). The acquired MMHD operations focus on employers with 250 to
5,000 employees and provide administrative services, PPO and indemnity insurance
products. The Company has experienced membership attrition of approximately 18%
through December 31, 1997 on acquired membership, a portion of which is the
result of recently instituted premium increases with respect to certain
accounts. The Company expects that it will experience some level of further
membership attrition of its acquired MMHD members as it pursues its strategy of
motivating members to select managed care products.
25
On May 20, 1996, the Company completed the Recapitalization, including the
acquisition of the commercial operations of BCC (the "BCC Commercial
Operations") for $235.0 million in cash. The Recapitalization included the
payment of a $995.0 million special dividend funded by $775.0 million in
revolving debt and the remainder in cash (see Note 2 to the Consolidated
Financial Statements for a description of the Recapitalization).
As a result of the GBO and MMHD acquisitions, the Company has significantly
expanded its operations outside of California. In order to implement the
Company's regional expansion strategy, the Company will need to continue its
development of satisfactory provider and sales networks and successfully convert
these books of business to the Company's existing information systems, which
will require additional expenditures by the Company.
Prior to their acquisitions by WellPoint, each of the GBO, MMHD and the BCC
Commercial Operations experienced a higher overall loss ratio than the Company.
The inclusion of these acquisitions has contributed to an increase in the
Company's overall loss ratio. In order to control the respective loss ratios and
reduce the financial risk of these acquired businesses, the Company has
undertaken a variety of measures, including the imposition of significant
premium increases and changes in product design. The Company also implemented a
series of price increases for certain of its California managed care businesses
in response to an increased loss ratio in the second and third quarters of 1997.
The Company will continue to evaluate the need for further price increases, plan
design changes and other appropriate actions in the future. There can be no
assurances, however, that the Company will be able to take subsequent pricing or
other actions or that any actions previously taken or implemented in the future
will be successful in addressing any concerns that may arise with respect to the
performance of certain businesses.
LEGISLATION
A variety of health care reform measures are currently pending or have been
recently enacted at the Federal, state and local levels. Recent Federal
legislation seeks, among other things, to insure the portability of health
coverage and mandates minimum maternity hospital stays. These and other proposed
measures may have the effect of dramatically altering the regulation of health
care and of increasing the Company's loss ratio or decrease the affordability of
the Company's products. In May 1997, the Texas Legislature adopted Senate Bill
No. 386 ("SB 386"), which 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 SB 386). The legislation became effective as of September 1, 1997. It
is too early to determine what effect, if any, this legislation may have on the
Company. However, 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 and financial
condition. See "Business--Government Regulation."
YEAR 2000
The Company is substantially dependent on its computer systems and
applications due to the nature of its managed health care business and the
increasing number of electronic transactions in the industry. Historically, some
computer systems and applications were developed to recognize the year as a
two-digit number, with the digits "00" being recognized as the year 1900. The
year 2000 presents a number of potential problems for such systems, including
potentially significant processing errors or failure. In order to address these
problems, the Company has developed and is in the midst of executing a
comprehensive plan designed to address the "year 2000" issue for its computer
systems and applications. During 1997, the Company completed a detailed risk
assessment of its various computer systems and applications, formulated a plan
for specific remediation efforts and began certain of such remediation efforts.
During 1998 and the first quarter of 1999, the Company expects to continue and
complete its remediation efforts and to undertake internal testing of its
systems and applications. In the second quarter of 1999, the Company
26
expects to undergo third-party testing of its applications and systems. The
Company currently estimates that its costs related to year 2000 compliance
remediation for Company-owned systems and applications will be approximately $20
million in 1998 and approximately $2 million in 1999. The Company expects that
these costs will be expensed as incurred and will be funded through cash flow
from operations.
The Company has begun to assemble survey data from health care providers,
health care transaction clearing houses, employers, agents and brokers and other
parties with which it communicates electronically to determine the compliance
efforts being u