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   Company Says Time is Right for Converting to For-Profit and Merging with Wellpoint

CareFirst Blue Cross Blue Shield’s Rationale:

Company Says Time is Right for Converting to For-Profit and Merging with Wellpoint

CareFirst Blue Cross Blue Shield’s Statement to the Press on December 13, 2001
WellPoint would acquire CareFirst for $1.3 billion, following CareFirst's conversion to for-profit status, pending regulatory approvals.

A third-party analysis conducted for CareFirst BlueCross BlueShield indicates that CareFirst could benefit from the increased revenues and improved access to capital that could result from combining with a large for-profit health plan. The report by Accenture, one of the world's leading management and technology consulting organizations, said that increased annual revenues could better enable CareFirst to serve customers' needs and remain competitive in Maryland, Delaware and Washington, D.C.

The report, "An Assessment of Health Coverage Industry Trends and CareFirst's Strategic Response," was prepared by Accenture prior to CareFirst's November 20 announcement of its intent to convert to for-profit status and merge with WellPoint Health Networks Inc. of California.

"Our decision to seek conversion to for-profit status and merge with WellPoint came only after a two-year deliberative process led by

CareFirst's Board of Directors," said David D. Wolf, executive vice president for medical systems and corporate development. "Throughout this process, we called on external guidance from experienced consultants like Accenture and investment bank Credit Suisse First Boston."

Wolf added, "The CareFirst leadership believes this report confirms what had become increasingly apparent: competing with national insurers and remaining a stable, locally led health insurer is inextricably linked to our ability to join with a strong, like-minded company. Our proposed conversion and merger with WellPoint will allow us to better serve members and generate substantial resources for the communities we serve while we preserve and strengthen CareFirst's position in the health care marketplace."

Based on the Accenture report, CareFirst believes:

  • The timing for a conversion and merger is opportune. CareFirst's profitability and strong market position put the company in a favorable negotiating position to obtain an attractive price. As a result of the company's strength, an acquisition of CareFirst and an accompanying conversion to for-profit status would help create a significant pool of funding which elected leaders could use to address unmet health needs, Accenture noted in its report.

  • WellPoint has agreed to pay $1.3 billion to acquire CareFirst, creating charitable trusts that offer an unprecedented opportunity for elected leaders to address such needs in Maryland, Delaware and Washington D.C.

  • CareFirst's current approach to expansion through affiliation and incremental membership growth will not likely provide the access to capital needed to invest in upgrades in technology to meet regulatory mandates, improve service, and enhance E-Commerce capabilities to meet the growing expectations of members.

  • Significant growth could enable CareFirst to more effectively serve customers and compete with large national insurers. The Accenture report estimates that if a company like CareFirst, whose current annual revenues total approximately $3.5 billion, increases annual revenues to between $11 billion and $16 billion, such growth could help it remain competitive over the next several years. In addition, CareFirst's leadership believes that, in order to meet statutory requirements, cover unexpected occurrences and take advantage of opportunities that arise, reserves would have to increase from the current $700 million to between $1.9 billion and $2.2 billion.

  • CareFirst's future ability to serve Mid-Atlantic customers is directly linked to its ability to align with another equally strong organization. Among the issues explored by Accenture was that CareFirst pursue a "convert and combine" strategy, under which the company would simultaneously convert to become a for-profit corporation and join with another public company, preferably through acquisition.
"The health care marketplace has changed dramatically in recent years," said Joe Marabito, an Accenture partner. "That change has led to substantial consolidation among commercial and Blue Cross Blue Shield health plans. It is clear from our analysis that smaller health plans lacking access to capital face increasing challenges in this environment."

Accenture was first engaged by CareFirst in 1999 to provide research and analysis of environmental factors affecting the health care industry and to evaluate strategic options that would position CareFirst for continued success. The full report is available on CareFirst's web site, www.carefirst.com.

On November 20, 2001, CareFirst and WellPoint announced that they had signed a definitive agreement to merge. Under the terms of the agreement, WellPoint would acquire CareFirst for $1.3 billion, following CareFirst's conversion to for-profit status, pending regulatory approvals.

The entire purchase price would be provided to benefit residents in CareFirst's three principal areas: Maryland, Delaware and the District of Columbia. In addition, the agreement calls for the creation of a new Southeast Region of WellPoint, which would be led by William L. Jews, CareFirst president and chief executive officer. The region, to be headquartered in Maryland, would include CareFirst's operations as well as WellPoint's UNICARE business in the Mid-Atlantic area.


For more information about CareFirst BlueCross BlueShield, see www.carefirst.com


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This story was published on January 2, 2002.
  
APRIL 2002
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