WellChoice, Inc. History

Address:

11 West 42nd Street
New York, New York 10036
U.S.A.

Telephone: (212) 476-7800
Fax: (212) 476-1281

Public Company
Incorporated: 2002
Employees: 5,400
Sales: $5.38 billion (2003)
Stock Exchanges: New York
Ticker Symbol: WC
NAIC: 524114 Direct Health and Medical Insurance Carriers

Company Perspectives:

The company's core principles of innovation and customer satisfaction enable us to deliver cost-effective quality products, superior claims processing and Internet based portals available to physicians, hospitals, members and brokers. These principles, coupled with our core strength in technology adoption and integration, provide the cornerstone for the successful operation of our business.

Key Dates:

1929:: A Baylor University official develops the prepaid healthcare concept that will become known as Blue Cross.
1934:: The Associated Hospital Service of the Capital District is formed, a predecessor of WellChoice.
1985:: Three years after Blue Cross and Blue Shield merge, the merger of several entities in New York creates Empire BlueCross BlueShield.
1994:: Michael A. Stocker is named chief executive officer of Empire BlueCross BlueShield.
1996:: Stocker announces that he wants to seek for-profit status for Empire BlueCross BlueShield.
2002:: WellChoice, the parent company of Empire BlueCross BlueShield, completes its initial public offering of stock.
2004:: Discussions of a merger with Oxford Health Plans are terminated.

Company History:

WellChoice, Inc. is the parent company of the largest health insurer in New York State, serving nearly five million members. The company's service area includes the New York metropolitan area, parts of upstate New York, and 16 counties in New Jersey. In most of WellChoice's New York markets it has the exclusive right to use the Blue Cross and Blue Shield names. The company serves large groups of more than 500 employees, including employees of New York City and New York State, smaller groups of employees, and individuals.

The Beginnings of Blue Cross and Blue Shield

WellChoice was incorporated nearly 70 years after the business it represented was formed. The company's roots stretch to the beginning of prepaid healthcare coverage in the United States, back to the formation of Blue Cross and Blue Shield, two organizations often referred to as "the Blues."

The two organizations sprang from different parts of the country, each seeking to provide different yet related services to workers. The concept underpinning Blue Shield emerged at the turn of the 20th century, when the owners of lumber and mining camps in the Pacific Northwest began paying monthly fees to groups of physicians for medical care. These early programs, which helped cover the expense of physicians' services, eventually evolved into a structured organization, Blue Shield, which was established in California in 1939. Blue Cross, by contrast, sought to help cover the cost of hospital care, a concept first developed by a superintendent of schools in Dallas, Texas, named Justin Ford Kimball. Kimball's interest was in helping teachers pay for hospital bills by pooling their monthly payments to pay for hospital care. In 1929, he introduced a plan to guarantee schoolteachers 21 days of hospital care at Baylor University Hospital for a $6 monthly fee. Kimball enrolled 1,300 teachers in his health plan the first year. A decade later, there were three million people covered by the prepaid hospital plan devised by Kimball.

The idea of sharing risk--the essence of both concepts that grew into Blue Shield and Blue Cross--spread across the country, fueling the development of the Blues into national organizations. In 1939, five years after it first appeared in Minnesota, the Blue Cross symbol was officially adopted as the national emblem for prepaid hospital care programs tailored after Kimball's Baylor program. That same year, the head of the Blue Shield Plan in Buffalo, New York, commissioned artwork combining a serpent and the U.S. Army Medical Corps insignia, creating the Blue Shield symbol. Under these two brands, the two organizations grew, their stature increasing as regions across the country embraced the idea of prepaid hospital care and prepaid physician care.

News of the prepaid hospital care concept developed by Kimball reached Albany, New York, in 1934. A group of individuals decided to form its own version of the Baylor program in Albany, typifying the manner in which Kimball's idea evolved into a national movement called Blue Cross. The Albany group created a prepayment plan designed to provide hospital services for group members, calling their organization The Associated Hospital Service of the Capital District, a precursor to WellChoice. The Associated Hospital Service opened its first office in 1935, expanding, under the Blue Cross emblem, into 13 counties by the end of the year.

As it did throughout the country, Blue Cross grew in stature in New York as the decades passed. Its membership eclipsed 300,000 by the beginning of the 1950s. Midway through the decade, in an influential confirmation of the program's worth, New York state employees and federal employees became Blue Cross members. By the 1970s, the ranks of Blue Cross members reached 500,000. Blue Shield, meanwhile, expanded in New York and elsewhere in much the same manner as Blue Cross. Separately, the two national organizations grew region by region. In New York, there were several geographically distinct entities whose work was performed under the Blue Cross and Blue Shield banners. Soon, the family of associate Blue Cross and Blue Shield entities would come together, adding cohesion and structure to a fragmented collection of healthcare insurers.

Forming an Empire in 1985

The grassroots movements begun to help lumberjacks and teachers reached a milestone in their maturation in the early 1980s. In 1982, the Blue Cross Association and the National Association of Blue Shield Plans merged. Their union created the Blue Cross and Blue Shield Association, which led regional constituents of each organization to ally with their counterparts. In New York, the melding process occurred in 1985, when Blue Cross of Northeastern New York merged with Blue Cross and Blue Shield of Greater New York, creating the basis of WellChoice, Empire BlueCross BlueShield.

Empire suffered a tortuous first decade of existence. The state-owned insurer was beset with a host of problems, including mounting debt, soaring management and administrative costs, and consumer dissatisfaction. Empire's difficulties intensified during the early 1990s, as the company struggled mightily to stay financially afloat. Between 1992 and 1995, the organization's statewide market share, as measured by premium revenues, plummeted from 34 percent to 19 percent. Partway through the slide, the company's collapse was avoided by the intervention of the state in 1993, but it remained plagued with problems. Empire needed a permanent cure for its ailments, not a temporary treatment.

A new leader was hired in 1994 to spearhead Empire's turnaround. Michael A. Stocker joined Empire as its new chief executive officer in 1994, ushering in an era of great change in New York's healthcare insurance industry. Before joining Empire, Stocker served as president of CIGNA Healthplans, a position he accepted after serving as executive vice-president and general manager of U.S. Healthcare, Inc.'s New York market from 1985 to 1992. A graduate of the University of Notre Dame who received his medical degree from the Medical College of Wisconsin, Stocker took control of Empire at a pivotal period in the organization's history. Empire was bleeding money and losing customers. It was Stocker's challenge to reverse the company's fortunes. As he did so, he left behind him an enduring legacy, one that forever changed the nature of Blue Cross and Blue Shield in New York.

A Bold Announcement in 1996

Stocker began to make changes that soon were evident in Empire's financial performance. The administrative and managerial functions of the company were made more efficient, helping Empire record $28.7 million in net income in 1996, one year after it posted a $19 million loss. Stocker's ultimate objective was much more profound in its implications than a reorganization, however. Stocker wanted to change Empire's status as a nonprofit organization into a for-profit corporation, proposing to radically alter the structure that had defined the company for six decades.

The first signs of Stocker's desire to change Empire into a for-profit concern appeared in early 1996. The company established two for-profit subsidiaries as a way to gain access to equity capital. Opposition to the idea of the state-owned Empire becoming a private-sector company, which hounded Stocker for years, quickly followed the formation of the two subsidiaries. Consumer groups were worried that profitable components of Empire's business would be plucked away from the company, thereby diluting its value. Stocker responded by announcing that Empire's board acknowledged the public's concern over the disposition of the organization's charitable assets. He promised, as quoted in the September 30, 1996 issue of Modern Healthcare, to "meet that issue head on." His solution, revealed in September 1996, was to seek full for-profit status for Empire and to create a new not-for-profit foundation endowed with the estimated market value of Empire to support the uninsured, under-insured, and hospitals. His declaration marked the beginning of a battle that dragged on into the 21st century.

Stocker's pressing need to convert to for-profit status drew its exigency from the market conditions affecting Empire. Stocker inherited a company that increasingly found itself competing against for-profit firms, which, he argued, left Empire at a disadvantage because it could not tap into equity markets to raise the capital needed to expand, buy new technology, and compete effectively for customers. Further, the deregulation of New York's inpatient hospital rates, scheduled to go into effect January 1, 1997, portended disaster for the state-owned insurer. Empire, as a last-resort insurer, received a 13 percent discount on hospital rates, but the deregulation of rates promised to strip the company of its discount. Roughly 60 percent of Empire's business was derived from traditional indemnity insurance contracts. These contracts, according to a report by New York's Special Advisory Review Panel, "may become obsolete" after deregulation. Stocker was convinced that Empire's long-term health could be ensured only by converting into a publicly traded company, but the road toward that goal was strewn with formidable obstacles.

Empire's efforts to complete an initial public offering of stock in 1997 stalled. The company needed permission from a host of agencies and departments to clear regulatory and approval hurdles, including the state attorney general's office, the New York Department of Insurance, the state Supreme Court, and the Securities and Exchange Commission (SEC). There was also uncertainty about the legality of Empire's conversion proposal, which eventually required the passage of a new law by the New York State Legislature. After failing in 1997, Empire tried again to push its case forward in 1999, filing, through its parent company HealthChoice, a proposed plan of restructuring with the Department of Insurance. At the end of December 1999, the Superintendent of Insurance approved the plan with some modification, but the plan was never implemented.

Empire's biggest foe at the dawn of the 21st century was Eliot Spitzer, New York's Attorney General. Spitzer maintained that Empire's plan for conversion was illegal. While Stocker and his executive team took up their case with Spitzer, Empire argued for new legislation to be passed to permit its conversion. Company officials appeared before lawmakers in 2000 and were rebuffed; they pleaded their case again in the spring of 2001. Stocker, after nearly five years of waiting for approval, was frustrated. In an April 6, 2001 interview with Long Island Business News, he stated: "Every day that our conversion is delayed and Empire is prevented from competing in a level playing field with its for-profit competitors, the value of the foundation is also put at risk. If we do not restructure, it will not only jeopardize Empire's continued viability, but it will also increase the likelihood that a significant public benefit that belongs to the state will be dissipated."

Empire promised to compensate the public by contributing the estimated value of the company, $1 billion, to one foundation that would help those in need and a second foundation that would support hospitals. Spitzer opposed such a plan, vowing to fight the conversion in court unless legislatures changed the law. In August 2001, the impatience of the company was expressed in a full-page advertisement in the New York Times, a sentiment delivered in an open letter to New York Governor George Pataki and the state's legislative leaders. As quoted in the August 27, 2001 issue of National Underwriter Life & Health-Financial Services, the advertisement read: "Empire has had 10 public hearings on this issue. The only significant reason we can see for a delay at this point is an inability to agree on how to divide the foundation's income. This is not an issue Empire can resolve, only you can resolve it. If you cannot agree on how to divide the $1 billion in foundation proceeds, then let the legislation pass, create one or more foundations, and let the foundation boards make the decision."

A New Era Beginning in 2002

After nearly six years of trying to change its status, Empire prevailed in 2002. In January, Governor Pataki signed legislation that gave HealthChoice the right to convert to a for-profit company. As the company prepared for its initial public offering (IPO), it formed WellChoice in August 2002 as the new parent company for its future as a for-profit enterprise. In November 2002, WellChoice completed its IPO, selling 16.7 million common shares and raising $417.3 million in net proceeds. The company was denied the first reward of its conversion, however, barring Stocker from gaining what he had been pursuing for six years. Consumer activists, represented by an advocacy group named Consumers Union, filed a lawsuit alleging the state law signed by Governor Pataki in January 2002 was unconstitutional because it was passed, as reported in the October 2, 2003 issue of A.M. Best Newswire, "strictly for the benefit of a single corporation." Consequently, state Supreme Court Judge Ira Gammerman froze the IPO proceeds in escrow until the consumers' lawsuit was resolved.

As WellChoice plotted its course in its new guise, the company faced a future that promised to include events peculiar to its new status as a for-profit enterprise. The Empire of old could not contemplate the actions WellChoice could entertain. One such event appeared likely to happen in April 2004, when WellChoice and Oxford Health Plans began discussing a possible merger. Oxford Health boasted 1.55 million members in New York and greater metropolitan areas in New Jersey, Connecticut, Delaware, and eastern parts of Pennsylvania. Although the discussions fell apart by the end of the month, the proposed merger hinted at similar actions in WellChoice's future. The remainder of the decade promised to see a more aggressive WellChoice, as the company developed and exercised its new corporate muscle as a for-profit company.

Principal Subsidiaries: EHC Benefits Agency, Inc.; Empire HealthChoice Assurance, Inc.; Empire HealthChoice HMO, Inc.; WellChoice Holdings of New York, Inc.; WellChoice Insurance of New Jersey, Inc.

Principal Competitors: UnitedHealth Group Incorporated; Aetna Inc.; Oxford Health Plans, Inc.; Health Insurance Plan of Greater New York; HealthNow New York, Inc.; Capital District Physicians' Health Plan, Inc.

WellChoice, Inc. History

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