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WellPoint Earnings Grow With Acquisition Strategy

WellPoint Earnings Grow With Acquisition Strategy Corporate Focus By JACQUELINE FOX Staff Reporter At mid-year, Thousand Oaks-based WellPoint Health Networks is making analysts look smart as their predictions of sales and profit growth in 2002 appear to be coming true. Largely due to a recent spike in same-store member enrollment and a round of healthy acquisitions over the last couple of years, shares of WellPoint’s stock skyrocketed earlier this month. WellPoint was trading at $83.49 on June 21. The day of a 2-for-1 stock split on March 18, one share cost $60.75. Net income for 2001 was $414.7 million on revenues of $12.2 billion, compared to $342.3 million net income on revenues of $9.0 billion in 2000. Total membership in health plans jumped from 10.1 million in 2001 to 13 million in 2002. Finally, first-quarter net income is up 46 percent to $141 million, or 97 cents a share, from $96.5 million, or 74 cents a share, in the same quarter of 2001. “They’ve got two things going for them,” said Greg Crawford with Fox-Pitt, Kelton in San Francisco. “First off, they have had a series of some key acquisitions, such as the Blue Cross/Blue Shield buys in 2000. But they have also been experiencing solid same-store growth numbers. And we are starting to see some of the patterns that the company has been so good at here in California being duplicated with success at Blue Cross and Blue Shield of Georgia.” Earlier this year, WellPoint acquired MethodistCare Inc. and Methodist Health Insurance Company, the managed care subsidiaries of Houston-based Methodist Health Care System. The former entities now operate under UNICARE Health Plans of Texas Inc. and UNICARE Health Insurance Company of Texas. UNICARE, WellPoint’s national operating unit, now serves roughly 423,000 members in Texas alone a significant boost for the company’s product portfolio in the state. Still, Dave Colby, executive vice president and CFO, tried to downplay the impact of the acquisitions, saying the key to WellPoint’s growth is the wide variety of products that can be tailored to meet the needs of a customer, whether it employs 50 people or 5,000. “What really has fueled our growth has been our same-store performance, not so much the acquisitions,” said Colby. The acquisitions have allowed the company to offer more programs, he said, that customers are taking advantage of. Crawford, however, put emphasis on the acquisitions. “The acquisitions have been successful and the expansion process has been strong,” he said. “WellPoint has had a long history of developing flexible products, and they are able to roll out new products in new markets much faster than their competitors seem to be able to.” He said the acquisition of Blue Cross and Blue Shield of Georgia in 2000 was particularly important: Membership enrollment there grew by 7.3 percent for the year ending March 31, 2002. In California, enrollment jumped 10.5 percent for the same period. The cloud on the horizon could be escalating costs. Nursing shortages, growing interest in unionization among health care workers, prescription cost hikes and expensive new technologies may soon compel providers like WellPoint to raise rates to their customers, who in turn pass them on to employees. Many in the industry are predicting providers will increase rates by as much as 25 percent over the next year. Colby said increases are inevitable, but WellPoint should be able to keep it at no more than 10 percent. “The rate increases come with more options, and that’s what we are seeing people want,” he said. “Rates are going up because our customers want what they want.” Crawford agreed that WellPoint will probably control costs better than others, largely because of its great market share and its ability to offer multi-tiered medical packages. “We are back in another era of medical cost inflation,” said Crawford. “But because WellPoint is so flexible, they are in tune with what the market wants. They have also mastered the art of deductible design and are able to offer less expensive products, so I’m not worried about their future earnings and increases. People are attracted to their model.” Summary Business: Managed health care provider Headquarters: Woodland Hills CEO: Leonard D. Schaeffer Market Cap: $ 12.5 billion Dividend Yield: N/A* Total Liabilities: $ 5.3 billion P/E: 25.0 Long-Term Debt: $ 838 million *WellPoint does not pay dividends.

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