Leonard Schaeffer Title:

Chairman and Chief Executive

Organization:

WellPoint Health Networks Inc.

Born:

Chicago, 1945

Education:

B.A., Princeton University

Career Turning Point:

Discovering in 1986 that Blue Cross of California was facing insolvency but deciding to stay with the company and begin the process of restoring financial strength and regaining customers' trust

Hobbies:

Hot air ballooning, driving sports cars, spending time with family

Most Admired Person:

Thomas Jefferson

Personal:

Married; two adult children

Leonard Schaeffer's WellPoint Health Networks is winning accolades amid health care industry troubles, but the company faces unhappy doctors and the persistent issue of drastic premium hikes

Although caught in the middle of the stormy health care debate, Leonard Schaeffer and his WellPoint Health Networks Inc. have been enjoying some good times.

The company, the nation's fourth largest health insurer, was recently named Fortune magazine's most admired health care firm for a third straight year. Schaeffer himself has been named a top executive by Business Week and Modern Healthcare magazines, among others.

So what's going on over at the Thousand Oaks headquarters that is drawing so much attention? Well, for one, the company has managed to turn itself around from a money-loser on the brink of failure to a consistent earner that most recently posted a 21 percent rise in profits for the first quarter ended March 31. For another, it has smartly not based its business on HMO offerings and instead has focused on insurance plans that provide its customers more choice.

But the company has not avoided all pitfalls. It has stumbled in some of its expansion efforts, including a failed bid to acquire the No. 1 U.S. health insurer, Aetna Inc. It also has been embroiled in some nasty disputes with medical providers, including Sutter Health Corp. and Catholic Healthcare West, which claimed the company's reimbursement rates were stingy. Similarly, it is the target of a high-profile federal lawsuit by the California Medical Association and other providers who accuse it and other insurers of conspiring to hold down reimbursement rates.

We sat down with Schaeffer recently in his handsomely appointed office to discuss WellPoint, unhappy doctors, projected double-digit premium hikes and other knotty issues.

Question:

Given your most recent earnings, what do you think your company is doing right that others in the managed care industry are not?

Answer: The critical event in the history of the senior officers here is what we encountered in 1986 when this company was in serious financial trouble. We all, as a group, promised each other that we would never have that kind of financial difficulty because it would jeopardize our ability to serve our members. So we are very prudent about pricing and making sure that we design products that meet people's needs and expectations.

Q: What does that exactly mean in terms of the products you offer?

A: We believe the future is in what we call network-based open access plans. The HMO is a closed network. It is a gatekeeper model. In order to use any other resource other than the gatekeeper, you have to go to the gatekeeper and get permission. Our plans say, "no gatekeeper," but there are a series of networks. You get one if you are in the basic network, but you can opt out to other networks. And as you opt out, you pay a larger and larger percentage yourself. So the question is, "How much are you willing to pay for greater choice?"

Q: But at the same time, hasn't there been trouble in the industry with medical providers being extremely unhappy with reimbursement levels, a problem your company has certainly not been immune from?

A: I am very concerned about what you could call the uneven financial results throughout the health care sector. We have done well, but we have relatively narrow margins of 3, 4 percent. What you will see here in California is that some hospitals are doing that well, or even better. If you look at the drug industry, they got margins of 50 to 60 percent. And then you look at some physician groups in the state, and they are having trouble staying afloat. So clearly, we don't have the kind of sharing that I would like to see.

Q: So what is the answer?

A: We need to remember that we are all here to serve the patients, the doctor's patient is our member and we both want to do right by that, so we have to be efficient and we have to be effective in what we do. What you are seeing is the more efficient, the more effective players hospitals, physician groups and medical health-care plans are doing well. The thing that doesn't make sense frankly are the huge profits of some of the pharmaceutical companies.

Q: How do you respond to allegations by the California Medical Association that low reimbursement rates by insurers are largely to blame for a growing number of physicians who no longer want to practice in the state?

A: We met with them and were very concerned to hear their comments. We did some research ourselves and could not find evidence of it.

Q: Still, how do you respond to CMA Executive Director Jack Lewin's severe criticism of managed care to the point the group is pursuing a racketeering lawsuit against your company and others?

A: It's unfortunate. I think that state medical societies are experiencing a loss of membership because professionals don't want to be associated with that. I don't think that name-calling helps anybody. We have begun a whole series of efforts to reach out to physicians and hospitals to try to avoid that. Our members are their patients. Their patients are our members. We want to make sure their care is uninterrupted. This is not about a fight. This is about recognizing we have joint accountability in making sure we reach that standard.

Q: Can you give us an example of that?

A: When we settled with Catholic Healthcare West, we did it on a timely basis and we included in that settlement additional funds to be used by CHW to make loans and scholarships for individuals who want to become nurses because of the nursing shortage. We also helped them invest in internal systems to do a better job of gathering data and improving communications techniques with us and companies like ours to get some of the (administrative) costs down.

Q: What do you think is driving the 13 percent premium increases that Calpers was recently hit with, and that experts say other businesses should now expect to face?

A: I think that, if you go back to when the Clintons came into power, they were going to reform health care. The problem then was that health care costs were going up in the high double digits (annually). The decision was made by the American people not to go the government route but to go the private sector. And what the private sector did is they moved to HMOs and cut dramatically the rate of increase in health-care costs. The problem is that, while the financial goal was achieved, a lot of abrasion was created between health plans, physicians and patients. That got a lot of attention in the media. I think physicians and hospitals and other caregivers went from thinking, "Gee, we have to do everything we can to reduce costs," to (a focus on providing better care). So I think we are getting, if you will, a pendulum kind of effect.

Q: Will the pendulum ever come to rest in the middle?

A: Over time, I think that it will be moderated, because the leading specialty groups have been focusing on what's called disease management (of chronically sick individuals). About 8 percent of the people in any actuarially sound pool, any large group of people, consume about 72 percent of the health care resources. So it's a small group of people with high costs. These are people with serious illnesses. You don't go in and say, "No, you can't get care." What you try to find is the more cost effective and most appropriate care for those people.

Q: Does that mean you are optimistic about the future affordability of health care, even as the baby boomers age?

A: The good news is that people are living longer and having a higher quality of life. The bad news is they will have more and more health problems, which can be dealt with but cost more. So we are going to see health care costs go up. It is a Malthusian inevitability. We've got to get it in our heads that what we are talking about is controlling the rate of increase, not saying it's not going to be more costly.

Q: What would you say to a business owner facing a double-digit premium increase if he or she were to walk in here and see your rather attractive offices, knowing that you earned over $4 million last year in salary and bonus?

A: We run a financially sound and stable company, not just for investors, but primarily for the 5.8 million Californians who rely on us to pay for their medical expenses. We believe that we bring value to the job of providing health care coverage to as many people as possible.

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