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By RONALD SHINKMAN Contributing Reporter As chief executive officer and chairman of Woodland Hills-based WellPoint Health Networks Inc., Leonard D. Schaeffer heads one of the San Fernando Valley’s most prominent companies. Among the largest publicly traded health plans in the nation, WellPoint which operates as Blue Cross of California within the state and as UNICARE in out-of-state regions has more than 6 million members and projected 1997 revenues of more than $6 billion. Before joining Blue Cross in 1986, Schaeffer was chief executive of Group Health Inc., a Minneapolis-based HMO. During the Carter administration he was administrator of the Health Care Finance Administration, which operates both the Medicare and Medicaid programs. Question: You are one of the very few high-ranking health care executives who has held a similar position in government. What from that experience have you brought over to the private sector? Answer: Both sides of that equation have very strong prejudices against the other. People in business are said to think people in government aren’t very focused or disciplined. The people in government are said to think business people are focused on bottom-line issues, only care about profits, and don’t care about quality. My experience is that both of those attitudes are extremely exaggerated and are really not consistent with the facts. In health care, people are drawn to this company WellPoint is the for-profit, Blue Cross is the not-for-profit because they are concerned that people have access to good health care. They’re concerned with helping people. So I don’t think it’s true that everyone (in business) is money-grubbing. There are also quality people in government. But I think in today’s world, health care is going to be more impacted by the business sector than it is in government. In the old days, government had a tremendous amount of money and was developing new products. But for whatever reason, Americans have said on both the state and federal level they no longer want government to manage the health care system. I was there for the end of the good old days, when government was constantly generating new programs. I felt I was in the part of the economy where the major decisions were being made. That has shifted to the private sector, and that’s one of the reasons I’m here. Most young Americans don’t think Medicare will be there for them. So they’re depending on the private sector, on things like 401(k)s, things like IRAs. We want to be there for them. Q: There’s been a lot of criticism of high executive salaries in the health care industry, yours included. What is your view on that? A: I think it’s very hard to get compensation right. We are in a very unusual position. We converted from a not-for-profit company, but were originally prohibited from using stock-based compensation for our employees by the Department of Corporations, and we had to use cash-based compensation. Once that issue was resolved, we got out of cash-based compensation, because it is not good for the bottom line and does not align your interests with those of the stockholders. In that process, we had one year with a big lump, and it was construed as, “These guys were being paid a lot of money.” But this isn’t a place where there’s a founder with a lot of stock. It’s all current compensation for current performance. Q: What’s your take on the HMO tax negotations with the city of Los Angeles? A: This whole process is baffling. We started over a year ago, hoping to resolve this thing. Not just our company, but all of the HMOs. There is almost no movement in the negotiations even though we have been discussing it for a year now. But (L.A. Councilwoman) Laura Chick has been very supportive and the mayor has been very supportive. There was a report that came out about the city tax structure, and it concluded that taxes were very high and there’s this kind of patchwork, crazy quilt. It’s not a very easy-to-understand system. There is a very high tax rate that was not designed for managed care companies; I don’t even think those types of companies existed when it was put into effect. We would certainly like to have this resolved. I think Laura Chick understands (the HMOs) are an enormous asset for the city. In the last three or four years we have been growing continually, as have many of the other HMOs. We have brought jobs and tax revenues to the Woodland Hills area and Los Angeles, but for whatever reason, they have not been able to come up with a proposal that makes sense. Q: So you’re not happy with the current proposal from the city? A: Frankly, I don’t even know what the current proposal is. It goes back and forth and back and forth, but it never goes forward. Q: Why do you think so many HMOs have congregated in the Woodland Hills area? Is it because of the access to Calabasas, Westlake Village and the other western suburbs preferred by executives as places to live? A: We’ve always been here. In terms of WellPoint and Blue Cross, this building and the 32 acres surrounding us were developed by Blue Cross 16 years ago when there was no one else here. I wasn’t involved in the decision because I wasn’t here yet (Schaeffer joined the company in 1986). I can’t tell you anything else, other than it’s a very nice place to be, and we like it. I don’t know why the other (HMO headquarters) ended up here. Q: In recent years you have acquired health plans with operations outside California. How will the rest of your expansion plans be fulfilled? A: What we’re trying to do is expand in a focused way, as opposed to being all things for all people. We have five geographic locations that we picked where we think we can expand and be successful Texas, Georgia, the Mid-Atlantic States, the Midwest, the Tri-state area of New York, Pennsylvania and New Jersey those locations were chosen because of the legislative/regulatory environment, the provider environment because they’re interested in managed care, and the employer environment. Take Mass Mutual and John Hancock together, and fully half of their members are located in these geographic areas. We will continue to acquire businesses that will enhance our market share in these areas. We’re not buying HMOs. HMOs are very expensive. We’re buying books of business that are primarily non-managed care, where the owner of the company wants to go to managed care but does not have the time or the capital to do it. We’re focusing on that because the acquisition cost is much lower. Aetna spent $3,700 a member when they bought U.S. Healthcare (an HMO); we spent $87 a member when we bought John Hancock (an indemnity insurer). We’re focusing on these (indemnity insurers) because we’re one of the few organizations to be able to switch members successfully from indemnity to managed care. That’s what we think is a basic skill of ours. This (strategy) has an appeal to Wall Street and investors because of its focus. If we get Wall Street to value that member we bought at $87 for an amount that’s even half the $3,700 Aetna paid, then we’ve created value. We’ll create value for our stockholders, we’ll create value for the people paying the bill because the cost of treatments will go down, and most importantly, we’ll create value for our members because they will have more choice. It does take a long time to move them over; it doesn’t happen overnight. People find their way to products comfortable for them. We’re able to track utilization where employees actually go, then project what their costs will be if they go into slightly more managed care products. We don’t tell people what’s good for them; we offer choice. This is critical for us. Our whole corporate philosophy is based on the notion of reinventing the health care system so that people feel comfortable and have some control over the health care services that are rendered when they need them.