Feb. 13 (Bloomberg) -- WellPoint Inc., the second-biggest U.S. health insurer, picked a new chief executive officer from outside the industry who says his work with hospitals and doctors will help smooth the insurer’s path in a time of change.
WellPoint named Joseph Swedish, 61, CEO of the nonprofit Catholic hospital system Trinity Health Corp., as its next leader after a six-month search. He replaces Angela Braly, who left WellPoint last year amid investor discontent over the Indianapolis-based insurer’s performance.
The insurer fell the most in three months in New York trading, with analysts saying the pick wasn’t likely to go down well with shareholders. Swedish lacks the extensive insurance experience that investors were looking for to turn around a company that has struggled to control medical costs and meet profit forecasts, said Carl McDonald, a Citigroup analyst based in New York.
“Swedish may ultimately be viewed as the best CEO in the history of managed care,” McDonald wrote in a note to clients today. “But it’s likely going to take the market some time to figure out if that’s the case,” he said.
The concern with picking a hospital CEO to run WellPoint is that almost all of the company’s earnings and “problem areas” come from the health insurance business, McDonald wrote.
WellPoint, the top seller of small business and individual plans, fell 4.6 percent to $63 at the close in New York, for its biggest one-day drop since Nov. 7. The new CEO will be under pressure as the U.S. health-care law transforms insurance markets starting next year, said Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Connecticut.
“I don’t think this is the time to experiment,” Skolnick said in a telephone interview. “Bringing a little hospital knowledge to a health plan won’t hurt. But not hurting, in my view, isn’t enough.”
Swedish headed Livonia, Michigan-based Trinity Health, a system of 47 hospitals in 10 states, since December 2004. He said his hospital experience and financial results were plenty relevant to the health-insurance industry.
“There are some very fundamental shifts going on that represent a convergence of the provider and payer sectors,” Swedish said yesterday in an interview. He plans to focus on tighter coordination with doctors, investing in information technology to help consumers learn more about their care choices and working to bring medical costs down.
Swedish said his first job when he takes over March 25 is reassuring WellPoint’s investors.
“What I’ll be working on in the coming weeks and months is developing a significant, credible, strong story regarding the growth and performance of this company,” Swedish said. “That’s what the investor community wants to hear. I think they want to get a strong sense that we are in fact predictable and reliable.”
Mark Giambrone, a portfolio manager at WellPoint’s biggest shareholder, Dallas-based Barrow, Hanley, Mewhinney & Strauss, said he didn’t know enough about Swedish to comment. Rouven Wool-Lewis, an analyst at another major holder, Baltimore-based T. Rowe Price Group Inc., said WellPoint deserves the benefit of the doubt given Swedish’s track record.
“It’s someone with deep health-care experience and deep experience as a CEO,” Wool-Lewis said in a phone interview. “If you get someone who’s a strong operator, they can surround themselves with good people.”
The mutual fund firm held 3.87 million WellPoint shares, or 1.3 percent of the total, according to a Sept. 30 regulatory filing. Barrow Hanley has 18.13 million shares, or 6 percent of the company, according to its latest filings.
Before Swedish’s selection yesterday, investors and analysts had focused on industry candidates, including Ronald Williams, the retired head of insurer Aetna Inc., and James Carlson, who ran the Medicaid insurer Amerigroup Corp. and engineered the sale of his company last year to WellPoint for $4.9 billion. Also rumored was interim CEO John Cannon, who served as WellPoint’s general counsel and will remain with the company.
WellPoint shares have declined 2.6 percent over the past 12 months through yesterday, even as the top U.S. insurer, UnitedHealth Group Inc. of Minnetonka, Minnesota, rose 6.3 percent.
Swedish said his lack of recent for-profit experience wasn’t an issue. “We may have been non-tax, but that doesn’t mean we were nonprofit,” Swedish said of his time at Trinity. “Our performance statistics rivaled most organizations, even the investor-owned. I’m not going to hide from that fact.”
WellPoint will pay Swedish a salary of $1.25 million, with a bonus of as much as $3.75 million more, according to a company filing with U.S. regulators. He will also get stock options this year worth as much as $8 million and $3.56 million to compensate for leaving Trinity.
It’s not clear whether Carlson, of Amerigroup, will stay after not getting the top job. He signed a two-year contract to remain with WellPoint after the deal closed in December. The contract allows for the two sides to part under “changed circumstances,” Citigroup’s McDonald said.
“In any combination of companies some turnover is inevitable, we are pleased that Amerigroup’s top talent has remained to lead the combined Medicaid business,” said Kristin Binns, a WellPoint spokeswoman. “Dick Zoretic heads Medicaid for WellPoint, and has an outstanding team of leaders to assist him,” she said, referring to another Amerigroup executive who joined WellPoint. “Any additional organizational details will be determined at a later date.”
As Trinity’s CEO, Swedish helped engineer a merger with Catholic Health East, which will make the new hospital group the fifth-largest U.S. based health system, WellPoint said in its statement. Trinity also runs a health insurance program called Mount Carmel Health Plan, which proves a Medicare Advantage program in Ohio.
“This is a guy who knows how to manage, with intense experience, at the provider level and he’s a great spokesperson and advocate,” said Michael Stocker, former president and CEO of WellPoint’s east region, who served with Swedish on the board of directors of Coventry Health Care Inc. “I think it’s a good choice.”
The selection of Swedish also was praised by Richard Umbdenstock, chief executive officer of the American Hospital Association, an industry trade group, who also has worked with the incoming WellPoint CEO.
“We’re seeing real pickup in the number of insurers and providers getting closer together to try to figure out how to marry their respective strengths into better management of care and better outcomes at lower cost,” he said in a telephone interview. “I think it’s a bold move on their part.”
Prior to joining Trinity, Swedish served as CEO at Centura Health, a faith-based nonprofit and Colorado’s largest family of hospitals, according to data compiled by Bloomberg. He has been a board member at Coventry, in Bethesda, Maryland, since February 2010.
Braly, appointed WellPoint CEO in 2007, was ousted last year after investors expressed discontent with her management. She resigned on Aug. 28, a month after the company missed analysts’ profit estimates for the second time in three quarters. It was the latest misstep in a tenure marked by difficulties with predicting medical costs and setting premiums.
WellPoint traded at a 2 percent premium to the Standard & Poor’s 500 index of the top six health insurers when Braly took over as chairman on March 1, 2010. When she departed, it changed hands at a 17 percent discount, suggesting investors’ waning confidence. The company lost about $9 billion of its value during that time, according to data compiled by Bloomberg.
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