Leonard the Giant Killer?

WellPoint's Schaeffer is taking on drug behemoths to make more medications available over the counter

At 5 feet 7 inches, Leonard D. Schaeffer often makes jokes about his own height. The CEO of insurer WellPoint Health Networks Inc. (WLP ) came back from the Academy Awards awards last year delighted to report that actor Tom Cruise is even shorter than he is.

Nevertheless, Schaeffer is not one to back away from big adversaries, and he's about to take on some doozies: the Food & Drug Administration and three leading pharmaceutical companies. On May 11, the FDA will hold a hearing to discuss WellPoint's petition to make the allergy medications Claritin, Allegra, and Zyrtec available over the counter. The makers of those blockbuster drugs say they'll fight Schaeffer tooth and nail, but he's undeterred. He figures the change would save his company $90 million a year in drug costs and unnecessary doctor visits. "It's ridiculous to pay $65 for a drug that's safe and effective," Schaeffer says. "I think the FDA will take this seriously."

PINCHPENNY. WellPoint's FDA petition is novel, to say the least: It's the first time a request for over-the-counter status has come from an insurance company. But it's only the latest example of the management style Schaeffer has employed to prolong one of his industry's most consistent winning streaks. While other big health-care companies have stumbled after seeking growth through rapid-fire acquisitions, Schaeffer kept his focus on cutting costs and finding more flexible pricing plans. He avoided the leap into Medicare coverage that hobbled PacifiCare Health Systems Inc. (PHSY ) and other health-maintenance organizations after the federal government capped reimbursements in 1997.

The payoff: In the past four years, the Thousand Oaks (Calif.) health insurer, the nation's fourth-largest, has charted annual operating-earnings growth rates between 9% and 13%. John Szabo, an analyst at CIBC World Markets, expects WellPoint's operating earnings to grow 21% this year, to $714.7 million, on 34% higher revenues of $12.4 billion, partly due to its 2000 acquisition of Cerulean Cos. Inc. Wall Street has noticed, too, sending the stock up 38% in the past 12 months, to about $100.

But keeping up the momentum won't be easy. Schaeffer's extreme focus on the bottom line has sparked a backlash among California doctors, many of whom call WellPoint "the blue shaft"--a dig at its Blue Cross of California plan--and claim it isn't reimbursing them enough to cover their costs. "Doctors feel severe animosity toward [Schaeffer] because he's undermining their efforts to provide good patient care," says Jack Lewin, CEO of the California Medical Assn.

SEEING RED. Schaeffer, 55, has raised the hackles of Schering-Plough (SGP ), Aventis (AVE ), and Pfizer (PFE )--makers of Claritin, Allegra, and Zyrtec, respectively. Previously, only drug companies petitioned the FDA for such a switch, and the companies contend it can't be made without their permission. But WellPoint looked at the factors the agency has traditionally considered and marshaled research that it says supports its case--including manufacturers' own ads. Says Schaeffer: "Here we have drugs that the drug companies say are extremely effective, with few side effects. But you have to have a doctor's appointment and a prescription to get them." Schering replies that by giving the drugs wider distribution, WellPoint would threaten optimal patient care just to cut costs. "Allergic disorders are complex and often associated with more serious conditions, such as asthma," says William O'Donnell, a Schering spokesman.

Blue Cross of California was itself in poor health, losing $165 million a year, when Schaeffer took over in 1986. He restructured, cutting 3,000 employees and organizing the rest by customer segment--individuals, small companies, large companies--rather than by job functions. Then he encouraged each unit to devise innovative "hybrid" products that would be as affordable for employers as an HMO but would offer more flexibility for members. That led to such plans as FamilyElect, which lets employees choose a different medical policy for each member of their families. The more flexibility members want, the more they pay. Today, less than a third of WellPoint's members are in traditional HMOs. And while most health plans guarantee a fixed premium for 12 months, WellPoint's contracts allow it to hike rates at any time for individuals and small businesses, with 60 days' notice.

The innovations emanate from a management style Schaeffer calls "loose-tight." He requires every manager to devise three-year and one-year plans, complete with monthly goals, and to report progress on WellPoint's intranet. Schaeffer is known to be unforgiving with managers who miss their goals, but he takes a hands-off stance with those who hit them. "He makes the planning process very time-intensive and regimented," says Deborah F. Lachman, senior vice-president for the Individual & Small-Group Div. "Yet he gives us freedom to be bold and creative."

"ALPHA MALE." And there's nothing Schaeffer loves more than stirring the pot. "He's the alpha male of the health-care industry," says Nancy Chockley, president of the National Institute for Health Care Management Research & Educational Foundation, a think tank that Schaeffer chairs. "If he detects any sort of power vacuum in the room, he fills it," she says.

Still, by taking on the drug companies--and the FDA--WellPoint is in for a long battle, at best. No one knows this better than Schaeffer, who has first-hand experience with bureaucracy. At 30, the Princeton economics grad rose to become budget director of Illinois. Schaeffer took an aggressive approach to controlling debt: "We either had to raise taxes or reduce spending, so I cut all kinds of unnecessary crap--cars, airplanes. The state of Illinois had nearly as large an air force as Israel."

Later, as an assistant during the 1970s to Joseph Califano Jr., Secretary of Health, Education & Welfare, Schaeffer was put in charge of combining Medicare and Medicaid into one agency. He had to persuade state officials to take efficiency steps such as cutting the days a mother on Medicaid stayed in the hospital after having a baby. The job "took a combination of schmoozing and cajoling," says Califano, now chairman of the National Center on Addiction & Substance Abuse.

These days, Schaeffer takes his mind off rising health-care costs by going hot-air ballooning with his wife, Pamela, and their two grown children. On one trip in Africa, he recalls, "we had prides of lions and herds of giraffes running in front of the balloon. It was fantastic." Then it was back to earth, where Schaeffer is sprinting to stay one step ahead of an equally determined herd of drug companies and doctors.

By Arlene Weintraub in Los Angeles

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