WellPoint’s new CEO likely to encounter more obstacles than her predecessor

Acquisitions were Larry C. Glasscock's strategy to make WellPoint Inc. into a health insurance goliath.

But as he hands the company's CEO reins to its top lawyer, Angela F. Braly, she faces much tougher odds to keep WellPoint
growing by gobbling up competitors.

There are no longer any for-profit Blue Cross Blue Shield insurance plans to acquire–Glasscock's favorite targets. State
governments have effectively stopped any more of those plans from converting to for-profit status. And because many are performing
well, few are clamoring to convert, anyway.

That new reality is one reason the job of WellPoint's CEO will become as much about winning over regulators, analysts
say, as it will be about wowing investors or wooing corporate clients.

All over the country, government is playing an expanding role in regulating and financing health care. That trend offers
health insurers opportunities for more business, but at the risk of more restrictive regulation.

Taxpayers now pick up the tab for nearly 47 percent of all health care spending. And their share is growing every year.

Governors–from Mitt Romney in Massachusetts to Mitch Daniels in Indiana to Arnold Schwarzenegger in California–are pushing
plans to extend health insurance coverage to more of the nation's 46 million uninsured.

In Washington, D.C., leaders from both parties are working on programs to create universal coverage. Some even are calling
for a single-payer system, similar to what Hillary Clinton tried unsuccessfully to create in 1994 as first lady. As a senator,
she's now among the leading Democratic candidates for president in 2008.

WellPoint officials say they want a "private" solution to the nation's health care challenges. But more and
more, Well-Point's success in the private sector will hinge on its success in the public halls of power.

"This is an industry, over the next five years, that is going to be under increasingly public scrutiny," said David
Frick, who was WellPoint's chief administrative officer until 2005 and was formerly deputy mayor of Indianapolis.

Most analysts last week judged Braly, 45, up to the challenge. She will succeed Glasscock as WellPoint's president and
CEO on June 1. Glasscock, 58, is leaving to spend more time with his family but will remain chairman.

Braly was chosen over two other WellPoint executives that were more visible to Wall Street: David C. Colby, chief financial
officer, and John S. Watts Jr., chief of commercial and consumer business.

"We believe she is the right choice for the role that, among other things, involves interaction with federal and state
government officials and negotiating alliances with other Blue Cross Blue Shield plans," wrote Citigroup analyst Charles
Boorady in a note to investors.

Still, Braly has enormous shoes to fill. Glasscock has been WellPoint's CEO since 1999. During his tenure, the company's
revenue grew from $6 billion to $56 billion. The company staged an initial public offering in 2001. Since then, its stock
price has increased nearly 300 percent, compared with 33 percent for the S&P 500.

The 42,000-employee company provides health insurance to 34.1 million Americans–more than any other company–although it
ranks second in revenue behind Minnesota-based UnitedHealth Group Inc.

Braly, a Texas native, holds a law degree from Southern Methodist University. She and her husband, Douglas, who used to run
his own trucking firm, have three school-age children.

Since April 2005, Braly has overseen WellPoint's legal affairs, government relations, public policy, marketing, social
responsibility, Medicare claims processing and the company's federal employees' business.

"I have [experience], not only in Washington again, but in most of the states," Braly said at a Feb. 26 news conference
announcing her appointment.

Just a few weeks ago, Braly and Glasscock traveled to California to speak with Shwarzenegger about his proposal to cover
uninsured Californians. WellPoint isn't fond of his requirement that all health insurers spend 85 percent of their premium
revenue on patient care. WellPoint currently spends about 81 percent of premiums on care.

California's plan likely would give WellPoint more customers, as would a proposal from Daniels to provide state-sponsored
health coverage to uninsured Hoosiers. The Daniels plan faces an uphill battle in the Indiana General Assembly.

Acquisition obstacles

But pumped-up public scrutiny already has shut off the main growth vehicle–at least temporarily–that Glasscock used to
build WellPoint into a health insurance giant: the acquisition of other states' Blue Cross and Blue Shield plans.

WellPoint and its predecessor companies have rolled up so-called Blues plans in 14 states, including Indiana. That leaves
25 other Blues plans that WellPoint does not control.

But increasing public opposition at the state level is thwarting the conversion of more of the not-for-profit plans to for-profit
status, analysts said.

In the last four years, regulators in Kansas, Maryland and Washington have blocked their Blues plans from converting to for-profit
status. Blues plans in two other states, New Jersey and North Carolina, backed away from their conversion plans because of
the cool response of regulators.

It is less complicated for WellPoint to acquire Blues plans that already have converted to for-profits because hospitals
and doctor groups typically oppose such moves. New York-based WellChoice lobbied its state Legislature for years to convert
to for-profit status before finally winning approval in 2002. Three years later, WellPoint scooped up WellChoice and its large
corporate clients in New York City.

WellPoint has spent the time to do such complicated deals in the past. The Indiana Blues plan acquired its Kentucky counterpart
in 1993, but only after three years of persuasion by then-CEO Ben Lytle.

Kentucky's regulators approved the deal, but investigations by the Kentucky attorney general and a court fight lasted
until a December 1999 settlement. The Indiana Blues plan agreed to give $45 million to a charitable health care fund in Kentucky.

"WellPoint's most important future targets are the complex legal and public policy transactions that occur to convert
a non-profit Blue," wrote Peter Costa, a senior analyst at FTN Midwest Securities Corp.

Braly already has one for-profit conversion of a Blues plan under her belt. She was the principal architect of converting
Missouri's Blues plan to for-profit status, which was named RightChoice. She then became the company's CEO. Braly
won approval for the deal by working to create a $1 billion foundation to serve uninsured and poorly served Missourians.

Negotiating deals

For any new Blues merger, Braly also must persuade the executives of the Blues plan to sell out. That's getting harder
to do, especially for the largest plans.

In the 1990s, when Blues plans were suffering from stiff competition from HMOs, many of the plans were financially weak.
They converted to for-profit status to win access to capital markets and survive.

Now, HMOs have lost appeal with consumers, and most Blues plans are profitable and healthy, especially the larger plans in
such states as Florida, Texas, Illinois and Michigan. That gives them less incentive to convert into for-profits or merge.

Yet the consolidation will go on, analysts say, because not all Blues plans are strong. Blues plans in smaller states are
struggling to keep up investments in computer systems and other overhead.

"With a significant number of independent Blues plans still operating–some with less than stellar performance metrics–WellPoint
has prospects for growth among Blues-branded enrollment," wrote J. Paul Newsome, an analyst at A.G. Edwards & Sons.

There had been fierce competition to acquire Blues plans until the $16.5 billion merger of WellPoint's two predecessors,
Indianapolis-based Anthem Inc. and California-based WellPoint Health Networks, in November 2004. The company kept the WellPoint
name but made Indianapolis its headquarters.

A new competitor has emerged, however. Chicago-based Health Care Service Corp., a not-for-profit that operates the Blues
plan in Illinois, has scooped up other not-for-profit plans in Oklahoma, Texas and New Mexico. The group's CEO, Raymond
McCaskey, told the trade publication Modern Healthcare that his company is a "safe haven" from WellPoint.

WellPoint can acquire health insurers that are not Blues plans–and has done so. In 2005, the company acquired Lumenos, a
Virginia-based pioneer of health savings accounts. And some of the earliest acquisitions made by WellPoint's California-based
predecessor were outside the Blues network–the health divisions of Massachusetts Mutual and John Hancock Mutual life insurance
companies.

In a conference call with analysts, Braly said WellPoint would consider "every merger and acquisition opportunity whether
it be Blue or non-Blue."

In order to keep its licenses from the Chicago-based Blue Cross Blue Shield Association, WellPoint must maintain at least
two-thirds of its national insurance revenue from Blues businesses. It seems to have some room to spare. Right now, 28.5 million
of its customers, or 84 percent, are members of Blues plans.

But Braly also said that she, like Glasscock, is committed to growing what the company already owns. WellPoint recorded no
acquisitions in 2006, but still added 245,000 customers.

A growing market

Nationally, health care spending is expected to nearly double in the next decade, to $4.1 trillion. And the government's
share of those costs is expected to rise to nearly 50 percent, according to a February report by the Centers for Medicare
and Medicaid Services.

Some analysts worry that an increase in government participation is bound to bring more restrictions, such as profit caps
or the spending requirements in Schwarzenegger's plan. If taken to an extreme, such measures could render health insurers
more like electric utilities: They are guaranteed a profit, but their prospects for growth are severely limited.

But Doug Sherlock, a health insurance consultant in Philadelphia, said more government spending is no great risk to health
insurers.

"There isn't a lot of profit-margin-type pressure that the federal government can exert on this," he said.
"This is an extremely-thin-margin business."

"If the government wants health care done," Sherlock said, "it has to employ private health insurers."