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Insurance M&A’s in Style: Anthem/Wellpoint Face Integration Hurdles

The mergers and acquisitions market in the insurance and financial services space is heating up. For Anthem and WellPoint, two Blues that have traditionally grown through acquisition and consolidation, the companies' experience in technological integration will be important to the deal's success.

Anthem, Inc.'s (Indianapolis, $13.2 billion in assets) decision to acquire WellPoint Health Networks, Inc. (Thousand Oaks, Calif., $13.9 billion in assets) began what has become a trend of insurance consolidation deals. And with a goal of lowering premiums by driving technological standardization, the two largest Blue Cross Blue Shield associations-which themselves have grown through acquisition-are positioned to lead the way toward technological integration.

Although specific plans for system consolidation have not been set, the initial integration steps are expected to be made in about eight months' time, after the merger is approved by the Department of Justice, various state boards, company shareholders and the Blue Cross Blue Shield Association, says Ken Ferber, spokesman, WellPoint.

At that time, "teams composed of management from both companies will concentrate first on getting an understanding of the systems; then they will make integration decisions," says Ferber. However, the merged company's integration efforts will not likely result in a one-system consolidation, he adds.

The two companies, which were not competitors prior to this deal, are on even, but different technological playing fields, notes Brad Holmes, research director, health care, Forrester Research. "Neither company is jealous of the other's technology," he says.

A possible obstacle to full system consolidation may be the fact that both carriers have grown through acquisition.

"Anthem is a creation of the coming together of nine blue plans," says Deborah New, spokeswoman, Anthem. "We started out as Blue Cross Blue Shield of Indiana in the 1940s. We began as a single-state plan, and we've grown by partnering with eight others."

For its part, WellPoint completed its acquisition of Blue Cross Blue Shield provider Cobalt Corp. (Milwaukee) in June 2003. Cobalt fit into WellPoint's core Midwestern geography strategy, according to Ferber.

Although consolidating fragmented groups can be a tremendously difficult task, both WellPoint and Anthem have practical experience in this area. "Both companies are continuously consolidating platforms and have been doing so for the last five years," says Forrester's Holmes. "From that perspective, both organizations will bring a sense of reality and an imperative to rationalize IT to drive business performance."

"We are two blue cultures and both have integrated blue companies, so our integration [difficulties] will be minimal. The real value in this deal will be our ability to leverage technology and synergies that will keep costs affordable," says WellPoint's Ferber. For instance, the combined group will consolidate its hardware and save $1 million during each cycle of its PC replacement, according to Ferber.

With better purchasing power, "Anthem and WellPoint will also have the ability to leverage large-scale systems and spread [technology] costs over more members," says Ferber. The combined companies also plan to reduce overhead by combining products. WellPoint is the leader in individual and small-group markets, and Anthem has a larger-group base with some significant national accounts. "By merging the products and bringing them across state lines, we can keep costs down," says Ferber.

But members shouldn't hold their breath; the process won't happen overnight. "If they consolidate business on one or two critical platforms, it's going to be at least a two-year process," says Forrester's Holmes. "But in the shorter term, they may be able to create a consistent set of products for multi-regional and national customers."

Longer term, WellPoint hopes to bring online self-service functionality to the merged group, Ferber reports. Currently, the carrier's members have access to an automated system that provides information on the quality of care provided at different hospitals, costs, rates of infection and the frequency with which a given procedure is performed at a particular location. "We are trying to drive this system to Anthem and bridge the gap," says Ferber. "Anthem has [technology] services that will benefit us as well."

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