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Leonard Schaffer

Triage might have been a word that came to mind when Leonard Schaeffer took the reins of ailing Blue Cross of California eight years ago.What he found was a non-profit concern hemorrhaging on the bottom line to the tune of $153 million in fiscal 1986. Schaeffer quickly cut the payroll almost in half to 3,500 …

Triage might have been a word that came to mind when Leonard Schaeffer took the reins of ailing Blue Cross of California eight years ago.

What he found was a non-profit concern hemorrhaging on the bottom line to the tune of $153 million in fiscal 1986. Schaeffer quickly cut the payroll almost in half to 3,500 people. Perhaps most important, he refocused the business, converting it from a traditional indemnity insurer to a managed-care provider.

“I was not greeted with a great deal of glee,” says Schaeffer, 48, Blue Cross chairman and CEO.

Even so, the shakeup has been a resounding success. “The turnaround job Schaeffer did was nothing short of amazing,” says Todd Richter, senior vice president with Dean Witter Reynolds in New York. “And he did it while under attack from the best of the California health-care hunch: Kaiser Permanente, FHP, PacifiCare, TakeCare.”

Net income last year slipped 10.9 percent to $220 million. But administrative costs stood at 11 percent of total premiums, compared with 16.7 percent when Schaeffer took over. Managed care comprises 95 percent of Blue Cross’ business, compared with 25 percent in 1987. Seeking access to new capital and expanded markets, Schaeffer and his team incorporated a managed-care subsidiary in 1992, WellPoint Health Networks, the largest publicly traded health-care company in the state. Schaeffer raised $517 million by selling 19.5 million WellPoint shares-equivalent to a 20 percent stake in the company.

But the restructuring has thrust Blue Cross into the regulatory spotlight. Because the transaction allowed the parent company to circumvent a law requiring non-profit organizations to reimburse the state if they convert to for-profit status, Blue Cross promised up front to increase its “public benefit” activities, including charitable donations, by an undefined amount. The precise sum is under negotiation.

A Blue Cross spokesman ascribes some of the differences between company and state to the restructuring’s groundbreaking status. “We were the first Blue plan to do something like that,” says CEO Schaeffer. “Initially we were seen as the Western crazy people, but now others wish to emulate us.”

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