August 2, 1999
DAILY INSIGHTS
The Problems With Dual Distribution
Gary R. Craft, CFA research@eoffering.com
---------------------
It seems we raised quite a fuss. Back when the WellPoint and HealthAxis (PAMC - BUY) agreement to market insurance across the Internet in seven states was announced, we cited the possibility of a new rate filing that would contemplate the lower cost HealthAxis distribution channel, i.e., better prices for consumers and small businesses because this is what the Internet is all about. And HealthAxis, as a technologically advanced Internet platform, could easily service customers well below the cost structure of physical world agents and could use its lower cost to help pass these savings along. In our Internet world, this makes perfect sense, right? Well, wrong.
A Senior VP at WellPoint has taken exception to our assessment and unequivocally denies that WellPoint will be filing different rates and/or treating HealthAxis in any way differently than its 36,000 physical world agents. Thus, whatever difference between HealthAxis' commission structure (about half the rate of a traditional physical agent) and the normal rate appears to be going into the pocket of the indemnity provider itself-WellPoint.
This is a fine line that WellPoint and its legacy indemnity providers are walking. As we pointed out in our recent July 27, 1999 report on insurance and technology ("What Do You Want To Be When You Grow Up?"), the problems in the business-to-consumer Internet insurance market are precisely of the nature of this current WellPoint imbroglio-if you don't pass savings along to your customers, then you will be seriously impacted by new Greenfield indemnity providers that significantly underprice your services.
Some of the context of Mr. Katz's comments, which are shown below, may be designed to placate a potential groundswell of livid or perhaps petrified physical world agents. However, if WellPoint or any other current legacy indemnity provider is unwilling to pass through savings of information goods in an information economy, we only can point our readers to historical parallels.
In the 1980s, changes in the U.S. Dollar and Japanese Yen exchange rates gave U.S. car manufacturers competitive advantages in the United States. Instead of holding the line or even lowering prices to drive away the hostile Japanese entrants and prevent them from getting traction, U.S. car manufacturers actually raised prices and began gorging themselves at the trough. What happened? The Japanese tried even harder, lowered breakeven points and in so doing, built better cars and nearly knocked the U.S. auto manufacturing industry out of existence. The U.S. industry has obviously made a comeback, but these were physical not information goods. Information goods carry network effects, meaning efficiencies continue to improve at any point along the revenue curve. It will be interesting to see how an indemnity provider dealing purely in information goods can get itself out of a similar pickle as a U.S. auto manufacturer when strength builds geometrically, not linearly.
First, the comment raising all the brouhaha, then the rebuttal:
"A separate rate filing with the State of California and additional targeted states, must be made before the partners can offer 'no-middleman' pricing, ten points below current prevailing rates."
The following statement is being issued to clarify erroneous statements made in the E*OFFERING article "HealthAxis Gains Traction" posted on July 12, 1999. The statement should be attributed to Alan Katz, Senior Vice President of Individual and Small Group Sales Development, WellPoint Health Networks Inc.
(Thousand Oaks, CA)-In the July 12, 1999 E*OFFERING article "HealthAxis Gains Traction," it was incorrectly reported that "a separate rate filing with the state of California and additional targeted states, must be made by WellPoint before the partners can offer 'no-middleman' pricing, ten points below current prevailing rates." Both the facts and the implications of this statement are false.
Neither of WellPoint's operating divisions (UNICARE and Blue Cross of California) are contemplating introducing or filing "no-middleman" products nor are we developing benefit plans specifically for HealthAxis. We realize some carriers represented by HealthAxis may be developing such products. We are not. UNICARE and Blue Cross of California regularly do develop new, innovative products. As these offerings emerge online, they will be available to all of our 36,000 independent agents, including HealthAxis, on an equal basis.
This statement also implies the existence of a WellPoint strategy to develop online products or services with the goal of reducing the role of traditional agents. This implication is also false. WellPoint's relationship with HealthAxis is part of our overall distribution strategy. WellPoint believes traditional agents will be the primary sales channel for individual and small group products for many years to come. We also believe technology can augment and leverage the high-touch value provided by traditional agents. UNICARE and Blue Cross of California are developing services and applications to encourage and enable agents to work with us online.
HealthAxis will have the same access to these services and applications as any other agent. To the extent their investment in technology provides them a first-mover advantage, they will benefit more quickly from these WellPoint initiatives, but they will do so on the same terms as other agents. For consumers wishing to purchase coverage through a "virtual" agency HealthAxis is ideally situated to seize a large portion of this market segment. We are pleased to be part of their product portfolio. However, WellPoint has no intention of changing the level playing field we maintain among all of our distribution partners regardless of whether their technology of choice is the Internet, a fax machine, or the telephone.
Gary R. Craft, CFA
Managing Director, Investment Research
E FINANCIAL SERVICES
Gary is managing director of investment research specializing in the electronic financial services segment of electronic commerce. He joined E*OFFERING in April 1999. Prior to that he started BancBoston Robertson Stephens' electronic commerce research practice. Gary is a regular speaker at BAI, IQPC, American Banker and American Bankers Association, as well as at financial technology user conferences. He is also a consultant to the American Wholesale Financial Services Advisory Group. Gary has nearly 10 years of experience in investment research, and holds graduate degrees in economics from Trinity College, and in business from the University of California, Berkeley.
Note: E*OFFERING maintains a market in the shares of Provident American Corp.
----------------------------------------------------
Additional information is available upon request.
The information contained herein is not a complete analysis of every material fact respecting any company, industry or security. Although opinions and estimates expressed herein reflect the current judgment of E*OFFERING Corp., the information upon which such opinions and estimates are based is not necessarily updated on a regular basis; when it is, the date of the change in estimate will be noted. In addition, opinions and estimates are subject to change without notice. This Report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the forward-looking statements. Factors that might cause such a difference includes, but are not limited to, those discussed in "Investment Risks." E*OFFERING Corp. from time to time performs corporate finance or other services for some companies described herein and may occasionally possess material, nonpublic information regarding such companies. This information is not used in the preparation of the opinions and estimates herein. While the information contained in this Report and the opinions contained herein are based on sources believed to be reliable, E*OFFERING Corp. has not independently verified the facts, assumptions and estimates contained in this Report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this Report. E*OFFERING, its managing directors, its affiliates, and/or its employees may have an interest in the securities of the issue(s) described and may make purchases or sales while this report is in circulation. This publication is not meant for private customers.
--------------------------------------------------------
The securities discussed herein are not FDIC insured, are not deposits or other obligations or guarantees of E*OFFERING Corp., and are subject to investment risk, including possible loss of any principal amount invested.
--------------------------------------------------------
Copyright à 1999 E*OFFERING Corp.
|
