Regence BlueShield Shutting Down Subsidiary After Spending $19.3 Million

Known as Kinetix Living Corporation, Regence purchased the company for $15 million, and spent another $4.3 million trying to keep it alive
The Lund Report

October 20, 2011 – Mark Ganz, president and CEO of The Regence Group, had nothing but praise when he announced the purchase of Kinetix Living Corporation last year.

“Kinetix is a company with a unique vision for advancing the health and wellness of our employees, members and communities,” he said in a statement. “We believe this acquisition will strengthen our ability to engage and empower consumers to improve their overall health.”

But now, less than two years later, Regence is preparing to shut down this Seattle-based company after investing $19.3 million.

Regence BlueShield acquired Kinetix, which specializes in customized fitness and nutrition programs such as in-person training coaches, for $15 million in March 2010 from Maveron, a capital investment firm.

Less than nine months later, Regence had made two capital contributions of $3 million in the form of cash, and had invested another $1.3 million earlier this year.

 “The company had no accounts receivable or payable to Kinetix at December 31, 2010,” and was not required to submit an audit, according to the Regence BlueShield its 2010 annual statement filed with the Washington Insurance Commissioner.

That meant, after spending $15 million to purchase Kinetix, Regence had invested another $4.3 million in capital contributions, which were “contemplated in filings with the Washington Insurance Commissioner during the acquisition of that entity,” according to annual statement filed by The Regence Group..

Despite its $19.3 million investment, Regence wasn’t able to generate enough sales to its corporate clients to keep the company alive in its four-state region -- Oregon, Washington, Utah and Idaho, according to Georganne Benjamin, corporate spokesman.  “The business model, under which the acquisition was made, did not gain traction in the market,” she told The Lund Report.

When Regence purchased Kinetix, the company’s estimated worth -- based on its assets and liabilities -- was only $8.5 million – its fair market value – according to filings with the Washington Insurance Commissioner.  

It’s unknown why Ganz chose to pay more than the fair market value for Kinetix. Only his non-profit board of directors would know that answer, and The Lund Report was unable to reach anyone who could respond.

Washington insurance officials acknowledged they were aware of the purchase, but said, ““We’re not prepared to comment regarding Kinetix,” according to Rich Roesler, with the public affairs department.

Regence BlueShield used its investment funds to purchase Kinetix, and, the acquisition has not had an impact on health insurance premium increases, according to Benjamin.  

“Kinetix was one small investment that did not attract the number of customers we had hoped,” she wrote in response to questions from The Lund Report. “Therefore, we chose to discontinue pursuing sales in it so we could refocus our efforts in other wellness areas to better benefit our customers.

“Kinetix was purchased as part of our investment portfolio. We believe it is critical to investing and building a portfolio that we continually evaluate our long-term objectives.  As part of our long-term objectives, we believe that a broad diversification of investments builds value and reduces the overall portfolio risk. Unfortunately, the nature of diversification will result in some investments losing value but that is offset by gains from other investments. Our investments do not impact our health insurance business operations including premiums. Premiums are driven by healthcare costs and the claims generated by our membership.”

Yet, Regence BlueShield hasn’t been hesitant  about raising premiums for individuals and small businesses – the only markets where Washington regulates rates.  

On October 1, Regence increased individual premiums by 12.7 percent, which affected 100,765 people, while in 2010 those rates rose by 16.8 percent, and 16.9 percent in 2009. .

Small businesses saw their rates rise by 13.3 percent this year, and they face another 7.7 percent hike in January, while they had to pay double-digit increases in the past two years -- 13.6 percent in 2009 and 13.5 in 2008.

Kinetix Was Started in 2000

At one point, Kinetix had 41 employees – now only 5 employees remain – all of whom have  been encouraged to apply for open positions within Regence, Benjamin said.  The company, which was started in Canada in 2000, was moved to Seattle after its co-founder Jamie Brrunner, landed a key customer in Starbucks.  For more than a year before Regence purchased Kinetix, it had offered the fitness and nutrition program to its own employees.

Upon the sale, Clayton Lewis, a Maveron partner, said, “We are gratified by this successful exit for Kinetix. It has been exciting to see Kinetix’s highly effective wellness program gain traction in corporate workplaces throughout the country. We are passionate about our investments in the health and wellness sector and enthusiastic about the innovation and future investment opportunities we see in the space.”

Steve Schickler, the former CEO of KInetix, said, “With Regence, we see true alignment in our preventative approach to healthcare that helps employees and individuals take control of their health and well being.”  

Leadership Changes Plague Regence

While Regence rebounds from the loss of $19.3 million from the downfall of Kinetix, the health insurer is experiencing major leadership changes at the executive level, with a shake-up that resulted in Bill Barr being replaced as president of its four-state region with Jared Short. It’s unknown whether the demise of Kinetix has had an impact on that corporate decision.

Regence has also seen its enrollment numbers plummet in the Oregon region, dropping by more than half a million in the past three years.

 

Pictured: Mark Ganz, president and CEO of The Regence Group

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Comments

“Kinetix was one small investment that did not attract the number of customers we had hoped,” Hope is always a good corporate strategy. And we wonder why Regence continues to struggle?

Well, if you notice who is on the board, Ganz signs the paycheck for nearly every one of them. So I wager that opposing Ganz at the board level would result in getting fired from the company. Only pressure from the regulators will result in change at this snakepit. Ganz must go for this ship to be righted, and that ain't gonna happen.

The Regence executives must have grown tired of the personal Kinetix trainers that were assigned to them -- too much discipline.

then again, in comparison to the money Regence has p*ssed away on Facets and CP-SS, this is chump change for them.

No wonder Regence has had to cut its losses on this one. The organization is now rife with addle-brained thinking that continues to stray from the core insurance business. Here is a classic bit of corporate-speak in the form of a direct quote from the posted vita of Mohan Nair, one of the Regence senior executives: "He guides an agile and multitalented team of idea igniters. This team called Innovation Force (IF), inspires ideas from every source, isolates and incubates select execution focused ideas and ignites them into products on new businesses." Say what??

Ganz is a moron, no doubt about it. Same with John Morgan whose inattention and inability to hold people to the fire proved to be the end of this $13m investment. In actuality, Kinetix had already proved itself to be a money making proposition before Regence purchased them, but Regence went too long without examining both Kinetix's books and "senior" "leadership" (especially Rich Finlay...) and asking questions. Questions like, "Where are your new clients?" and "How come your 6-figure salaried sales team spends thousands on travel monthly but never converts any sales?" and "How do you justify paying some of your coaches more than $50k/year when they have no clients?" Regence dropped the ball here.

$19 million....who hasn't made a $19million mistake? Oh that's right, 99% of us haven't but we end up paying for it. Lost benefits, increased deductibles, etc.

I was so sorry to hear that Kinetix was closing down shop. It has affected a lot of people and families even though only 5 were still employed at the time of their announcement. I know many were "encouraged" to apply for jobs within Regence but I would love to hear an update on how many, if any, were actually hired.