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Read Making a Killing

home / healthcare / in the media

The Indianapolis Star
Jun 10, 2004

by JEFF SWIATEK

Anthem merger runs into roadblock;

Delay in deal possible after California's chief says it isn't in state's best interests.
SACRAMENTO, Calif. -- Anthem Inc. and WellPoint Health Networks hit the first roadblock to their proposed merger Wednesday, as California's insurance commissioner said it was "not in the best interests" of the state and legislators skeptically questioned the deal during a public hearing.

California is the only state left to act on the mega-deal, which has been blessed by nine other states that have a direct regulatory say over it. The $16.4 billion deal would create the nation's largest health benefits firm, headquartered in Indianapolis, where Anthem is based. California's approval is critical to the merger.

Comments made during the hearing in the State Capitol suggest that a regulatory decision in California may not happen soon and might not come before the earliest planned merger date of July 1.

Insurance Commissioner John Garamendi publicly threw the first wrench into the process of getting approval in WellPoint's home state by saying the takeover by Anthem brings "no identifiable benefits and creates potential risks for California."

Garamendi stopped short of saying he will withhold his agency's approval of the deal. "That decision has not been made," he told legislators.

He was among the first witnesses to testify before a joint hearing of the Senate Insurance Committee and the Assembly's Select Committee to Investigate the Merger of California Health Insurance Providers.

Key California legislators who oversee insurance matters recently scheduled the joint hearing after California's two insurance regulatory agencies appeared on the verge of approving the deal without a single public hearing.

Legislators don't have jurisdiction in California over insurance mergers but they can influence regulatory agencies to act, which is what Assemblyman Manny Diaz, a San Jose Democrat and chairman of the select committee, tried to do.

"I think it's very, very important to California that you do that (hold a hearing)," Diaz told an attorney for the Department of Managed Health Care, which must approve the change in control of WellPoint before the merger can take effect in California."

The Department of Managed Health Care's director was not present to say whether her department would have a hearing, making it unclear what would happen next in the regulatory process.

An attorney for the department said it was negotiating with Anthem and WellPoint about a proposal to require the merged company to boost its equity reserves 50 percent beyond what California law requires for health benefit companies.

California, with 6.7 million WellPoint members, would represent by far the largest customer base in the 13 states where the combined Anthem-WellPoint would be licensed to sell its main products, the Blue Cross and Blue Shield insurance policies.

That makes California's approval critical to the deal. Both companies' shareholders are scheduled to vote on the merger June 28. It was unclear whether the shareholder votes would go ahead if California hasn't approved the deal by then.

The hearing occurred the day after a California consumer group, the Foundation for Taxpayer and Consumer Rights, released a WellPoint document that shows 293 of its executives and managers could reap more than $500 million in merger bonuses, termination payments and stock option gains within three years of the merger taking effect.

State Sen. Jackie Speer, D-Hillsborough, called the compensation figures "obscene" during questioning of Anthem and WellPoint executives.

The companies presented an independent compensation expert to defend the package.

George Paulin, president of Frederick W. Cook & Co., said the merger-related payoffs, not counting stock option gains, would run 1.2 percent to 2.2 percent of the value of WellPoint's stock. That's lower than the average of 2 percent to 3 percent that such bonuses and severance payouts, often called "golden parachutes," generally run for large mergers, he said.

Anthem President Larry Glasscock told legislators that the compensation to the 293 WellPoint employees would be paid by Anthem, as the acquiring company, and not from premiums paid by California members.

Steve Thompson, vice president of government affairs for the California Medical Association, which represents doctors, criticized the proposed payouts in a statement he gave legislators.

WellPoint's "primary motivation to merge with Anthem is to feather the financial nests of its executives," he said in the statement.

Thompson also called Glasscock's remark about Anthem paying for the payouts "facetious."

"It would be a merged company. They would still be using WellPoint dollars, at least in part. Anthem's going to be paying for everything (after the merger occurs)."

The doctors group is among several state medical associations suing WellPoint and other insurers in a federal lawsuit in Florida. The suit alleges the insurers use pricing schemes that amount to racketeering.
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Contact Star reporter Jeff Swiatek at (317) 444-6483 or JEFF.SWIATEK@INDYSTAR.COM


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