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Read Making a Killing

home / healthcare / in the media

Los Angeles Times
Jun 19, 2004

by Lisa Girion, Times Staff Writer

Health Giants Seek to Calm Critics;

Insurers Anthem and WellPoint are working on a way to placate foes of their combination.
Even as criticism of Anthem Inc.'s proposed purchase of WellPoint Health Networks Inc. mounts, the outline of a deal that could secure California regulators' blessing for the buyout is taking shape behind the scenes.

The $16-billion acquisition, which would create the nation's largest health insurer, has run into resistance in part because executives at Thousand Oaks-based WellPoint could reap $356 million in bonuses when the deal is completed.

Opposition to the marriage of the two healthcare giants is expected to intensify as a June 28 shareholder vote draws near. There are indications that more state pension funds could join the California Public Employees' Retirement System in opposing the transaction in protest of the bonuses. And state Insurance Commissioner John Garamendi, who has expressed concerns about the deal, has set a public hearing for Friday.

Observers say the anger over the deal is the latest symptom of discontent over healthcare costs and corporate greed.

"People are just choking on healthcare premium costs, and the rationale always is medical costs just keep going up," said state Sen. Jackie Speier (D-Hillsborough). "And then you have a merger like this where all of their financials are really scrutinized and you wonder, 'Were the premium increases really necessary?' "

Amid the controversy, Anthem and WellPoint have been quietly attempting to forge a deal that would pass muster with Garamendi and the state's HMO overseer, Cindy Ehnes, the director of the Department of Managed Health Care.

WellPoint has proposed putting conditions on the license of its Blue Cross of California subsidiary that address concerns about the deal's effect on consumers. For instance, Blue Cross would be required to continue participating in MediCal and other programs for the poor. But consumer advocates have criticized the proposals as too vague to enforce.

For his part, Garamendi wants to ensure that Anthem can't "cherry-pick" customers by dropping sick patients when it discontinues their plan.

Anthem has sought to assure regulators, lawmakers and consumers that the buyout wouldn't harm California consumers.

"Our mantra is, 'We need to figure out all the ways we can tie that down,' " said Gary Cohen, the insurance department's top lawyer.

The deal was expected to close in July, but some on Wall Street are concerned that the controversies could delay it. Announced eight months ago, the acquisition has been cleared by federal antitrust watchdogs and regulators in several states.

It hit a snag in California when the managed-care department released a previously confidential WellPoint report estimating that retention and severance bonuses for nearly 300 of its executives would cost $147 million to $356 million.

The disconnect over the bonuses was evident at a hearing in Sacramento last week when a WellPoint compensation consultant assured skeptical lawmakers that the pay packages fell within industry norms.

Days later, CalPERS, the nation's largest pension fund and a shareholder in both companies, said it would vote against the deal. State Treasurer Philip Angelides, a CalPERS board member, vowed to urge other large investors to follow suit.

On Friday, consumer watchdogs aired concerns that $650 million in cash now on Blue Cross of California's books could be shifted to Indianapolis-based Anthem's balance sheet.

Anthem Chief Executive Larry Glasscock has pledged that money from the Blue Cross health maintenance organization wouldn't be used to pay the executive bonuses or any other costs associated with the buyout. And the company has told regulators that it would reserve 50% more than what state law requires the HMO to keep on hand to pay claims.

Blue Cross already keeps $704 million -- about $400 million more than the law requires -- as a condition of its Blue Cross and Blue Shield Assn. license contract, WellPoint spokesman Ken Ferber said.

But Jerry Flanagan, a spokesman for the Foundation for Taxpayer and Consumer Rights, said neither the Blue Cross association rules nor Anthem's pledges guaranteed that the cash would stay in California.

"That money was paid by patients and business owners in good faith to provide healthcare -- not to fund executive payouts," he said, "and that's what will happen if the money leaves this state."

By law, Anthem is entitled to absorb any cash above required reserves, and the company has said it is legally obligated to pay the bonuses to WellPoint executives, said Cohen, the insurance department's lawyer.

"My focus is that they do something else for the community that is commensurate with what they are paying their executives," Cohen said.

There is nothing specific on the table, he said. But some have floated the idea of having Anthem set up a trust that would help provide healthcare for the poor and uninsured.

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