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Read Making a Killing

home / healthcare / in the media

Los Angeles Daily News
Jun 28, 2004

by Evan Pondel, Staff Writer

WellPoint deal may flop

Garamendi may kill pact with Anthem
WellPoint Health Networks Inc.'s $16 billion acquisition by Anthem Inc. won the approval Monday of shareholders, but California Insurance Commissioner John Garamendi -- saying the benefit of the deal is "willfully inadequate" for the state -- may derail part of the transaction.

The commissioner does not have the ability to directly scrub the acquisition. But he can block Anthem from buying WellPoint's Blue Cross Life & Health Insurance Co. subsidiary. Such a move would be considered a material change to the transaction, possibly derailing the deal altogether.

"This is not about health care, it's about a financial roll-up deal that benefits executives and shareholders," said Garamendi during a phone interview Monday. "Significant undertakings must occur and we are working with Anthem and WellPoint as we speak."

Indianapolis-based Anthem Inc. has already submitted a list of proposed undertakings should the deal be approved, but Garamendi said they are inadequate and he will not OK the acquisition as it currently stands. The commissioner is concerned about hundreds of millions of dollars that Blue Cross has effectively "upstreamed" to WellPoint to fund acquisitions instead of providing affordable health care to the poor.

Garamendi said the current deal does not address these issues and Anthem "will raid Blue Cross of California's treasury by as much as $600 million" to pay for the acquisition. Approximately $200 million would come from Blue Cross Life & Health Insurance Co., according to the commissioner.

The California Department of Managed Health Care is also in the process of mulling the WellPoint-Anthem deal. The department has scheduled a hearing July 9 to address several issues raised by Garamendi and consumer groups -- specifically, the estimated $150 million to $360 million that 300 WellPoint executives could receive in bonuses and severance pay if the transaction goes through.

"We are looking at the July meeting as the final step in the approval process," said Ken Ferber, a spokesman for Thousand Oaks-based WellPoint. "And we feel we have no reason to believe we shouldn't be optimistic."

So far, the deal has received 10 out of 11 required state insurance regulatory approvals with only California remaining. Though WellPoint and Anthem shareholders have approved the deal, Ferber said the company is well aware of the influence of Garamendi and the Department of Managed Health Care.

Opponents of the transaction still exist on several other fronts, including the nation's largest public pension fund. The California Public Employees' Retirement System expressed its opposition earlier this month due to the potential payouts to WellPoint executives. The group, along with several other pension funds, withheld votes on the transaction.

Consumer advocacy groups have also raised the specter of compensation packages and the threat of a WellPoint-Anthem monopoly. The Foundation for Taxpayer and Consumers Rights said Monday it is calling on state regulators to require the companies to refund $1 billion to patient and small businesses.

The Santa Monica-based consumer advocacy group accused WellPoint and Anthem of "looting" $4 billion, including the $1 billion in cash reserves and $3 billion in company assets that are the property of California patients.

Jerry Flanagan, lead health care advocate for the foundation, said Garamendi and the Department of Managed Health Care will likely influence the outcome of the WellPoint-Anthem deal.

"You are playing with fire if you engage a public debate and then railroad a decision," said Flanagan, who characterized Garamendi and the department's fight as a political race.

Shares of WellPoint declined $2.45 to close at $108.90, while Anthem fell $1.49 to close at $86.33 Monday on the New York Stock Exchange.

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