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Read Making a Killing

home / healthcare / in the media

Ventura County Star
Jun 25, 2004

by Deborah Crowe

State official threatens deal

Garamendi wants companies to assist the poor
California Insurance Commissioner John Garamendi on Friday threatened to put the kibosh on WellPoint Health Network Inc.'s merger with Anthem Inc. unless the companies promise to invest as much in healthcare for the state's underprivileged as they propose for compensating their top executives.

"I want to see that same amount, $600 million, go to the poor in California," Garamendi said during a Department of Insurance hearing on Anthem's $16.4 billion bid to acquire WellPoint, the Thousand Oaks-based parent of Blue Cross of California.

Garamendi's department, which regulates indemnity health insurance companies like WellPoint's Blue Cross Life & Health Insurance Co., is one of two state regulators that must approve the deal. The California Department of Managed Health Care, which has scheduled a July 9 hearing on the merger, has oversight of Blue Cross of California.

Garamendi holds considerable leverage over the deal, even though Blue Cross Life & Health comprises only 10 percent of WellPoint's business in California. The merger agreement, on which Anthem and WellPoint shareholders will vote Monday, is contingent on acquisition of all WellPoint's subsidiaries.

Change in any part of the agreement, such as altering the retention bonuses or termination severance pay for 293 key executives, would require the terms be resubmitted to shareholders and some regulators, WellPoint officials say.

'Idea had merit'

Thomas Geiser, WellPoint's general counsel, told Garamendi his idea "had merit" and would be discussed further with the commissioner's staff.

While Garamendi's proposal had the air of a spur-of-the-moment brainstorm, officials privy to the negotiations say some form of symbolic financial mitigation has been under discussion for weeks.

But the commissioner scored political points with activists, such as the Foundation for Taxpayer and Consumer Rights, which have been pushing regulators to extract higher concessions from the two companies in exchange for approval.

Critics of the deal have been particularly upset by the $45 million lump sum severance pay for WellPoint Chief Executive Officer Leonard Schaeffer, who will retire after the merger closes. Schaeffer was paid $11.6 million last year, more than half in bonuses.

Representatives of Foundation for Taxpayer and Consumer Rights of Santa Monica arrived at the hearing with a 25-pound roasted pig to symbolize its disgust with the high cost of the deal. During the hearing, they also held up posters with a photo of Schaeffer's head on the cartoon of a pig eating at a trough.

Garamendi's $600 million proposal was derived from the foundation's high-end estimate of what the two companies might reward executives who stay on board at least two years after the merger and to compensate executives whose jobs are eliminated or downgraded in the consolidation.

The companies contend the $600 million estimate is highly inflated and includes the value of unvested stock options that could be exercised regardless of the merger.

Anthem CEO Larry Glasscock, who will head the combined company, WellPoint Inc., said he doesn't expect the payouts to be more than $200 million.

Garamendi blasted Anthem officials for arguing that legally binding agreements they have agreed to with the state would prevent California policy holders' premiums from being used to finance the merger.

"I want to know how California policyholders are going to participate in paying off the debt," Garamendi said. "That money has to come from policyholders and providers. There's no other place it can come from. I want to know how much comes from California."

In WellPoint's defense

WellPoint did have supporters speak in defense of the company's plans during the public comment portion of the more than four-hour-long hearing.

Melinda McIntyre, CEO of National Health Financial Services in Los Angeles, suggested the state government wastes at least as much money that could have been spent on healthcare for the poor as Garamendi is suggesting Wellpoint should contribute.

"This is a free market system and the idea is to create value - not Enron-style value, but real value as Blue Cross has done," said McIntyre. "Remember the value of all that Blue Cross has done for the state over the years."

Shares of Anthem rose 50 cents to $87.82 on Friday, while WellPoint's stock increased $1.40 to $111.35.
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Contact the author at dcrowe@VenturaCountyStar.com

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