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Read Making a Killing

home / healthcare / in the media

Los Angeles Times
Jul 12, 2004

by Michael Hiltzik

Golden State: HMO Regulator Is Taking a Back Seat in Anthem DealHMO Regulator Is Taking a Back Seat in Anthem Deal

Drifting into a slumber inside a Sacramento auditorium Friday, I was repeatedly jolted awake by the sound of a large vehicle spinning its wheels.

But no: It was merely the state Department of Managed Health Care going through the motions of scrutinizing the proposed $17.4-billion acquisition of WellPoint Health Networks Inc. by its rival, Anthem Inc.

The occasion was the agency's first and only public hearing on a deal sure to affect the roughly 7 million Californians who receive medical coverage through WellPoint's Blue Cross of California subsidiary or its other units. The DMHC, which regulates HMOs, reluctantly convened the session nine months after the transaction was formally announced and eight months after its officials held their first closed-door meeting with the companies' executives.

In the interim, the merger won approval from regulators in all 10 other states affected by the deal, the federal government and the shareholders of both companies -- all without the DMHC publicly weighing in.

A more cynical observer than myself might mistake this delay for an attempt by the department to let the merger build up such a head of steam that it would have no option but to flash a green light. More charitably, the delay may simply result from the agency's lack of a director between January 2003, when its last boss quit, and March 2004, when Gov. Schwarzenegger appointed Cindy Ehnes to the post.

In any case, Anthem and WellPoint's opinion appears to be that the purchase is a fait accompli and that state officials -- including Insurance Commissioner John Garamendi, who has attacked the deal -- can't do much about it.

As the DMHC prepared to convene its hearing Friday morning, a WellPoint representative loitered outside, distributing (rather tastelessly, I thought) a Wall Street analyst's report deriding California's regulatory process as "a headache that will pass." The analyst praised the DMHC for having been set to approve the transaction a month ago without the inconvenience of a public hearing, and foresaw that the acquisition would soon close "with very limited, if any, concessions from the combined company." This judgment WellPoint evidently endorsed.

Once the session got underway, the agency's representatives didn't project much eagerness to delve into the numerous consumer and financial issues raised by the proposed buyout. They pointed out that they had extracted several tentative financial commitments from the two companies, but although WellPoint and Anthem portray these as big sacrifices, some appear to be actions they would take for regulatory or business reasons anyway. And none involves an explicit commitment by these ostensibly patient-friendly healthcare giants to move their customer-service ratings, such as those compiled by Consumer Reports and the DMHC itself, into the first rank from the mediocrity zone they currently inhabit.

Nor has the agency directly questioned acquisition terms that will grant executives of Thousand Oaks-based WellPoint retention or severance bonuses and stock options worth $200 million to $600 million -- a handout that certainly seems exceptionally wasteful at a time when the same executives bemoan the rising pressures on healthcare premiums and the expanding ranks of the medically uninsured. (Garamendi has suggested that the companies set aside, in a fund for the uninsured, an amount equal to what they're paying in executive bonuses, but they're not biting.)

The companies have defended the payouts with arguments that only sound more fatuous as time passes. One is that the bonuses are comparable to the largess customarily scattered, like rose petals, in the path of corporate executives who happen to be milling nearby whenever such huge transactions unfold.

In this vein, a WellPoint compensation consultant testified Friday that at the low end of estimates ($200 million), the payouts would amount to only 1.2% of the merger value, which he judged "reasonable." Given that he's on WellPoint's payroll, it's a wonder that he didn't extol the bonuses as positively frugal.

Then there's the issue of "cherry-picking," in which a health insurer discontinuing a plan offers alternative coverage only to healthier patients. The HMO agency says it has secured a commitment from Anthem that it won't pull any such switcheroos for at least three years after the merger, a period that sounds suspiciously abbreviated.

Anthem officials also have been quick to maintain that the company never has cherry-picked -- it's WellPoint that has been accused of the practice. But given that Anthem also brags about how many WellPoint executives plan to stay on after the acquisition is completed, who knows which company's DNA will ultimately dominate the offspring?

The key question left unanswered by Friday's hearing is why an agency whose only role is to oversee health plans hasn't taken the lead role in examining an acquisition that will affect California more than any other state.

We've heard from Garamendi and state Treasurer Phil Angelides, another foe of the deal, but as elected officials they're vulnerable to the charge of grandstanding. Ehnes, by contrast, is the governor's appointee. I had hoped to ask her at the hearing how she proposed to exercise her eminent authority in this case. But she didn't bother to show up.

*


Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.




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