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NEWS RELEASE
Jul 09, 2004


CONTACT: Jerry Flanagan, (415) 497-1710

Patients, Taxpayers Criticize Anthem/WellPoint Merger Over Higher Premiums, Unpaid Taxes, Executive Compensation

Sacramento, CA -- At public hearings today on the buy-out of Blue Cross of California's parent-company, WellPoint Health Networks, by Anthem Inc., patients and taxpayers called on legislators and regulators to derail the deal and investigate Blue Cross' special tax status that has allowed the company to avoid paying about $500 million dollars in gross premium taxes since 1994.

Consumer advocates called the hearing -- held by California's Department of Managed Health Care -- "a sham" given that the Department Director Cindy Ehnes was not present, questions could not be asked of the state, and only pre-set agenda items could be discussed..

Pat and Dave Parker traveled to Sacramento from Orange County to voice their concerns about overpaying premiums to Blue Cross then recently being dropped by the company. The couple had approached Governor Schwarzenegger at his Los Angeles Lakers skybox fundraiser in December about their travails with Wellpoint, a major Schwarzenegger donor, and were promised a return call they have yet to receive. Their letter to Schwarzenegger today can be read at
http://www.consumerwatchdog.org/healthcare/fs/fs004453.php3

"It is both of our past over-paid premium dollars that are included in the company's billion dollar reserves that will be removed from the state if the merger is approved," wrote Pat and Dave. " That money should be refunded to us and to our fellow Blue Cross enrollees. What angers us even more is the incredibly small number of top executives who figure to split up to $607 million in stock and cash from the pending merger with no logical benefit for policyholders or care providers!"

The Foundation for Taxpayer and Consumer Rights has raised the issue that every other for-profit insurer, except Blue Cross, pays the gross premium tax on their preferred provider organization (PPO) products as required by Article XIII, Section 28 of the California Constitution.

"Blue Cross of California must be required to pay-off any past tax debt and ensure that the pending merger does not result in additional costs to taxpayers and patients before the acquisiton is approved," said Jerry Flanagan of FTCR. "Blue Cross must not be allowed to continue to cheat the state."

According to the most recent analysis by FTCR based on available data:

In 2003, according to filings with the Department of Managed Health Care (DMHC), Blue Cross of California collected $8.6 billion in premiums from 4.4 million enrollees.

According to DMHC, 41%, or 1.8 million, of those 4.4 million enrollees are PPO members. Estimating conservatively, that means $3.53 billion of Blue Cross' 2003 premium earnings came from PPO enrollees.

If Blue Cross played by the same rules imposed on other for profit PPO providers, then it would have paid a gross premium tax last year equal to 2.35% of that $3.53 billion, or $82.9 million.

However, since Blue Cross converted to for-profit in 1994, it has paid much less than that amount because instead of paying gross premium taxes the company has paid a far lower net income tax.

In 2003, the company's total net income as reported to DMHC was $459.3 million -- including both its HMO and PPO products. Even if Blue Cross paid every penny of its income tax -- something that corporations rarely do -- that total would have been a mere 8.83% of $459.3 million, or $40.6 million (Blue Cross' actual tax payments on its PPO and HMO products do not appear to be public record. However, if it abided by the gross premiums tax law based on these estimates Blue Cross would have paid $82.9 million in gross premium tax on its PPO and $23.9 million for net income on HMO product. Total taxes should have been about $106 million)

Even after adding in the company's $.99 per member fee to the DMHC, the total payment to the state in 2003 was approximately $45 million. That's compared to an approximate $106 million tax burden under the gross premium tax calculation.

Blue Cross of California claims to have an exemption from the gross premiums tax under a 1990 law pertaining to non-profit hospital service plans. Blue Cross converted to a for-profit health insurer in 1994. The 1990 law, SB 785, was authored by Senator Alan Robbins -- who was later arrested by the FBI on corruption charges. The statute follows.

Health and Safety Code Section 1396.5. Nonprofit hospital corporations operating in 1965; privileges under Knox-Keene Health Care Service Plan Act A nonprofit hospital corporation which substantially indemnified subscribers and enrollees and was operating in 1965 under Chapter 11A (commencing with Section 11490) of Part 2 of Division 2 of the Insurance Code and which is regulated under the Knox-Keene Health Care Service Plan Act shall enjoy the privileges under the act which would have been available to it had it been registered under the Knox-Mills Health Plan Act and applied for a license under the Knox-Keene Health Care Service Plan Act in 1976.

It's unclear to FTCR how a constitutional duty to pay gross premiums tax can be obviated by a statute referring to a nonprofit hospital corporation that no longer exists.

FTCR has also criticized the proposed compensation package for top Wellpoint executives. Previously confidential documents acquired by FTCR through a Public Records Act request disclosed that under the terms of the proposed merger of Blue Cross of California parent company, WellPoint Health Networks, and Anthem Inc. executives would receive up to $607 million in cash and stock. WellPoint CEO Leonard Schaeffer will receive $82.3 million in cash and $152.9 in stock options once the merger is complete. The compensation documents are now publicly available at: http://www.consumerwatchdog.org/healthcare/rp/rp004344.pdf

Company executives have refused to guarantee that premiums will not increase as a result of the merger, or that Blue Cross of California patients will continue to have access to their physician of choice, neighborhood hospitals, and the same prescription medications that they currently do.

The Schwarzenegger Administration has refused to honor Public Records Act requests calling for the release of documents providing details of communications between Administration officials and the CEOs of the merging companies. The Schwarzenegger Administration's Department of Managed Health Care (DMHC) still refuses to release over 500 pages of documents pertaining to the merger.

Governor Schwarzenegger has received $92,400 in campaign contributions to his various fundraising committees from WellPoint and its executives.

-End-

The Foundation for Taxpayer and Consumer Rights is a non-profit and non-partisan consumer advocacy group. For more information, visit us on the web at http://www.consumerwatchdog.org


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