Anthem Announces Plans To File Suit Over Garamendi’s Decision To Block Part of Merger With WellPoint
As expected, officials for Indiana-based Anthem in a conference call to investors on Tuesday said that the company plans to file a lawsuit "within the next several days" to challenge a decision by Insurance Commissioner John Garamendi (D) to block part of a proposed merger with California-based WellPoint Health Networks, the Wall Street Journal reports (Rundle, Wall Street Journal, 7/28). Garamendi on Friday rejected part of the proposed merger after Department of Managed Health Care Director Cindy Ehnes announced her approval of the agreement earlier in the day.
The proposed merger, announced last October, would combine the companies under the name WellPoint and establish a headquarters in Indianapolis. The combined company would have $27.1 billion in assets, 40,000 employees and 26 million members in 13 states. Garamendi does not have the authority to block the merger, but he can deny a request by Anthem to acquire the license of Blue Cross of California, which represents the largest part of WellPoint operations in California. He has regulatory authority over Blue Cross Life & Health, a subsidiary of Blue Cross of California that offers life insurance and preferred provider organization plans and accounts for about 10% of WellPoint operations in California. The 10 other states with direct regulatory authority and the federal government, as well as WellPoint and Anthem shareholders, have approved the proposed merger.
Garamendi said that Anthem would use as much as $400 million annually in health insurance premiums paid by California residents to finance the proposed merger in the first three years and an unlimited amount after that time. In addition, Garamendi criticized the amount of compensation packages for WellPoint executives under the proposed merger (California Healthline, 7/27).
Anthem Chair and CEO Larry Glasscock said, "Our response will be to bring legal action in a California state court within the next several days." He added, "We feel that we've met all the statutory requirements." Glasscock said that Anthem officials would evaluate a "very long" list of other options to complete the merger, but he added that the company would not sell Blue Cross Life & Health to bypass Garamendi. "We're focused on completing the transaction in its totality," Glasscock said (Kusmer, AP/Louisville Courier-Journal, 7/27).
Garamendi remains "confident in the face of Anthem's promised lawsuit," according to the Hartford Courant. Garamendi said, "This deal is atrocious to policyholders all across the nation, not just in California. It only means that policyholders are going to pay more and get less" (Levick, Hartford Courant, 7/28). He added, "It's going to be a beautiful court fight, and I'm anxious to get at it" (Snider, Bloomberg/Contra Costa Times, 7/28).
The lawsuit would "at least delay the deal," and some analysts expect "that it could be an uphill battle," the Journal reports (Wall Street Journal, 7/28). Credit Suisse First Boston analyst Patrick Hojlo said that the lawsuit could delay the completion of the proposed merger for six to 12 months (Bloomberg/Contra Costa Times, 7/28).
In the call to investors, Anthem officials reported that second-quarter earnings increased by 34% to $237.9 million, or $1.66 per share, from $177.3 million, or $1.25 per share, a year earlier (Wall Street Journal, 7/28). The second-quarter earnings results exceeded estimates of $1.64 per share from Thompson First Call analysts (Hartford Courant, 7/28). Anthem also increased 2004 earnings estimates to between $6.95 and $7.05 per share -- compared with previous estimates of between $6.90 and $7 per share -- which does not include potential gains from the completion of the proposed merger (Kusmer, AP/Portland Press Herald, 7/27).
Anthem also reported that second-quarter health plan membership increased by 8% from a year earlier to 12.6 million members (Wall Street Journal, 7/28). However, the price of Anthem stock decreased by more than 7% to $81.76, the lowest closing price since Jan. 30 (Theobald, Indianapolis Star, 7/28). According to the Journal, the decrease in stock price resulted because of "investors' worries about the direction of industry trends," rather than Garamendi's decision to block part of the proposed merger (Wall Street Journal, 7/28). The revised earnings estimates were not as high as expected, and the second-quarter results included a report that medical costs increased "slightly faster" than health plan prices, the Courant reports (Hartford Courant, 7/28).