Anthem Files Suit Against Garamendi Over Decision To Block Part of Proposed Merger With WellPoint

Indianapolis-based Anthem on Tuesday filed suit in Los Angeles Superior Court against Insurance Commissioner John Garamendi (D) over allegations that his decision to reject part of a proposed $16.4 billion merger with Thousand Oaks-based WellPoint Health Networks was "an illegal act that must be set aside," AP/Long Island Newsday reports (Jablon, AP/Long Island Newsday, 8/4). Garamendi last month rejected part of the proposed merger after Department of Managed Health Care Director Cindy Ehnes announced her approval of the agreement.

The proposed merger, announced last October, would combine the companies under the name WellPoint and establish 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, the federal government and 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, 7/28).

In the lawsuit, Anthem alleges that Garamendi made the decision to reject part of the proposed merger "based upon his personal beliefs about public health care policy and executive compensation -- grounds for disapproval which do not exist under the California Insurance Code" (AP/Long Island Newsday, 8/4). The lawsuit seeks a writ of mandate that would overturn the decision (Strauss/Swiatek, Indianapolis Star, 8/4). In addition, the lawsuit asks the court to affirm the legality of the proposed merger and prohibit future attempts by Garamendi to block the agreement (AP/Long Island Newsday, 8/4).

The lawsuit "sets the stage for what could be an extended and, possibly, uphill legal battle," the Wall Street Journal reports (Wall Street Journal, 8/4). According to the Star, "there was no indication Tuesday that the suit would force Garamendi to change course" on his decision to reject part of the proposed merger by Nov. 30, when the agreement and the approval by DMHC could expire (Indianapolis Star, 8/4).

Some legal analysts questioned Garamendi's authority and decision in the matter. Thomas Rundall, a University of California-Berkeley professor of business and public health, said, "The question is whether this particular merger is of a sufficient scale that it is qualitatively different than the many other mergers we have seen" (Rapaport, Sacramento Bee, 8/4).

Legal analyst and Los Angeles attorney Jeffrey Riffer said, "Even if they win in lower court, I believe Garamendi will appeal." He added that the court "would be reluctant" to overturn the decision by Garamendi because he "was given the power to approve or disapprove. So the only issue is did Garamendi abuse his discretion?"

Anthem spokesperson Ed West said, "We will approach the court and ask that the case be decided as soon as possible. We're hopeful it will proceed along in an expeditious manner." He added that the law does not allow Garamendi to "use this as a megaphone for his personal beliefs about public policy issues in health care, about corporate America or about executive compensation" (Indianapolis Star, 8/4).

Anthem CEO Larry Glasscock said, "Filing this suit is something we did not want to do. However, we genuinely feel we have met all the legal requirements necessary for approval of the merger" (AP/Long Island Newsday, 8/4). Anthem officials predicted that they will receive a favorable decision in the case by late this year or early 2005 (Lifsher, Los Angeles Times, 8/4).

Garamendi on Friday said that he had not been served with the lawsuit, according to the Bee. However, he said, "This is a lawsuit I welcome. This will give me an opportunity to fully investigate and for the public to fully understand the merger." He also said that Anthem and WellPoint have used "Enron accounting" to inflate the value of investments they promised to make in California (Sacramento Bee, 8/4). Garamendi said, "We have no intention of losing," but added that he remains open to negotiations with Anthem (AP/Long Island Newsday, 8/4).

According to the Times, Garamendi said he would reconsider his decision to reject part of the proposed merger if Anthem agreed to invest as much as $600 million in health care programs for low-income California residents (Los Angeles Times, 8/4).