Garamendi Blocks Part of Proposed Merger Between WellPoint Health Networks, Anthem
Insurance Commissioner John Garamendi (D) on Friday rejected part of a proposed merger between Thousand Oaks-based WellPoint Health Networks and Indianapolis-based Anthem after Department of Managed Health Care Director Cindy Ehnes announced her approval of the agreement earlier that day, the Los Angeles Times reports (Girion/Lifsher, Los Angeles Times, 7/24). 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 the state. The 10 other states with direct regulatory authority and the federal government, as well as WellPoint and Anthem shareholders, have approved the proposed merger (California Healthline, 7/12). Garamendi 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 (Rundle, Wall Street Journal, 4/24). Ehnes earlier on Friday approved part of the proposed merger related to the HMO operations of Blue Cross of California (Feder Ostrov, San Jose Mercury News, 7/24).
Garamendi said he opposed the proposed merger in part because the agreement could affect the quality of health care available to California residents, the AP/San Diego Union-Tribune reports. 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. "I cannot in good conscience approve this transaction," Garamendi said, adding, "I do not believe it is in the best interest of California policyholders."
Ehnes said that the merger was "a good deal for consumers and sends a strong message that California is a state with a competitive and healthy marketplace where business is welcome" (Wasserman, AP/San Diego Union-Tribune, 7/24). She said that WellPoint and Anthem representatives have agreed to a number of concessions in exchange for DMHC approval of the proposed merger. The concessions include:
- $17 million for a program to improve mental health services and reduce childhood obesity rates in the state;
- $15 million to increase enrollment in Healthy Families, the state SCHIP program;
- $100 million to expand access to health care in rural and other underserved areas of the state; and
- Protections to Blue Cross of California policyholders if the combined company decides to revise the forms of health insurance offered (San Jose Mercury News, 7/24).
WellPoint CEO Leonard Schaeffer said, "We were shocked, literally shocked" that Garamendi decided to reject part of the proposed merger, adding, "If you look at what the merger does, it's really very, very good for California" (Los Angeles Times, 7/24). WellPoint spokesperson Ken Ferber said, "Every single thing he asked for, we gave him. He never gave us any indication there would be a denial. There's clearly a political agenda" (San Jose Mercury News, 7/24). Anthem CEO Larry Glasscock said, "I believe that this transaction is going to happen" (AP/San Diego Union-Tribune, 7/24). Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights, a consumer advocacy group, supported the decision by Garamendi, who he said was "the only regulator in the state to stand up to WellPoint and Anthem and say, 'Enough is enough'" (San Jose Mercury News, 7/24). Treasurer Phil Angelides (D) said that Ehnes, who Gov. Arnold Schwarzenegger (R) appointed, should have opposed the proposed merger. "Schwarzenegger has chosen to protect an outrageous unearned payday for a handful of WellPoint executives and to send the bill to California families and employers struggling to pay the soaring cost of health insurance," Angelides said. A Schwarzenegger spokesperson declined to comment on the proposed merger. Ehnes said that the governor was not involved in her decision to approve the proposed merger (Sacramento Bee, 7/24).
The decision by Garamendi to reject part of the proposed merger "could stall the entire" agreement, the Times reports (Los Angeles Times, 7/24). According to a source familiar with the proposed merger, WellPoint and Anthem this week will file a lawsuit in Los Angeles Superior Court over allegations that Garamendi exceeded his regulatory authority in the decision, the Bee reports (Sacramento Bee, 7/24). Under the California insurance code, the state insurance commissioner can reject agreements that are unfair, prejudicial or unreasonable to policyholders in the state, Garamendi said, adding that the proposed merger between WellPoint and Anthem meets those criteria (Los Angeles Times, 7/24). WellPoint and Anthem also could sell Blue Cross Life & Health to a third party or spin off the subsidiary to investors and proceed with the remainder of the proposed merger. However, Garamendi would have to approve the sale, which could complicate such an agreement, according to an unnamed Wall Street analyst. Some analysts also said that WellPoint and Anthem could offer additional concessions in exchange for approval of the proposed merger (San Jose Mercury News, 7/24).This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.