Garamendi May Oppose Proposed WellPoint-Anthem Merger

Insurance Commissioner John Garamendi (D) on Tuesday said that he would oppose a proposed merger between Indianapolis-based Anthem and Thousand Oaks-based WellPoint Health Networks unless Anthem spends an amount equal to compensation packages for WellPoint executives included in the agreement -- between $200 million and $600 million -- on low-income health care programs, the Sacramento Bee reports (Rapaport, USA Today, 7/7). According to Garamendi, the funds could provide health coverage for as many as 577,000 low-income children in California for one year (Girion, Los Angeles Times, 7/7). Garamendi said he would not demand that Anthem support a specific health care program, but some state lawmakers have recommended Healthy Families (Swiatek, Indianapolis Star, 7/7).

The proposed merger, announced last October, would combine the companies under the name WellPoint and create a headquarters in Indianapolis. The combined company would have $27.1 billion in assets, 40,000 employees and 26 million members in 13 states. The Department of Managed Health Care and the Department of Insurance must approve the proposed merger. Garamendi cannot block the merger, but he has the ability to deny a request by Anthem to acquire the license of WellPoint subsidiary 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 Anthem and WellPoint shareholders, have approved the proposed merger (California Healthline, 6/29).

Patient advocacy groups, officials from the CalPERS and Garamendi in recent weeks have raised concerns that the combined company could drop health coverage for members with severe illnesses and that the executive compensation packaged included in the proposed merger could damage the finances of Blue Cross. A document filed June 8 with DMHC by Anthem indicated that WellPoint executives could receive a combined $147 million to $356 million in bonuses or severance payments after the completion of the proposed merger (California Healthline, 6/24). Garamendi has said that the amount could reach about $600 million (Bloomberg/Contra Costa Times, 7/7). According to Anthem, WellPoint executives would receive a combined $147 million in bonuses if the company retains all 293 executives, and if all executives are dismissed within three years, they would receive a combined $356 million in severance payments. In response to concerns, WellPoint spokesperson Ken Ferber said that Anthem would cover the cost of the executive compensation packages, which according to Ferber would have no effect on operations in California (California Healthline, 6/24).

Garamendi also said that he would oppose the proposed merger unless Anthem CEO Larry Glasscock ensures that premiums paid by members in California would not finance the WellPoint acquisition or the executive compensation packages (Los Angeles Times, 7/7). According to the Star, Anthem plans to borrow $4 billion to acquire WellPoint (Indianapolis Star, 7/7). Garamendi likely will not make a decision on whether to support the proposed merger until the conclusion of a public hearing scheduled for Friday by DMHC (Appleby, USA Today, 7/7). Garamendi said, "This is a bad deal for policyholders. The cash goes to executives, and it's going to come out of the pockets of policyholders or providers who will be told they will receive less and as a result will have to cut back on services" (Los Angeles Times, 7/7). He added that his decision on whether to support the proposed merger is "resting solely on Anthem-WellPoint restructuring this deal in such a way as to benefit California consumers, policyholders in the state of California and those who cannot afford insurance" (Bloomberg/Contra Costa Times, 7/7).

Anthem spokesperson Ed West said, "We believe we will be able to finalize the California regulatory approval process in a way that will be mutually satisfying." He added, "For now, the focus is going to be on securing both regulatory approvals." West also said Anthem has offered to finance annual outside audits to confirm that premiums would not increase for members as a result of the proposed merger (Los Angeles Times, 7/7). According to USA Today, WellPoint executives were "encouraged by Garamendi's statements that negotiations continue." Ferber said, "We're quickly moving toward a resolution" (USA Today, 7/7). According to analysts, if Anthem agrees to "make additional concessions to gain Garamendi's approval ... it would set an expensive precedent for future deals and could upset commissioners in other states who already approved the acquisition," the Los Angeles Times reports (Los Angeles Times, 7/7).