WellPoint To Sue Garamendi for Decision To Block BCBS Sale in Anthem Merger

Officials for Thousand Oaks-based WellPoint Health Networks on Monday said the company plans to file suit against Insurance Commissioner John Garamendi (D) over allegations that he misused his authority in rejecting part of the company's proposed merger with Indianapolis-based Anthem, the Los Angeles Daily News reports (Pondel, Los Angeles Daily News, 7/27). Garamendi on Friday rejected the proposal 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 the state. 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 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, 7/26).

According to the Daily News, WellPoint officials have said that Garamendi abused his regulatory authority, "providing fertile ground for litigation." WellPoint expects to announce grounds for a lawsuit later this week, the Daily News reports (Los Angeles Daily News, 7/27). Garamendi said that under the California insurance code, the state insurance commissioner can reject agreements that are unfair, prejudicial or unreasonable to policyholders in the state. He added that the proposed merger met those criteria (California Healthline, 7/26).

Anthem and WellPoint on Monday said they are "mulling their options" following Friday's decision. Anthem officials are expected to provide details on the company's plans Tuesday during a conference call with investors in which the company will release its second quarter earnings (Rundle, Wall Street Journal, 7/27). Analysts say the company also could re-negotiate the merger "to avoid Garamendi's jurisdiction" by selling Blue Cross Life & Health or placing it in a trust, the Los Angeles Times reports (Girion, Los Angeles Times, 7/27).

In the conference call with investors, Anthem CEO Larry Glasscock said, "We're going to file this lawsuit in California as quickly as we can. We feel very strongly we've met all the statutory requirements" for approval (Theobald, Indianapolis Star, 7/27). According to the Indianapolis Star, WellPoint spokesperson Ken Ferber said the company would not consider a merger that excluded Blue Cross Life & Health. Ferber said, "Let me put that to bed. The definitive agreement was for all the assets of WellPoint. And that's the deal." Ferber added that Garamendi "did not give any indication that [regulators] would be open to further negotiations" (Theobald/Schneider, Indianapolis Star, 7/27). Garamendi said he expected a court challenge, according to the Daily News. He said, "I am comfortable a judge would agree with my decision," adding, "The law that requires me to approve or disapprove an acquisition is very clear. Two of the six criteria say that a merger should not prejudice the interest of the policyholder and that the deal is fair and reasonable for the policyholder. And I was looking at the policyholders of BC Life & Health." According to the Daily News, Garamendi said he would review future proposals from the two companies (Los Angeles Daily News, 7/27).

Credit Suisse First Boston analyst Patrick Hoylo said WellPoint and Anthem could go to court as early as this week. He said the companies have a 70% chance of winning a suit based on his analysis of the state Supreme Court's ruling on state agencies' ability to exercise "independent judgment" (Los Angeles Times, 7/27). Stanford Law School professor Kenneth Scott said, "Arguing before an appeals court that [Garamendi] has committed an abuse of discretion is not an easy kind of appeal to win." He added, "It all depends on how clear the statute is, and a lot of these statutes are pretty vague" (Los Angeles Daily News, 7/27).