Deal OKd to Create Biggest Health Insurer
California Insurance Commissioner John Garamendi on Tuesday dropped his opposition to Anthem Inc.’s proposed $18.4-billion purchase of WellPoint Health Networks Inc., paving the way for creation of the nation’s largest health insurer.
Garamendi, who four months ago called the transaction “one lousy deal for California healthcare consumers” and had used his authority to block it, said he changed his mind after Anthem agreed to make several major concessions.
Among these was the company’s commitment to direct $265 million toward various state health projects -- more than double the amount that it had committed to earlier.
The decision removes the biggest hurdle to a deal announced more than a year ago. It would form an insurance behemoth serving about 28 million people across the country, including 7 million in WellPoint’s California Blue Cross operations.
Regulators in other states must still give their final blessing, but they are widely expected to do so.
“We have worked diligently with Commissioner Garamendi,” said Anthem Chairman Larry C. Glasscock, “to demonstrate that this merger will truly benefit Californians.”
Garamendi -- who technically has jurisdiction over only a small part of the deal but was able to hold up the entire process -- said the breakthrough came last week. That’s when representatives for Anthem and Thousand Oaks-based WellPoint showed up at his office with a new proposal.
“I demanded more,” he said, “and after long negotiations” secured enough compromises to become convinced that consumers “will realize benefits from this transaction.”
Others aren’t so sure.
Critics of the deal worry that, Anthem’s steadfast assurances notwithstanding, the Indianapolis-based company may siphon money out of WellPoint’s coffers to help fund the acquisition, leaving California Blue Cross customers in a precarious financial position.
Some also remain concerned about the size of the “change-in-control” payments that would go to WellPoint management, including Chairman Leonard Schaeffer.
Garamendi pegged the value of these compensation packages at $265 million -- matching the sum he wrested from Anthem to help improve healthcare programs in California. But others insist that executives could pocket as much as $600 million when accelerated stock options are figured in.
“While I greatly appreciate the good work that Commissioner Garamendi has done on behalf of California consumers and underserved communities, I remain deeply troubled by this merger’s excessive golden parachutes for executives,” state Treasurer Phil Angelides said.
For most California consumers, the change in ownership promises to be imperceptible, at least for now. Although Anthem is the buyer, the combined company is slated to be called WellPoint Inc., and Blue Cross will remain the name that’s used in the marketplace.
Anthem has vowed repeatedly that it would not raise premiums to pay for the WellPoint purchase.
But critics fear that over the longer term, consumers could still suffer. By dominating the U.S. health insurance market, some believe, the company could force employers to pay more for coverage and pressure hospitals and doctors to cut their fees, eventually resulting in inferior service.
Even Garamendi voiced some apprehension. “I continue to have misgivings about the consolidation of health insurance companies,” he said, “but those concerns are beyond the normal scope of my review.”
Schaeffer, the WellPoint chairman, has maintained that the massive size of the combined company would allow it to accelerate the implementation of a cutting-edge medical database that would both improve the quality of care and help hold down costs.
Yet other experts aren’t sure whether this much-ballyhooed idea would actually pan out. “That’s something that only time will tell,” said Joy Grossman, associate director for the Center for Studying Health System Change.
To win over Garamendi, Anthem agreed to contribute $65 million to health programs that serve the state’s low-income residents. The money would go to free clinics, the Medi-Cal program for the indigent and financial aid for nursing students.
Anthem also agreed to allocate $100 million of its investment portfolio over 20 years to health services in California. This is on top of an additional $100 million in healthcare-related investments that Anthem had earlier pledged to funnel to California’s rural and underserved communities.
Garamendi also persuaded the company to increase its expenditures on patient care. In the past, the California Medical Assn. has criticized WellPoint for spending less than 80% of every premium dollar on medical costs, below the industry average of 85%.
Getting Anthem to commit to a new formula was “laudable and extremely creative on Garamendi’s part,” said Jack Lewin, chief executive of the medical association.
“Garamendi acted responsibly,” he added, “when other states rolled over in the face of this merger.”
Before Garamendi tripped up the deal, nine other states and Puerto Rico had approved it, as had both companies’ shareholders and the Federal Trade Commission.
But several states said later that they were waiting for things to play out in California to see whether they too should demand more concessions before finalizing their agreements.
In fact, Georgia Insurance Commissioner John Oxendine rescinded his approval in July. In a statement Tuesday, Oxendine said he was “reviewing these new developments and evaluating their impact on Georgia consumers.” He declined to elaborate.
Insurance officials in Missouri, Illinois, Delaware, Virginia, Texas and elsewhere also said Tuesday that they were looking at the new terms extracted by Garamendi to see whether California’s agreement affected their approval of the acquisition.
None of these other states, however, indicated that the deal was in jeopardy.
The transaction also must be again reviewed by California’s Department of Managed Health Care, which had approved it in July.
Tom Burnett, president of Merger Insights, an investor research service, said he expected Anthem to complete the acquisition by the end of the month.
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Largest health insurers
WellPoint’s Blue Cross is the largest health insurer in California.
Health insurers ranked by membership* in California (in millions)
Blue Cross: 7.18
Kaiser: 6.31
Blue Shield: 2.70
Health Net: 2.47
PacifiCare: 2.01
* As of year-end 2003
Source: California Assn. of Health Plans
