As investment bankers, lawyers and corporate chieftains meet to decide on giant merger proposals involving some of California's biggest health care companies, a little-known state bureaucrat is in a key role behind the scenes.
Gary Mendoza, commissioner of the California Department of Corporations, the state agency that regulates health maintenance organizations, must give his stamp of approval to the deals involving four big health care companies: WellPoint Health Networks, Health Systems International and Blue Cross of California, all based in Woodland Hills, and Blue Shield of California, based in San Francisco.
WellPoint--whose largest shareholder is Blue Cross, with an 80% stake--was close Thursday afternoon to reaching a definitive agreement to acquire Health Systems for $1.8 billion, sources said. The WellPoint and Blue Cross boards have also been considering a competing offer by Blue Shield to buy WellPoint for $48 a share, or about $4.8 billion, in cash and stock.
Whatever deal WellPoint strikes will eventually have to be approved by Mendoza, a former law partner of Los Angeles Mayor Richard Riordan who was appointed commissioner in 1993.
Mendoza's authority over the deal stems from a Blue Cross proposal to create a giant new health care charity with its WellPoint holdings. Nonprofit Blue Cross in 1993 spun off its HMO and other managed care plans into a for-profit subsidiary, WellPoint. Under state law, when a health care firm converts to stockholder ownership, it is required to set up a public charity to reimburse Californians for the tax breaks it got while it operated as a tax-exempt organization.
Mendoza has pledged not to rubber-stamp any merger unless it is also a good deal for California consumers.
"It is our view that the people of California own 80% of WellPoint," Mendoza said Thursday. "We have an active and ongoing interest in what's going on" in the WellPoint discussions.
The state agency has hired the investment bank Bear, Stearns & Co. as its adviser on the WellPoint deals.
Michael Tennenbaum, senior managing director at Bear Stearns' Los Angeles office, said Mendoza has several requirements for evaluating any WellPoint deal. The new foundation must get enough cash to give it sufficient liquidity to begin charitable activities. Other considerations are the fairness of the bidding process to all parties, and the future business prospects of the company created by the merger, he said.
Sources close to Blue Shield have complained of being "frozen out" of the bidding. And they have also contended that their proposal provides more than twice as much cash to the new charity as the WellPoint-Health Systems plan.
Despite Mendoza's assurances that he will protect the interests of Californians by getting the most money for the new foundation, consumer advocates and legislators have questioned whether he is taking a sufficiently tough stance with Blue Cross.
"It's not clear whether Mendoza has the involvement and capability with this much money at stake to represent the consumer interests effectively," said Jeanne Finberg, staff attorney with the Consumers Union office in San Francisco.
Earlier this week, the advocacy group, which publishes Consumer Reports magazine, wrote Mendoza to urge him to set up an independent board for the Blue Cross charity, to be called the California HealthCare Foundation.
The Consumers Union, Finberg said, is concerned that WellPoint and Blue Cross directors will put profits for executives and shareholders ahead of the interests of the new charity.
Assemblyman Phillip Isenberg (D-Sacramento), who has been critical of the Blue Cross charity plan, says the proposed deals involving WellPoint illustrate the need for more state overseeing of health company conversions to for-profit status. Blue Shield and Kaiser Permanente are the largest health plans in California that still operate as nonprofit organizations.