Fairness of Health Care Deal Questioned : Mergers: Department of Corporations makes it clear it expects changes in structure of WellPoint-Health Systems deal.
State regulators have questioned the fairness of a proposed merger between two health care giants, WellPoint Health Networks and Health Systems, but company officials said the issues raised do not put the $1.9-billion deal in jeopardy.
Regulators said they are not seeking to delay the merger, but made it clear that they would expect some changes in the structure of the deal before they would approve it.
Company officials said they expected regulators’ concerns would cause jitters on Wall Street today, with shares of WellPoint and Health Systems expected to take a hit.
In a letter sent Monday to WellPoint’s biggest shareholder, Blue Cross of California, Department of Corporations Commissioner Gary S. Mendoza said the state has “serious concerns” about the “fairness and reasonableness” of certain aspects of the deal to Blue Cross, a giant insurer based in Woodland Hills.
The Department of Corporations, which regulates health maintenance organizations such as Health Systems’ Health Net unit, is an important player in the merger, in which nonprofit Blue Cross proposes to convert to for-profit status. Under such conversions, companies are required by law to turn their assets--in this case, Blue Cross’ 80% equity stake in WellPoint--to a public or charitable benefit.
Blue Cross has proposed creating the California HealthCare Foundation, a $2.3-billion charity that would become one of the nation’s largest philanthropic organizations. But consumer groups and legislators have attacked the Blue Cross proposal, accusing the insurer of plotting to use the charity to help support the managed-care industry and the newly merged company.
The Department of Corporations can block the merger if it deems that the conversion would not adequately compensate Californians for the benefits Blue Cross enjoyed for many years as a nonprofit with tax-exempt status.
In his letter, Mendoza criticized the Blue Cross plan, saying it would not give the charity enough control over the merged company.
“Blue Cross’ right to elect directors and exercise other shareholder rights should reflect the approximate 56% voting power that it will hold,” the commissioner said.
Mendoza also said Health Systems Chief Executive Malik Hasan and WellPoint CEO Leonard Schaeffer would wield influence in the merged company and charity foundation that “appears at odds with accepted practices of corporate governance and may be inconsistent with New York Stock Exchange guidelines.”
Blue Cross said in a statement late Monday that it was “surprised and disappointed” by Mendoza’s letter.
“The tone and content of the letter are inconsistent with discussions we have had with the department to date,” Blue Cross said, adding that the letter also contained “significant factual errors.” The insurer did not specify what those errors were.
David Olson, a spokesman for Health Systems, said he did not believe the issues raised in the letter would delay the merger, which is expected to close by the end of the year.
