Health Systems-WellPoint Deal Hits Snags : Merger: Contractual and corporate governance issues are holding up completion, sources say. Firms wouldn’t be specific.

WellPoint Health Networks’ proposed acquisition of the parent company of Health Net has hit some significant snags that are holding up completion of the $1.6-billion deal, executives said Monday.

Industry analysts and executives said it is still possible that the deal will close by the Dec. 31 deadline for a definitive agreement. If that timetable cannot be met, the agreement could be extended, or the deal may have to be renegotiated.

The merger of WellPoint and Health Systems Inc., which operates Health Net health maintenance organization, would create the nation’s largest publicly held managed care firm, with about 4.4 million members and combined annual sales of more than $5.4 billion.

But the two companies are now at odds over “significant contractual issues” and “corporate governance issues,” people close to the situation said Monday.

WellPoint Health Networks Inc., which is 80%-owned by Blue Cross of California, runs the CaliforniaCare HMO. Both firms are based in Woodland Hills, as is Health Systems. Executives at WellPoint and Blue Cross declined to comment on the merger discussions.

Malik Hasan, chairman and CEO of Health Systems, disclosed the delays last week in remarks to investment analysts after Health Systems released its third-quarter financial results. After California regulators approved the deal in September, company officials had said negotiations were moving quickly and would be completed by Thanksgiving.

Closing the deal by year-end will be difficult because of the Securities and Exchange Commission requirement that proxy materials be mailed to shareholders 20 business days before meetings can be held to approve transactions. If the remaining issues are not resolved by next week, it would be difficult to get the materials to shareholders by Thanksgiving and schedule a meeting before the December holidays, executives said.

“Everybody involved in the negotiations is working hard to make this happen, but it’s going to be awfully tight to get it done by the end of the year,” said Don Prial, a Health Systems spokesman.

Health Systems officials said the remaining issues, although “significant,” are unlikely to scuttle the deal. One strong incentive for completing the transaction is a clause requiring any party that backs out of the agreement to pay a $50-million penalty.

Moreover, the companies have stressed that the deal is critical to their survival in the intensely competitive managed care industry and to their goal of expanding operations across the country.

One conflict between the companies arose last month, when WellPoint filed a lawsuit against a well-regarded national accrediting group. The suit came after WellPoint’s HMO subsidiary, CaliforniaCare, failed an accreditation review by the National Committee on Quality Assurance. Health Systems officials were perplexed by WellPoint’s decision to fight the NCQA in court--thereby drawing more public attention to the HMO’s poor rating--and would have preferred “a quieter, more conciliatory approach,” a source close to Health Systems said.