Health Firms Meet to End Merger Dispute

As WellPoint Health Networks and Health Systems International officials met Wednesday to resolve disputes in their proposed merger, a state regulator sent a scolding letter to the firms saying there is “no legitimate reason” for delaying the $1.6-billion deal.

The letter, sent Tuesday by California Department of Corporations Commissioner Gary Mendoza, indicates what problems have arisen in the deal: a dispute between the chief executives of the firms over management roles and compensation.

Mendoza played a key role in overseeing the merger, which would create two health care charities with an endowment of $3.2 billion. Health officials statewide are counting on the charities to make up some of the shortfall from budget cuts.

The state required the companies to form the new charities because nonprofit Blue Cross of California owns 80% of WellPoint’s stock. State law requires nonprofit organizations that convert to for-profit status to compensate the public for the tax-exempt status they enjoyed for years.

Company executives disclosed earlier this week that WellPoint’s acquisition of rival Health Systems, the corporate parent of the Health Net health maintenance organization, had hit some snags. Those executives have said the deal’s closing will be delayed but that they expect the transaction to be completed.

Special board committees of WellPoint and Health Systems have held meetings this week to try to resolve the differences between the two Woodland Hills-based firms, sources said.

Although the companies have not commented on the unresolved issues, Mendoza’s letter states that the agency “questions the legitimacy of a renegotiation of management responsibilities and the propriety of making compensation issues a driving force.”

Mendoza declined to discuss the letter.

Mendoza, who heads the agency that regulates HMOs, approved the deal in September after months of rancorous negotiations.

Since the deal was announced in March, analysts and industry officials have questioned the practicality of the power-sharing arrangement between WellPoint Chairman Leonard D. Schaeffer and Health Systems Chairman Malik M. Hasan. Both men are known to have strong personalities and, some say, commensurate egos.

Sources close to the situation have said that Hasan has sought a greater management role in the new company. Under the agreement, Hasan would oversee physician relations and merger and acquisition activities, while Schaeffer would head day-to-day operations.

Some analysts speculated that Hasan’s decision to go public with disputes between the two firms during a telephone conference with analysts and reporters last week might be a strategy to enhance his negotiating position with Schaeffer.

Spokesmen for Health Systems and WellPoint would not comment on the specific issues holding up the deal.