WellPoint, Health Systems Reach Accord : Health care: Pact formally cancels merger of the Valley-based firms.

After nine months of negotiations and much squabbling, WellPoint Health Networks and Health Systems International have formally agreed on terms calling off their $1.6-billion merger, which would have created the nation’s second-largest managed health-care company.

The two companies, both based in Woodland Hills, said Friday that they reached a settlement releasing each other from all legal claims, including a provision that would have required either company backing out of the deal to pay the other a $50-million breakup fee.

WellPoint’s acquisition of Health Systems had been all but dead since early December when talks broke down amid a nasty public dispute between WellPoint Chairman Leonard D. Schaeffer and Health Systems Chairman Malik M. Hasan over management issues.

Blue Cross of California, which owns 80% of WellPoint’s stock, was also a party to the termination agreement.

Workers at the two firms expressed mixed reactions.

“I’m kind of happy” that the deal was nixed, said Denise Forbin, an accounting representative at Health Net, owned by Health Systems and one of the nation’s largest health maintenance organizations.

“I think it makes people a little more settled,” Forbin said. When the merger agreement was on, “you didn’t know what was going to happen.”

But Forbin’s friend, Robin Tinsley, also a Health Net accounting representative, said she was disappointed that the two companies would not combine. “I think there would have been a lot of positive opportunities for people,” she said. “It would have been a big, strong company, with more opportunities for benefits and travel.”

With the marriage officially kaput, some employees of the two companies--whose buildings face each other across Oxnard Street in Warner Center--say they are relieved.

Blue Cross employees Terri Clay, a customer services representative, and Kim Jerro, who works in membership and billing, chimed “Yes!” in unison, when asked if they had been concerned about layoffs.

“We figured there would be tons of layoffs” after the merger, said Stefani Boas, a customer service representative at Blue Cross, the nonprofit health-care company that owns 80% of WellPoint. Now, she said, “We feel more secure.”

And if she ever loses her job at Blue Cross, Boas figures she can try to get work at Health Net--an option she would not have had if the two companies had become one.

Some workers expressed frustration at being subjected to months of uncertainty, only to see the deal collapse in the end.

“I think it’s awful,” said Michelle Outlaw, a clerk in provider services at Blue Cross. “They put all this time and energy into it. It’s stupid to worry us all and then not do it.”

Outlaw was also annoyed because, in preparation for the merger, her benefits had been reduced. Now that the deal is off, she does not expect that they will be changed back.

Jose Olmedo, a membership eligibility specialist at Health Net, said he had been worried that his department would have been targeted for layoffs under the merger because Blue Cross has a similar department. “So far, people seem pretty pleased,” he said.

Robin Ryan, a medical assistant in Health Net’s workers’ compensation division, said she is glad the deal is off because some customers did not want to enter new contracts while the merger was pending. “So we had to wait,” she said. “It was harder for us not knowing what the outcome was going to be.”

But, as with many other workers, Ryan wondered whether Health Net would now begin looking for another partner. She hoped not. “I don’t think we need anybody else,” she said.

The cancellation of the merger does not absolve Blue Cross and WellPoint of their obligation to create a public health-care charity, tied to Blue Cross’ plan to switch from nonprofit to for-profit status. Under state law, nonprofits that switch to for-profit status are obligated to compensate the public by an amount equal to their total assets.

WellPoint’s acquisition of Health Systems would have provided Blue Cross with the means to create a $3.2-billion charitable foundation that would have helped pay for medical care for California’s needy.

As the merger dissolved, state regulators said that Blue Cross must keep its commitment to fund the charity.

Blue Cross officials have said they intend to meet that obligation and will submit a new proposal to the state on how to fund the foundation.

The collapse of the merger, however, raises questions about whether the size of the charity will remain the same, how it will be funded and how quickly a new plan can be approved.

Friday, the companies also said that certain major shareholders, including Hasan and Schaeffer, have also reached a settlement regarding the merger and related irrevocable proxies.

The deal, which would have created the nation’s second-largest publicly held managed-care firm, with more than $5.4 billion in revenue, fell apart after the companies went public with allegations that each had reneged on an acquisition agreement reached last March.

WellPoint and Health Systems accused each other of trying to stack the board of the new company with inappropriate people and of attempting to get lucrative payouts for executives and consultants who worked on the deal.

Although the deal reached Friday would seem to end any legal action between the two companies, officials from both firms have said they expect shareholder suits to be filed.

In New York Stock Exchange trading Friday, Health Systems rose 37.5 cents to $32.125 a share and WellPoint was unchanged at $32.125.