Garamendi Hardens Stance on Anthem
State Insurance Commissioner John Garamendi said Tuesday that he would reject part of Anthem Inc.’s proposed acquisition of WellPoint Health Networks Inc. unless Anthem spent as much on healthcare for uninsured Californians as it would on payments to executives.
Although Garamendi does not have authority to block the entire deal, he can scuttle Anthem’s purchase of WellPoint’s Blue Cross Life & Health Insurance Co., a subsidiary representing about 10% of its California business. The state Department of Managed Health Care regulates the Blue Cross of California HMO, the biggest piece of WellPoint’s California business.
Thousand Oaks-based WellPoint has said its sale would trigger the payment of $200 million to $600 million in severance pay, retention bonuses and stock options to its executives. Calling such compensation extraordinary in an era of accelerating health costs, Garamendi said the same amount of money would buy a year’s worth of healthcare coverage for as many as 577,000 children in California.
After three weeks of negotiating with the companies, Garamendi said in a conference call Tuesday that the two sides remained far apart, and he characterized the last week of talks as disappointing.
Anthem’s planned $17.4-billion acquisition of WellPoint would create the nation’s largest health insurance company.
Anthem spokesman Ed West declined to discuss how the companies would proceed if Garamendi rejected the transfer of Blue Cross Life & Health to Anthem.
“We believe we will be able to finalize the California regulatory approval process in a way that will be mutually satisfying,” he said. “For now, the focus is going to be on securing both regulatory approvals.”
Garamendi also said he would reject the deal unless Anthem Chief Executive Larry Glasscock proved that he could make good on his pledge that California policyholder premiums would not fund any part of the WellPoint acquisition or the executive payments.
“This is a bad deal for policyholders,” Garamendi said. “The cash goes to executives, and it’s going to come out of the pockets of policyholders or providers who will be told they will receive less and as a result will have to cut back on services.”
Shares of Anthem and WellPoint fell after Garamendi’s announcement. WellPoint dropped $2.57 to $108.40, while Anthem’s shares fell $1.90 to $86.40; both trade on the New York Stock Exchange.
Shareholders of both companies have approved the deal, as have regulators in 10 states.
But the Anthem-WellPoint deal has come in for sharp criticism in California over the payments and concerns about rising healthcare costs from consumer advocates, state Treasurer Phil Angelides, CalPERS and other public employee pension funds.
Garamendi said he did not expect to make a final decision until after the state Department of Managed Health Care’s hearing Friday.
West reiterated Anthem’s position that the merger would save $250 million a year in operating costs. Anthem has said that medical insurance premiums would not rise as a result of the acquisition, and it has offered to pay for annual outside audits to verify that.
Money from California “is going to be used one way or another to pay the debt, which pays the cash severance payments” and also pays shareholders, Garamendi said.
Industrywide, the consequences of rising healthcare premiums, co-pays and deductibles are rippling through the state, Garamendi said. He noted that 70% of California’s uninsured children live in homes where at least one parent is working full-time, that one-third of the state’s Latinos have no health insurance and that one-quarter of all small employers offer no health insurance.
One Wall Street analyst said Tuesday that despite Garamendi’s concerns about the acquisition, he was confident the deal would win approval.
Another analyst was less optimistic, saying Anthem may have to take Garamendi to court if he rejects the WellPoint sale.
If Anthem does make additional concessions to gain Garamendi’s approval, the analysts said, it would set an expensive precedent for future deals and could upset commissioners in other states who already approved the acquisition.
In the conference call, Garamendi bristled at the suggestion that Wall Street thought he was overstepping his bounds.
“I’ll tell you what’s out of bounds,” he said. “What’s out of bounds is this deal.”
