The people at WellPoint Health Networks Inc. profess to be mystified at why politicians and consumer advocates have suddenly piled on about certain costs of the healthcare company’s proposed $16-billion acquisition by Indianapolis rival Anthem Inc.
It has been known almost since the planned purchase was announced in October, they say, that WellPoint Chairman and Chief Executive Leonard Schaeffer would pocket $37 million in cash out of the deal (plus a lump-sum $45-million payment of accrued and takeover-related pension rights). The corporate change-in-control provisions that will pay hundreds of millions of dollars more to a select group of executives were enacted years ago, they add, and fully disclosed to any investor willing to dive into the Thousand Oaks-based company’s public financial documents.
So why all the fuss now?
It’s hard to answer this plaintive cry except by observing that with a transaction this complex, it can take an unexpected event to drill an overlooked point into people’s heads. Here, the event was the release by state regulators of a WellPoint document conveniently delineating the executive payouts in chart form, rather than as the customary find-the-Waldo puzzle in a 200-page proxy statement.
The disclosure provoked a burst of outrage among California political leaders. Treasurer Phil Angelides and Sean Harrigan, head of the California Public Employees’ Retirement System, announced this week that CalPERS -- a shareholder of both WellPoint and Anthem -- would vote against the deal and urge other institutional holders to do the same. They’re also pressuring California regulators to block the acquisition, or at least to hold public hearings.
Indeed, what really might be troubling the folks at WellPoint is that all this outrage may finally open regulators’ eyes to how thin the economic rationale for the buyout really is. As Angelides put it: “This merger is good for one set of people -- Mr. Schaeffer and his cronies.”
The companies acknowledge that they expect few economies of scale that might directly reduce the cost of patient care, such as obtaining volume discounts from drug companies. (Both are probably already big enough to extract about as much blood as there is in that stone.) Instead, they say, $250 million in annual savings will come from merging technology, such as by combining their two computer systems into one. Whether such gains will offset the chaos that might ensue from integrating two companies, not to mention from shifting WellPoint’s corporate suite across the country to Indianapolis, is hardly clear.
But a look at the history of both firms suggests that what’s really driving this deal isn’t the quest for economic efficiency, but an egomaniacal thirst for growth for its own sake. Both Anthem and WellPoint have been on an acquisition binge aimed at Blue Cross plans across the country -- particularly plans that already have converted from traditional nonprofit status into for-profit entities (as WellPoint did in 1996).
After years of gaining membership and revenue this way, the companies found that fewer for-profit Blues were left for the picking, and that regulators were making it much more difficult -- that is, costly -- to convert the last nonprofit plans. The era of growth by piecemeal acquisition was over. By then, the only real rival each company had was the other. The logic of one final meta-marriage was inescapable (to them, at least).
Have the partners offered up any other rationale than this? They say the combined company will be financially stronger than the components, but both have done just fine on their own. Over the last five years, WellPoint’s revenue and profit have roughly tripled. Anthem’s numbers are similar.
Whether these results have produced superb healthcare for members is a different question. Judging from the annual HMO report card posted by the California Office of the Patient Advocate (it’s at www.opa.ca.gov), WellPoint looks like an exemplar of pure mediocrity.
Of the nine large California HMOs that participated in the latest survey, WellPoint’s Blue Cross is tied with two others for the lowest overall grades. On most individual measurements, it’s in the middle of the pack. And while it ranks first or second in a few categories, it’s at or near the bottom in others.
A Blue Cross of California spokesman says that, given the level of care is determined primarily by physicians and hospitals and most HMOs in the state contract with the same providers, “we expect to be in the middle of the pack.” He adds that many surveys give a poor picture of the real quality of care.
Critics note that draining as much as $356 million from the corporate treasury to hand bonuses and severance payments to WellPoint executives won’t make it any easier to improve members’ medical care.
Company officials suggest that the payouts won’t cut into benefits or affect premiums for Blue Cross of California members. But what’s to prevent the new entity from effectively financing the payouts by hammering down physician reimbursements or specialist referrals in ways patients sense only subtly and over time?
WellPoint spokesman Ken Ferber says that such behavior isn’t WellPoint’s style. Schaeffer, he adds, constantly reminds his troops how easy it is to lose customers if they’re mistreated.
But after a brief sojourn as a figurehead chairman of the combined company, Schaeffer will leave the enterprise to a management led by Anthem brass. How can anyone know how the new company will operate?
“Does Anthem have the same commitment we do?” Ferber says. “I can’t answer that.”
Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at firstname.lastname@example.org and read his previous columns at latimes.com/hiltzik.