WellPoint dividend is questioned

Times Staff Writer

State regulators are investigating whether a $950-million dividend Blue Cross of California sent to its Indianapolis-based parent violates an agreement the companies made to limit such payments to keep premiums down and maintain the quality of healthcare benefits, officials said Friday.

Officials said the parent, healthcare giant WellPoint Inc., should have taken no more than $141 million out of California. They called the higher amount excessive, particularly as Blue Cross, which serves more than 7 million state residents, has continued to raise premiums.

The state Department of Managed Health Care also is considering expanding its probe to determine whether there are any other potential violations of the three-year agreement, part of a deal to win the agency’s approval for a corporate marriage that created the nation’s largest health benefits provider.


Cindy Ehnes, director of the Department of Managed Health Care, said she was shocked to learn of the $950-million payday for WellPoint, whose total profit last year was $3.1 billion on $57 billion in revenue.

“We are concerned that it reflects a viewpoint of California being its own ATM machine, while, at the same time, Californians are struggling to get health insurance for their families,” Ehnes said in an interview.

The state agency could order WellPoint to return to California policyholders any payments it determines were taken improperly, as well as levy other fines and penalties.

A WellPoint spokeswoman said the dividends Blue Cross paid its corporate parent complied with the agreement as well as all regulatory requirements.

“The current surplus is primarily a result of Blue Cross’ continued growth in membership, increased efficiencies that were realized through the 2004 merger ... and the company’s success in reducing administrative expenses,” WellPoint spokeswoman Shannon Troughton said in a written response. “Like our counterparts in the industry ... WellPoint regularly receives dividends from its state plans.”

She said WellPoint requested the dividend at the end of March, and Blue Cross paid it this month.

The merger came about when an Indianapolis-based company then known as Anthem Inc. purchased Thousand Oaks-based WellPoint, which used the Blue Cross license in California, and adopted its name. Consumer advocates, physician groups and others criticized the $15.5-billion merger because it included an estimated $3.4 billion in debt as well as severance, options and bonuses for executives of as much as $600 million.

Opposition also stemmed from fears that out-of-state owners would be less committed to California’s government insurance programs for children and the poor. There also was concern that the company would raise premiums and cut benefits to boost the bottom line.

Ehnes and then-state Insurance Commissioner John Garamendi, who is now lieutenant governor, blessed the deal only after extracting agreements that California policyholders would not pay for it through premium increases or benefit cuts. The agreements attempted to achieve that goal by limiting, through complex formulas, the so-called upstreaming of revenue to WellPoint from its California operations, which also include Blue Cross Life & Health.

But premiums have continued their long and steady rise, and Blue Cross has been battered by a storm of criticism since the deal closed over, among other things, its practice of rescinding coverage after patients submitted claims for expensive medical care authorized in advance by the insurer.

Troughton said Blue Cross paid dividends of $537.5 million in 2006, $518 million in 2005 and $350 million in 2004, the year the merger took place.

Regulators are not yet reviewing earlier dividends. But Ehnes said the latest dividend “is out of the bounds of propriety and certainly the spirit of” the agreement. She said the department was still trying to determine whether it amounted to a technical violation.

Ehnes said it appeared that after the department raised concerns about the proposed dividend, Blue Cross changed the way it accounted for some assets in an effort to justify it.

WellPoint’s Troughton denied that.

“Blue Cross communicated clearly with the DMHC in advance our plans for the dividend and the amount,” she said. “In fact, we’ve been working with DMHC since 2006 to come up with this figure. We did not change any accounting practices. We were never notified at any juncture that the DMHC intended to challenge the procedure or the amount.”

Troughton said the company’s profit was in line with the industry.

“Health insurance is a competitive industry that does not exhibit excessive profit margins,” she said. “Over the last five years, WellPoint and the health insurance industry each averaged an after-tax profit margin of 4.8% and 5.2%, respectively. This profit margin compares with an average profit margin of 11.6% for the [Standard & Poor’s 500], a group of 500 large publicly traded companies considered representative of the market as a whole.”

Blue Cross of California serves more than 6 million people in managed-care plans. WellPoint’s other California unit, Blue Cross Life & Health, serves more than 1 million people with insurance policies. In the view of Insurance Commissioner Steve Poizner, who oversees that Blue Cross unit, it “is operating completely within the confines of our agreement,” said his spokesman Byron Tucker.

Troughton said WellPoint was a good corporate citizen. Blue Cross and Blue Cross Life have made contributions as a result of the merger agreement, including more than $170 million toward a $200-million commitment to the Investment in a Healthy California program; $35 million for health clinics in underserved communities; $15 million for outreach and enrollment for California’s Healthy Families and Medi-Cal programs to cover more children; and $15 million to train as many as 2,500 new nurses in California, addressing a shortage.


Times staff writer Marc Lifsher in Sacramento contributed to this report.