California insurance chief fears premium hikes will finance merger
LOS ANGELES — California’s insurance commissioner grilled executives from Anthem Inc. and WellPoint Health Networks Inc. Friday, saying plans to create the nation’s largest health benefits company appear to benefit executives and stockholders over patients.
“My question is, who is paying for this merger? And who is benefiting from this merger?” Garamendi asked during a public hearing. “My concern is that premium payers across the nation are paying $4 billion for no benefit.”
Members of the public weighed in on the deal later during the four-hour hearing.
Under terms of the deal, WellPoint shareholders would receive one share of Anthem stock plus $23.80 in cash per share, for a total cost of $16.4 billion.
Anthem Chairman and Chief Executive Larry Glasscock said none of the $4 billion in cash needed to finance the transaction would come from California policyholders, a promise that was met with skepticism from Garamendi. Anthem has agreed to pay for merger-related bonuses and severance payouts for 293 WellPoint executives of $147 million to $356 million, Glasscock has said.
The commissioner said his concern was that the new company would have to increase premiums or reduce benefits for health and life insurance to generate the funds needed to pay for the merger.
“I want to assure you premiums will not be raised as a result of this merger,” Glasscock said.
Anthem and WellPoint are in talks with California regulators over the terms of the merger and will continue discussions, including about executive compensation, said Anthem spokesman Edward West.
“We’re going to continue to work on those things” in order to satisfy Garamendi, West said after the hearing. “He was very clear about that. We’re going to go to work with his staff to address all of that.”
Before the hearing began, members of several consumer groups gathered around a roasted pig, as a symbol of corporate greed, to protest the proposed merger. The Foundation for Taxpayer and Consumer Rights has said it objects to the large severance packages and bonuses to WellPoint executives as part of the merger.
“This deal is not kosher,” said Jerry Flanagan, a foundation spokesman.
California’s two insurance regulatory agencies have not yet approved the merger. California is the last of 10 states with a say in the merger to act on it. A second California regulatory hearing on the merger is set for July 9.
Stockholders will vote on the proposal on Monday.
Representatives of multistate public and labor pension funds announced during the hearing that they would collectively vote their $420 million investments in the two firms against the merger. Officials from California, New York, Illinois, Iowa and Maine cited the merger’s “egregious compensation plan” for their opposition.
“This package really is the poster child in many respects for excessive compensation,” said California Treasurer Phil Angelides.
Noting the firms defend the package as an industry standard, he said, “That’s what’s wrong with the executive compensation system. It is the whole system that’s gone awry.”
Angelides and other state treasurers have long criticized American corporate salaries as excessive and having played major roles in the September 2003 resignation of former New York Stock Exchange Chairman Richard Grasso over his $187 million pay package.
“We find it immoral that they can get so greedy when working families everywhere are struggling to finance their health care,” said Rob Feckner, investment chairman for the California Public Employees’ Retirement System. The pension fund owns more than 1.3 million shares in the two companies valued at $250 million.
“This is obscene. It’s undeserved,” Feckner said. “This merger should not be allowed.”
Iowa Treasurer Michael Fitzgerald called the executive pay package “an outrageous ransacking of the value of these two companies.
“These are companies we own. There are families saving for their kids’ college educations and individual Iowans that own shares of these companies,” Fitzgerald said. “They’re tired of having their nest egg, their investment, looted.”
Other declared opponents are the New York Common Retirement Fund, New York Teachers Retirement System, Amalgamated Bank, Los Angeles County Employees’ Retirement Association, Illinois State Board of Investment, American Federation of Labor — Congress of Industrial Organizations (AFL-CIO) and the American Federation of State, County and Municipal Employees (AFSCME) Pension Fund.
The large funds that have joined to oppose the merger hold $420 million worth of stock in Anthem and WellPoint, representing about 2 percent of the $22 billion total value of the two companies’ stock.
“We acknowledge this is an uphill fight,” Angelides said of the effort to persuade shareholders to turn down the merger.
“We’re just going to have see how it goes,” Anthem’s West said of the shareholder vote.