California official concerned about payouts to WellPoint executives

The Indianapolis Star

A second public hearing will be held in California to examine Anthem Inc.’s proposed takeover of WellPoint Health Networks, including the touchy issue of whether Anthem would be allowed to move any of WellPoint‘s $1 billion in Blue Cross policyholder reserves out of California.

California Insurance Commissioner John Garamendi said he has “grave concerns” about the $16.4 billion deal and he wants them aired at a hearing on June 25 in Los Angeles.

“We must assess an enormous transaction that will result in extraordinary financial benefits for a handful of managers and directors. It is also bound to have an impact on the status quo of insured Californians,” Garamendi said in a news release.

His hearing will follow one held June 9 by state legislators concerned about Indianapolis-based Anthem’s takeover of California’s largest health benefits company.

California is the only state out of 10 with a say in the merger that hasn’t yet approved it.

Garamendi has criticized planned bonuses and severance payouts of $147 million to $356 million that would go to 293 WellPoint executives once the merger goes through.

“My ultimate goal is to ensure that these considerable executive compensation packages do not come at the expense of Californians,” Garamendi said.

Anthem has said it will foot the bill for the merger-related payouts to the WellPoint executives.

But that claim was questioned by a California consumer group that released a draft document Friday from California regulators appearing to show Anthem would be allowed to remove $652 million in policyholder reserves from Blue Cross of California, WellPoint‘s largest business unit.

The document from the Department of Managed Health Care, which is negotiating merger terms with the companies as part of the regulatory approval process, says California Blue Cross wouldn’t be allowed to pay dividends or move money to its new parent company if that would drop premium-funded reserves below 150 percent of the state-required minimum.

That represents a 50 percent boost in reserves beyond what the Blue Cross unit must now meet.

But the Foundation for Taxpayer and Consumer Rights said California Blue Cross had $1.07 billion in reserves as of March 31, far more than the $422 million needed to meet the reserve requirement plus 50 percent. Under the draft proposal, nothing would stop Anthem from removing the remaining $652 million and using it as it wished, said Jerry Flanagan, health care policy director for the Santa Monica, California-based consumer group.

Flanagan suggested the excess reserves could be used to pay for the executive compensation package to WellPoint executives.

The draft provision amounts to “a license to steal from California patients and business owners who paid for these reserves in the form of premiums that were supposed to pay for health care,” Flanagan said in a statement.

Anthem spokesman Edward West dismissed Flanagan’s statements as “wild-eyed speculation.”

“Anthem will not use excess capacity from Blue Cross of California to finance the merger,” West said. In addition, he said, “We do not have any plans to spend or materially reduce the excess capacity” of Blue Cross of California.

WellPoint spokesman Ken Ferber said the draft document released by theconsumer group is outdated and “substantive changes” have since been made to it. He wouldn’t discuss the changes.

A spokeswoman for the managed care department, Lynne Randolph, said, “We’re still in the review process” with Anthem and WellPoint and the released document is not a final version.

In a related development Friday, Institutional Shareholder Services, a New York company that advises large shareholders on corporate deals, reaffirmed its support for the Anthem-WellPoint merger.

Earlier this week, California Public Employees’ Retirement System, a major shareholder in Anthem and WellPoint, announced its opposition to the merger while calling on the shareholder services group to reassess its recommendation in favor, based on new information coming out about the level of executive bonuses and severance payouts.

Anthem and WellPoint shareholders are scheduled to vote on the merger on June 28. Those votes will go on, said Ferber, whether California has approved the merger by then or not.

“They’re voting on a deal that is premised on approval” by California, he said.
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Contact Star reporter Jeff Swiatek at: (317) 444-6483 or [email protected]