California issues demands on execs’ compensation, Blue’s profits

The Indianapolis Star

To buy its way into California’s health care market, Anthem Inc. has agreed to give considerable autonomy to WellPoint Health Networks’ California business and let it retain much of its profits.

A regulatory draft document, released for today’s public hearing in Los Angeles on the Anthem-WellPoint merger, shows that Anthem is willing to make concessions to pull off the nation’s biggest merger of health benefit companies.

They include a pledge not to use money from Blue Cross of California to pay for $147 million to $356 million in merger-related bonuses and severance payouts to WellPoint executives, and an agreement to let the Blue Cross unit for three years retain the same level of its profits that it has kept under WellPoint‘s ownership.

Anthem also agrees to not saddle WellPoint‘s California business with parent company debt and to keep existing policies and contracts with customers in place, unless market conditions change.

“It’s interesting. I’m guessing Anthem wouldn’t go anywhere near this far” in making concessions to regulators in other states, said Duane Sobecki, senior partner at Focused Results, an Indianapolis consulting firm.

California is the last of 10 states to act on the merger. Because of the size of the California market, which would contain one in four of the merged company’s members, California’s approval is seen as critical to the deal.

California’s negotiations with Anthem and WellPoint don’t affect any merger-related agreements in other states.

California Insurance Commissioner John Garamendi released the proposed conditions as part of his agency’s hearing today in Los Angeles to examine Anthem’s $16.4 million deal to take over WellPoint and create the nation’s largest health benefits firm, based in Indianapolis.

The 15-point document addresses several concerns about the deal publicly cited by Garamendi.

The document, which WellPoint officials also helped draw up, “really gives teeth to commitments” that executives of the two companies made at a legislative hearing on the merger on June 9, said Ken Ferber, a WellPoint spokesman.

“They are assurances of how we will operate the California plan,” said Anthem spokesman Edward West.

California regulators, he said, “are being very thorough” in scrutinizing the proposed merger.

California regulators may demand further concessions from Anthem before approving its takeover of WellPoint‘s California business, said Jerry Flanagan, consumer advocate for the Foundation for Taxpayer and Consumer Rights, a California nonprofit consumer group.

“It’s not a matter of them throwing a bone, it’s going to be how big the bone is,” he said. The list of conditions “will change dramatically” as the regulators and politicians further examine the deal, he predicted.

The consumer group is lobbying regulators to prohibit Anthem from transferring to its balance sheet any of the $1.07 billion in reserves held by Blue Cross of California.

In the draft agreements, Anthem commits to keeping Blue Cross‘ reserves at 150 percent of state-required levels. But that amounts to only about $420 million, which seems to allow Anthem to remove the remaining $650 million, Flanagan said.

A second and more powerful regulatory body in California, the Department of Managed Health Care, has scheduled its own hearing on the merger, on July 9.

The regulatory pressures in California over the proposed deal, which was announced last October, are mounting even as shareholders for both companies vote on the merger on Monday.

The vote is conditioned on California’s approval of the deal.

WellPoint is known as a company savvy about the workings of its heavily regulated industry. Its chief executive, Leonard Schaeffer, is a former high-ranking federal and state of Illinois health regulator who has made catering to regulators a company maxim.

At WellPoint, “Your first thought is, ‘What will the regulators think?’ ” Ferber said. “Respect for the regulatory process is not only a core competency here but we consider it a competitive advantage.”

Both companies say they hope to complete the merger in mid-year.

Completion of the merger seems likely, said Les Funtleyder, a health care strategist for Miller Tabak, a New York investment and trading firm.

“I would suppose it could close in a couple of months,” he said. “The longer things go, the more nervous people get.”

A spokesman for Garamendi, Norman Williams, said the commissioner has “no hard timeline yet” for rendering a decision on the merger.

“It’s going to be an informed decision on his part” that takes into consideration today’s testimony, Williams said.

As health insurance mergers grow in scale, agreements such as the one California is negotiating with Anthem and WellPoint become more complex, Sobecki said.

Anthem and other big insurance acquirers have agreed to similar stipulations with regulators in other states where Blue Cross–Blue Shield plans have been bought, said Edmund Abel, director of health care services at Blue & Co. in Indianapolis. One state, Kansas, rejected Anthem’s proposal to buy the major Blues plan there.

California’s demands appear to be “pretty detailed in terms of what they are getting (Anthem) to commit to in the next three years,” Abel said.
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Approvals needed:

Anthem must win approvals from shareholders and from the state of California to clear the way for its acquisition of WellPoint:

June 28: Shareholders of both companies vote on approving the deal.

Today and July 9: California regulators hold public hearings as part of the state’s approval process.
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Contact Star reporter Jeff Swiatek at (317) 444-6483 or [email protected]