LOS ANGELES – Anthem Inc. sued California’s insurance commissioner Tuesday for blocking its proposed $16.4 billion merger with WellPoint Health Networks Inc., a deal that would create the nation’s largest health insurer.
The suit, filed in Los Angeles County Superior Court, asks for a ruling that Anthem met all legal conditions for approval of the merger and to prevent Insurance Commissioner John Garamendi from blocking it.
“The commissioner is required to follow California law in making his decision and he failed to do that,” David R. Frick, Anthem’s chief legal officer, said in a statement.
“Filing this lawsuit is something we did not want to do,” said Larry C. Glasscock, Anthem’s chairman, president and chief executive officer. “However, we genuinely feel we have met all the legal requirements necessary for approval of the merger.”
The lawsuit names Garamendi and the Insurance Department. It specifically seeks a writ of mandate to overturn his decision to reject Anthem’s acquisition of a WellPoint California subsidiary called BC Life & Health Insurance Co. It is one of 75 WellPoint subsidiaries involved in the deal but the only one over which Garamendi would have jurisdiction.
“The commissioner’s decision is an illegal act that must be set aside,” the suit contends.
It contends that Garamendi rejected the deal “based upon his personal beliefs about public health care policy and executive compensation – grounds for disapproval which do not exist under the California Insurance Code.”
Garamendi said he welcomed the lawsuit as “an opportunity to fully investigate and for the public to fully understand” a merger plan that he called “abusive and reprehensible.”
It would create nearly $4 billion in debt for the companies that could have been used to provide services, the commissioner said in a conference call from Sacramento.
Garamendi said he believed he acted fully within sections of the California Insurance Code that allow him to reject deals that are not “fair and reasonable” to policyholders.
“I’m happy to take this to a judge anywhere,” Garamendi said, adding: “We have no intention of losing.”
The companies had argued the deal would benefit the 28 million people nationwide insured by Anthem and Thousand Oaks, Calif.-based WellPoint, parent of Blue Cross of California.
The insurance commissioner rejected the deal on July 23. Garamendi, who has oversight authority over about 4 percent of the deal, had said he could not “in good conscience” support the merger. Garamendi charged that it would pull $400 million a year out of California for three years (in the form of dividends sent to Indiana-based Anthem instead of remaining in the state) and an unlimited amount afterward to help Anthem finance the takeover. He also criticized a $76 million payout to WellPoint‘s chief executive, Leonard Schaeffer, who would lose his job.
Garamendi said that amount could provide a year’s worth of insurance coverage for 47,000 children in a state where 6 million people lack health insurance.
Garamendi’s decision was the last major hurdle in the process. The state’s Department of Managed Health Care had approved the deal, along with the federal government and nearly a dozen other states and territories affected by it.
The companies argued it would strengthen the ability to compete in the crowded California marketplace and provide better services.
Anthem spokesman Ed West said the company had testified that it estimated the merger costs at only $300 million and had promised it would be paid through a combination of debt and cash on hand. No premiums would be raised, he said.
“No policyholder, physician or hospital will be expected to pay any of that,” he said Tuesday.
WellPoint and Anthem said they agreed to numerous concessions for the change in ownership of Blue Cross of California, which insures 7 million Californians.
Among them, Blue Cross will invest $17 million in mental health and child obesity programs, up to $100 million over 20 years for health care in rural and underserved communities and $5 million over three years to increase enrollment in the state’s Healthy Families Program.
WellPoint put a full-page ad supporting the merger in Tuesday’s Los Angeles Times, arguing that the merger “will help those currently insured by containing costs, increasing available programs , and making better medical information more widely available.”
Critics claim the companies would have to raise premiums to deal with the costs of the merger.
“I think it’s going to be a real uphill battle,” Jerry Flanagan, of the Foundation for Taxpayer and Consumer Rights, said of the lawsuit.
In general, California courts have granted the insurance commissioner “broad authority to protect policyholders,” he said.
“There’s a $4 billion price tag for patients to pay … this is not something that’s in the best interests of California” and Garamendi should have an easy time proving it in court, Flanagan said.
The U.S. Department of Justice, Puerto Rico and nine other affected states – Delaware, Illinois, Georgia, Missouri, Oklahoma, Texas, Virginia, West Virginia and Wisconsin – have approved the merger.
The stock prices of both companies fell Tuesday after the announcement. Anthem shares closed down 94 cents a share at $81.36 on the New York Stock Exchange.
WellPoint‘s shares fell 72 cents to $99.81.