Insurance chief is accused of unfairly blocking the planned merger with WellPoint.
The suit, filed in Los Angeles Superior Court, accuses Garamendi of stepping outside the bounds of California’s insurance code with his decision last month to deny the proposed merger, which would create the nation’s largest health plan.
“The commissioner displayed his presumption and strong bias against the merger and his intent to (deny it) based upon his personal beliefs about public health care policy and executive compensation – grounds for disaproval which do not exist under the California Insurance Code,” the suit states.
Garamendi said in a news conference Tuesday afternoon that he had not yet been served with the suit. “Let’s assume I am going to be sued,” he told reporters in a teleconference. “This is a lawsuit I welcome. This will give me an opportunity to fully investigate and for the public to fully understand the merger.”
When Garamendi turned down the deal between WellPoint, headquartered in Thousand Oaks, and Anthem, based in Indianapolis, it had already been approved by shareholders, federal antitrust investigators and officials in 10 of 11 states where clearance from insurance regulators was needed.
It also had the blessing of the California Department of Managed Health Care, which regulates HMOs and has authority over Blue Cross of California, by far the biggest piece of WellPoint‘s business in the state.
Expert observers had mixed responses Tuesday about the authority of the state insurance commissioner and Garamendi’s ruling on the merger.
The lawsuit “ignores the fact that California courts have given insurance commissioners broad discretion to protect policyholders,” said Jerry Flanagan, of the Foundation for Taxpayer and Consumer Rights.
Thomas Rundall, a professor of business and public health at UC Berkeley, said Garamendi did not provide a “compelling reason” for denying the deal.
“The question is whether this particular merger is of a sufficient scale that it is qualitatively different than the many other mergers we have seen,” he said. “That will be hard to prove.”
Garamendi’s denial of the deal on July 23 sent stocks of WellPoint and Anthem tumbling on the New York Stock Exchange, where they continued to drop Tuesday on news of a lawsuit that will indefinitely delay the merger.
Garamendi said he turned down the deal because it would be financed by millions of dollars in premiums paid by California patients, and he believes it overcompensates top executives.
The insurers said they will invest $100 million over 20 years in a fund that is expected to generate $450 million for California health programs to treat rural patients and the poor. The investment is contingent on the merger’s going through.
“He has hurt the very people he states he is trying to help,” David R. Frick, Anthem’s chief legal officer, said of Garamendi’s move.
The insurance commissioner Tuesday accused both companies of “using Enron accounting” to inflate the value of investments they agreed to make in California if regulators approved the merger.
Garamendi also disputed the company’s estimate for executive compensations connected to the merger. He put the value of cash and stock bonuses to executives at $600 million.
Anthem and WellPoint said that $600 million payout figure assumed all 293 executives eligible for financial incentives were able to exercise them. The companies said executive perks from the merger would total no more than $250 million and be paid by Anthem, which has no members in California.