California is considering making the firms donate to state health program in return for OK on merger.

The Indianapolis Star

California legislators and regulators are advancing a proposal for Anthem Inc. and WellPoint Health Networks to pay $400 million to a program for uninsured Californians. The companies, which need the state’s green light to complete their $16.4 billion merger, oppose the idea.

If California is successful with what appears to be the most developed proposal so far in the merger talks to extract a promised contribution to public health, other states could seek to protect their policyholders from paying for concessions by Anthem and WellPoint.

The California proposal, which is still being refined, hasn’t been formally presented to Anthem and WellPoint, and the companies would oppose it because it wouldn’t bring a financial return to their shareholders, WellPoint spokesman Ken Ferber said Friday.

But along with a pledge by Anthem not to use money from California policyholders to fund potentially lucrative merger-related payouts to WellPoint executives, the health funding idea might raise regulatory hackles in other states. Insurance regulators have a duty to ensure that their states’ policyholders don’t end up paying for concessions that benefit only Californians, Sally McCarty, Indiana’s insurance commissioner, said Friday.

“We want to make sure Indiana policyholders aren’t harmed by any concessions given in California,” she said.

California provides about one-fourth of the 28 million members of Anthem and WellPoint and is the only state with a say in the merger that hasn’t approved it. The 21 million other members live primarily in 12 other states, including 1.9 million in Indiana.

McCarty said any deal Anthem and WellPoint make to fund special programs in California or exclude California policyholders from paying for $147 million to $356 million in compensation due WellPoint executives could amount to a “material change” in the merger conditions that Indiana and other states have approved or reviewed. Such a change could allow other regulators to reopen merger discussions with Anthem and WellPoint, McCarty said.

“We certainly don’t think it would be fair if it (the compensation to WellPoint executives) comes from Indiana policyholders,” McCarty said.

“Right now we haven’t established there is a problem,” she said, noting her staff is watching the California negotiations “very closely.” If Indiana decides to object to a provision in the California merger order, “what we would do I can’t tell you,” she said. “We would have to go back to the (regulatory) books and see what happens.”

Executives from WellPoint and Anthem met California regulators this week to discuss ideas for the companies to make an investment in health programs as part of getting approval to merge, WellPoint‘s Ferber said.

The investment would have to bring a return that benefits shareholders, unlike the $400 million proposal, he said, declining to be specific on what might be acceptable to the companies.

“This $400 million program has no validity,” he said. “This is not on the table.”

In talks with regulators so far, Anthem and WellPoint have agreed to numerous merger conditions. They include boosting California Blue Cross‘ reserves by 50 percent over the state’s minimum required level, keeping Blue Cross management in place in California, and not burdening the Blue Cross unit with debt of the parent company.

Having Anthem and WellPoint give $400 million to the California Healthy Families Program was first suggested last month by the Latino Coalition for Healthy Californians, a nonprofit special interest group.

“It’s a proposal that is viable and is being looked at seriously” by regulators, said Saeed Ali, chief of staff for Assemblyman Manny Diaz, D-San Jose, chairman of a legislative committee set up to scrutinize the proposed takeover of California’s largest health benefits company by Indianapolis-based Anthem.

Staff from the committee and two California agencies with regulatory say on the merger were briefed Tuesday on the proposal by a University of California researcher, Gil Ojeda, who is analyzing it for the committee.

Ojeda said he was asked to “flesh out” the proposal by the middle of next week, looking at such things as whether it can be carried out under existing laws.

The proposal is likely to be discussed at a third California public hearing on the merger, set for Friday by the Department of Managed Health Care.

It’s not attractive enough to the Foundation for Taxpayer and Consumer Rights, a nonprofit California group that has raised objections to the merger.

“$400 million is chump change. We need more,” said Jerry Flanagan, the group’s consumer advocate. WellPoint‘s Blue Cross unit has reserves of $1 billion that regulators should aim to keep in the state under a takeover by Anthem, he said.

California in the past month has scrutinized the proposed takeover more closely than any other state, prompting a widening of the arbitrage profit, or “spread,” built into WellPoint‘s stock price.

Since California Insurance Commissioner John Garamendi issued a news release more than two weeks ago criticizing the executive compensation and other aspects of the deal, the spread has jumped from a range of 60 cents to 80 cents, to $1.30 to $1.40.

The spread is the difference between WellPoint‘s currently traded stock price and the per-share takeover price offered by Anthem.  Arbitragers closely track mergers to look for chances to profit on spreads.

The current spread indicates that some Wall Street watchers are nervous about the California negotiations’ delaying the deal.
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Contact Star reporter Jeff Swiatek at (317) 444-6483 or [email protected]