California’s insurance commissioner Tuesday dropped his opposition to a merger forging the nation’s largest health plan after WellPoint Health Networks Inc. and Anthem Inc. pledged to spend $265 million on state health programs and promised not to raise premiums to finance the deal.
Insurance Commissioner John Garamendi‘s approval removed one of the last major stumbling blocks to the $16.5 billion merger, in limbo since July 23 when he became the only regulator in the nation to withhold his blessing.
“I can now say Californians will not pay for this merger. California will directly benefit,” Garamendi said at a news conference at a Los Angeles health clinic.
The merger between WellPoint, based in Thousand Oaks, and Anthem, based in Indianapolis, would create an insurer with combined revenues of approximately $37 billion a year and 28 million members nationwide, including 7 million in California.
Garamendi had denied the deal because he objected to what he termed “excessive” executive compensation packages totaling as much as $600 million and because he wanted assurances that nearly $4 billion in debt from the merger would not be paid by California patients.
To get a green light from Garamendi, the insurers agreed to invest $265 million in California health programs, including initiatives for community clinic construction, nurse education, and Medi-Cal and Healthy Families enrollment drives. Shares of both companies surged Tuesday. WellPoint closed up 8.5 percent and Anthem closed up 5.5 percent, both on the New York Stock Exchange.
But the deal is not yet done.
Regulators who previously approved the merger – including the head of California’s Department of Managed Health Care and insurance regulators in Missouri, Texas and Georgia – said they were reconsidering their position.
In Georgia, the only state so far to withdraw its approval of the deal, Insurance Commissioner John Oxendine said he was reviewing Garamendi’s terms to “determine the impact on Georgia consumers.”
Danny Saenz, deputy insurance commissioner in Texas, said he, too, was taking another look.
“The transaction seems to have changed significantly in terms of the dollar amount California has asked for,” he said.
Even in California, Garamendi’s settlement needs to pass muster with other regulators.
DMHC Director Cindy Ehnes approved the merger the same day Garamendi denied it. Now, she is reconsidering.
“Our requirements contain important prohibitions against… increasing executive compensation packages, unlike the deal Commissioner Garamendi has just announced,” Ehnes said.
Garamendi said any bonuses and buyouts that top $265 million would have to be matched “dollar for dollar” by an increased investment in state health programs. His deal would not cap executive payouts.
Anthem and WellPoint said they were meeting with regulators to address any new concerns.
In a prepared statement, Anthem’s president and chief executive Larry Glasscock also said the companies had dropped a lawsuit filed against Garamendi seeking to reverse his denial of the merger.
“We now look forward to the successful completion of the merger,” Glasscock said. He would head the post-merger company, to be called WellPoint and based in Indianapolis.
On Wall Street, analysts said they expected any additional resistance to the merger to come from states such as Georgia, where insurance regulators are elected, not appointed.
“I will be watching the states where, for political motives, you might expect elected regulators to make requests for concessions based on the terms Garamendi achieved,” said Charles Boorady, a managed care analyst with Smith Barney Equity Research.
In California, some consumer groups remained concerned that Garamendi had not eliminated executive compensation deals from the merger.
“Garamendi’s deal took from the rich to give to the poor, but company executives and Wall Street financers still got far more than they deserve,” said Jerry Flanagan, with the Foundation for Consumer and Taxpayer Rights.
It will take years to know whether consumers will benefit from a merger. No matter the outcome, Garamendi can use his handling of the deal to political advantage, said observers in California.
“If he went to court against these companies and lost, he could have come away with no money out of the deal,” said Jack Pitney, professor of government at Claremont McKenna College. “This probably isn’t a home run for him, but it’s a base hit.”
Added Sherry Bebitch Jeffe, a political scientist from the University of Southern California, “This builds a simple image of him as David doing battle against Goliath. It adds to the supply of images he can use as he moves toward what I assume could be a gubernatorial campaign in 2006.”
TERMS OF THE DEAL
California Insurance Commissioner John Garamendi approved amerger Tuesday between WellPoint Health Networks Inc. and Anthem Inc. that would create the nation’s largest health plan. In exchange, the companies will:
* Invest $200 million in health care projects in low-income communities. After 20 years, the companies would get back that money, plus any profits.
* Make $35 million in grants to community clinics.
* Give $15 million to finance nurse training at community colleges, which would be expected to train 2,500 new nurses over five years.
* Spend $15 million on marketing and enrollment efforts for the state’s Healthy Families and Medi-Cal health programs for the poor.