Garamendi Questions Costs of Deal to Buy Wellpoint

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Los Angeles Times

State Insurance Commissioner John Garamendi said Friday that he wouldn’t support Anthem Inc.’s $16-billion acquisition of the parent of Blue Cross of California unless the Indiana company spends hundreds of millions of dollars on healthcare programs for California’s poor.

At a hearing on the transaction in Los Angeles, Garamendi said that without such an investment, Anthem’s purchase of Thousand Oaks-based WellPoint Health Systems Inc. offered no benefit to Californians.

Garamendi doesn’t have the authority to block the entire deal, which would create the nation’s largest HMO provider. But he can deny Indianapolis-based Anthem’s acquisition of WellPoint‘s Blue Cross Life & Health Insurance Co. subsidiary, thus complicating things.

The Los Angeles hearing, organized by Garamendi, was the latest development in what has become a highly controversial business deal. Opposition to it has coalesced around concerns that Blue Cross premiums paid by Californians would be used by Anthem to help finance the buyout — including retention bonuses and severance pay for nearly 300 WellPoint executives that could cost an estimated $147 million to $356 million.

Garamendi said he couldn’t endorse the acquisition unless Anthem agreed to invest in health programs for the poor an amount equal to the compensation paid to WellPoint executives. Garamendi said he believed the compensation figure could hit $600 million when stock options held by WellPoint executives were included — a potential windfall the insurance commissioner called “reprehensible.”

Anthem and WellPoint executives at the hearing disputed Garamendi’s figures.

Anthem Chief Executive Larry Glasscock said cash compensation paid to departng WellPoint executives wasn’t likely to exceed $200 million. A compensation expert hired by WellPoint, George Paulin of Los Angeles, said the package was similar to those for executives at other California companies.

Glasscock pledged that Californians would not pay for the acquisition through higher premiums.

In an interview, WellPoint General Counsel Thomas Geiser said the company was in talks with state insurance regulators about investing in health services for the poor. He said one option that was being discussed was funding clinics operated by nonprofit organizations or by government agencies.

Geiser said no final decision had been made, and Glasscock said it was premature to discuss such investments.

Anthem and WellPoint shareholders are set to vote on the proposed acquisition Monday. The state Department of Managed Health Care, which has yet to sign off on the deal, has scheduled a hearing on the issue for July 9.

Friday’s hearing attracted about 150 people. Before it began, members of consumer organizations gathered around a roast pig on a platter. Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights said it was a symbol of how “HMO executives feed at the trough.”

Anthem executives tried to reassure regulators that the deal was in the best interest of Californians. Glasscock said that Anthem would fund the transaction in part through $250 million in annual savings that would be achieved when the companies were combined. For example, he said, the united companies wouldn’t need two headquarters staffs.

Anthem also said that it would not drop severely ill customers from its Blue Cross programs, a practice known as cherry-picking. The company said that if it discontinued any insurance program during the next three years, enrollees would be accepted into other programs without regard to their health status.

Nettie Hoge, deputy insurance commissioner, later said the department was satisfied that Anthem wouldn’t weed out the sickest patients to reduce
post-purchase expenses.

Anthem said it would impose certain solvency and liquidity requirements on Blue Cross Life that would restrict the subsidiary’s ability to distribute cash to Anthem. However, the restrictions are far less stringent than WellPoint‘s current practices.

Garamendi challenged Anthem’s proposal and said it would enable the insurance company to use $400 million of WellPoint‘s cash to pay for the deal.

Geiser pledged to build a “titanium wall” around Blue Cross funds so that no portion of it would go to finance the acquisition or to fund severance packages for executives. Anthem’s proposal also allows the state Department of Insurance to audit Blue Cross Life.

Separately Friday, State Treasurer Phil Angelides said that public pension funds representing about $530 million of stock in Wellpoint and Anthem planned to withhold their votes on the transaction.

Among the groups are the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the New York State Common Retirement Fund, the New York State Teachers’ Retirement System, the Los Angeles County Employees’ Retirement System and the Illinois State Board of Investment.
Times staff writer Marc Lifsher in Sacramento contributed to this report.

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