Schwarzenegger Administration Called On To Keep Tradition of HMO Regulators & Hold Hearing On Wellpoint Deal, Not Rubber Stamp Big Contributor’s Approval

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Santa Monica, CA — The Foundation for Taxpayer and Consumer Rights has requested that Governor Schwarzenegger’s HMO regulator hold hearings on the $15 billion acquisition of Wellpoint Health Networks by Anthem Inc. in keeping with a decade-long tradition of HMO oversight in the state.

Schwarzenegger’s Department of Managed Health Care is reportedly in the final stages of the merger approval process but has no plans to hold public hearings for the buyout by Indiana-based Anthem of the parent company of Blue Cross of California. Blue Cross and its executives have given the Governor’s various committees $92,400. Wellpoint is also a corporate client of the investment firm Dimensional Fund Advisors, which the Governor reports owning at least a $1 million share of on his economic interest statement. Wellpoint CEO Leonard Schaeffer will make up to $335 million depending upon what his stock options cost him.

“A governor elected to bring more sunshine to government should not break with tradition and deny the public the opportunity to question HMO executives that are his biggest contributors about how an out-of-state insurer will guarantee prompt benefits promised patients,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights. “HMO money should not be able to buy a rubber stamp on the biggest health plan merger in history.”

Below is text of Court’s letter to California Department of Managed Health Care Director Cindy Ehnes:

May 18, 2004

Cindy Ehnes
California Department of Managed Health Care
980 9th Street, Ste 2450
Sacramento, CA 95814

Dear Ms. Ehnes,

I am writing to request that, in keeping with the custom of the executive branch during the managed care era, you convene statewide hearings about whether the Department will grant approval in the acquisition of Wellpoint Health Networks by Anthem Inc.

Your predecessors who faced similar major acquisitions held statewide hearings and required material modifications to the deals in order to guarantee that health plan members continued to receive continuity of care, promised benefits and no disruption in service.

For example, Governor Pete Wilson’s Department of Corporations Director Keith Bishop convened extensive hearings on the Foundation Health-Health Systems International (Health Net) acquisition and the FHP-PacifiCare acquisition. In both cases the public testimony led Bishop to put certain conditions on the acquisitions to guarantee that members continued to receive high quality care and uninterrupted service. Similarly, hearings were held by the Department in March 1999 on the Aetna-Prudential merger. Yet your Department has not announced such a public decision making process on the Anthem-Wellpoint acquisition and its implications for Blue Cross of California members — even though deal poses an even greater threat to patients involved than the previous mergers for the reasons I describe below.

More troubling still are rumors from the capitol that Wellpoint, the parent company of Blue Cross of California which is a Department licensee, expects this deal to be rubberstamped by the Governor very soon and without the usual hearing process because the company and its executive are “close” to this Governor. Wellpoint and its top executives have contributed $92,400 to Governor Schwarzenegger’s committees. Wellpoint is also a major corporate client of Dimensional Fund Advisors, of which the Governor is purported to personally own more than a 25% share.

Due to the serious policy considerations outlined below, past precedent and this Administration’s pledge to have a more open government, I ask that hearings be scheduled immediately. This is the only way for doctors, patients, employers, nurses, other health plans and pharmacists to guide your decision making about approval of the acquisition so that you can use that opportunity to require any modifications to the deal that would prevent potential problems for continuity of patient care.

As you know, you are the only regulator with approval authority over a part of this acquisition that is asked to take into consideration not merely anti-trust considerations but the impact on the quality of and continuity of patient care. You simply cannot do this without hearing from those affected by these companies’ past and current practices. This is particularly vital since Anthem is a largely unknown player in California.

Outlined below are serious concerns raised by both companies’ practices that I believe must be addressed in this hearing process.

First, Wellpoint and Anthem have had significant problems in the past in terms of both delivering care and processing claims. Both companies owe the public and your office an explanation of how they will integrate and improve their arrangement of care and their payment processing so that there is no disruption to Blue Cross patients after the acquisition. For example, the types of questions that must be answered by Anthem and Wellpoint executives include: where will the administrative headquarters be centered, in California or elsewhere; which employees will be retained; which standards will be used for utilization review; will employees with familiarity with Wellpoint contracts be in charge; will new contract terms be imposed; will all benefit packages continue; will provider networks be restricted; how will computer systems be integrated?

The track records of both companies make it vital these questions be answered. The California Medical Association reports that Wellpoint has the worst record of physician payment of any health plan. Wellpoint also has the highest administrative and overhead cost to its operations — 27% of overall expenditures go to profit and administration. Wellpoint is the subject of unfair business practice cases by Catholic Health Care West over fraudulent billing practices; by doctors for underpayment (Bell v Blue Cross); and by patients for bait and switches on policy terms (Kavruck v. Blue Cross). Currently, a class action has been certified where the class is composed of individual attorneys covered under the state bar plan who were terminated effective January 1, 1998 because Wellpoint allegedly breached the covenant of good faith and fair dealing by ignoring certificates of coverage and disassembled groups to dump members illegally.

Anthem, for its part, is being sued in federal and state court by Connecticut doctors who say the company illegally reduced their reimbursements for treating patients. The allegations include delaying and denying payments, using such tactics as “down coding” claims to procedures that pay less, and “bundling” claims so the the plan doesn’t pay the full cost of more than one procedure done on a patient. The Connecticut Medical Society made these allegations.

According to the Indianapolis Star, the doctors “charged Anthem keeps claims payouts down by secretly setting targeted payout levels, then reprimanding claims processors who exceed them and paying a bonus to those who hit them. Doctors who are deemed ‘high utilizers’ of costly services to Anthem patients are terminated from Anthem’s preferred provider network, the lawsuit charges. Anthem also plays doctor, using secret internal guidelines that aren’t always medically based to decide whether medical procedures should be done, the lawsuit says. Anthem ‘has unfairly and deceptively employed an arsenal of acts and practices designed to delay, hinder, reduce and/or eliminate making payments to (Connecticut doctors),’ the lawsuit says.” ( Indianapolis Star, April 7, 2002) The charges about the way Anthem pays claims are reportedly based on information from whistleblowers who worked for the insurance company.

Before your Department approves this merger, Anthem must answer questions about these very serious charges and about what guidelines it will use for Wellpoint patients in California.

Another case that Anthem must publicly answer questions regarding is Dardinger, Exr., V. Anthem Blue Cross & Blue Shield Et Al. The case resulted in a $49 million punitive damage verdict against the plan which, as you know, requires a finding of malice. The executor of the patient’s estate brought action against Anthem to recover for breach of contract and the bad faith denial of a claim for intra-arterial chemotherapy (IAC) to treat metastatic brain tumors.

In addition, Anthem last year reached a $1.36 million dollar settlement in a class action lawsuit on behalf of Indiana policyholders. The suit alleged that the company’s Anthem policies refused to pay for skilled nursing care for the 69 plaintiffs, or their families, although their policies included stipulations for the coverage.

Moreover, as of last week the U.S. Department of Justice is looking into Anthem’s use of contracts that require doctors and hospitals to give it the lowest rates offered on patient services. In the past several months, federal officials have asked Indianapolis-area hospitals to provide copies of Anthem contracts with the lowest-cost guarantee, known as most-favored nation clauses. Officials also have questioned other insurance companies about whether the documents give Anthem an unfair business advantage. Over time, such arrangements limit competition or keep new insurers out, reducing choices.

No health plan with these type of allegations against it should be allowed to take over such a large book of business in California without answering to the public about the lessons its learned and the safeguards it has put in place to prevent similar abuses.

Another important question that needs to be addressed publicly by Anthem executives are how Anthem will take over Wellpoint’s obligations to treat members once cared for by MedPartners Provider Network, which, as you know, filed for bankruptcy after the Department was forced to seize the company for shaky finances. Anthem must continue to pay the higher costs associated with payments made to physician groups for continuity of care for Wellpoint members in MedPartners.

Finally, there are serious corporate governance and executive compensation issues that Anthem and Wellpoint executives must answer to the California public for.

Just last week CalPERS said that it would withhold votes from directors at five companies that allowed auditors to provide non-audit services. Anthem Inc. was one of those companies. Given the need for Californians to be assured of the financial information Anthem provides, executives at the company should be required to answer your questions about the integrity of its financial information and the extent of non-audit services provided by auditors.

Moreover, a great deal of money is at stake for those who currently pay premiums to Wellpoint. The company has lavished compensation on its executives and spends less on patient care compared to overhead than any other major health plan in the state — about 27% of its premiums go to administration, executive compensation and profit. The public has the right to ask Wellpoint and Anthem executives about the size of their compensation packages.

For example, depending upon the cost of Wellpoint CEO Leonard Schaeffer‘s stock options, he could be making as much as $335 million from this deal — an excessive amount that will lead to higher premiums, lower payments to doctors, and potential financial problems for the acquired company. (According to a Securities and Exchange Commission filing Schaeffer will receive 3.3 million shares of the combined company, plus an additional $78 million in cash. His total reported gain, not including salary, will be $116 million in cash plus the 3.3 million shares of WellPoint Inc., valued at about $257 million, for a total of $335 million.) In addition, many other big executives at Wellpoint are expected to reap windfalls off this deal and the public has a right to scrutinize the size of their parachutes too.

Given the Governor’s financial relationship with Wellpoint and its executives, who stand to make unprecedented gains from this acquisition, it is imperative that all these issues be aired publicly in hearings if the specter of impropriety and back-scratching is to be avoided. As I have outlined, there are many serious issues that Anthem and Wellpoint executives must answer. I look forward to working through those issues with you in the same public hearing process that has accompanied every other major health plan’s acquisition of another in recent history.”


Jamie Court

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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