State leery of health plan deal;

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WellPoint executives could walk away with millions of dollars if Anthem merger OKd

The San Francisco Chronicle

Executives of WellPoint Health Networks Inc. could receive a combined $147 million to $356 million in special payments after the health plan is acquired by Anthem Inc., company documents filed with state regulators show.

The hefty payouts — which would come in the form of either bonuses or severance pay to 293 senior WellPoint executives — is one factor prompting state officials to scrutinize the proposed $16 billion takeover. California is the last of 11 states that must approve the deal to give it the go-ahead.

The merger of WellPoint, which is the parent company of Blue Cross of California and is based in Woodland Hills (Los Angeles County), and the smaller Indianapolis company would create the country’s largest health insurer. In addition to the pay issue, state regulators are concerned about the impact of such a large HMO on consumers.

For their part, consumer groups are up in arms over the money WellPoint executives stand to collect.

“It’s just appalling,” said Jerry Flanagan, health advocate with the Foundation for Taxpayer and Consumer Rights, a Santa Monica group that on Tuesday obtained merger documents filed with the state Department of Managed Health Care. “It leaves less money left over to treat the sick.”

California, with about 6.7 million Blue Cross members, will be the combined company’s largest market. Georgia signed off on the acquisition Tuesday, leaving California as the only state that hasn’t yet approved it.

The WellPoint executive pay package could range from $147 million to $356 million, depending on how many people leave as a result of the merger. The payout will be smaller if more executives stay and collect bonuses for completing the operation. It will be larger if more executives leave and receive severance packages.

The filing also notes that WellPoint executives hold unvested stock options recently valued at $251 million.

“Where does all the money come from to pay these huge bonuses? Ultimately, of course, the consumer pays for such excesses through higher premiums or lower payments to providers, which can translate into reduced benefits and degradation in quality,” state Insurance Commissioner John Garamendi said in a statement Wednesday.

WellPoint downplayed the size of the payments. Spokesman Ken Ferber said the total package would probably be closer to the low end of the spectrum because he expects most WellPoint executives to stay with the company.

Although the new company will be based in Indianapolis, most executives won’t have to move to Indiana. Blue Cross of California will remain in the state.

The only certain departure is WellPoint‘s chief executive, Leonard Schaeffer. He will receive $30.5 million in severance and $10.5 million in retirement payments, Ferber said.

Schaeffer will also benefit from the rise in WellPoint‘s stock price that followed announcement of the company’s acquisition. According to the filings, Schaeffer’s shares were valued at $96 million, and his options were worth $153 million as of April 21.

Ferber said the company’s bonus and severance agreements were established in 1994 and published most recently in the 2002 proxy statement.

State regulators expressed concern Wednesday that the compensation package could push Blue Cross over regulatory lines when it comes to administrative expenses.

“We have told them up front we don’t want them to come to us a year from now and tell us (their) administrative costs have skyrocketed due to his executive compensation package,” said Kevin Donohue, senior counsel for the state Department of Managed Health Care.

The department does not have direct control over the WellPoint-Anthem merger, but it can step in if it believes state laws are being violated when it comes to the operations of Blue Cross of California.

Donohue said Blue Cross‘ administrative costs average about 12 percent. He said administrative costs exceeding 15 percent would trigger a red light, but the department could act earlier to force the company to reduce the costs.

WellPoint‘s Ferber said the acquisition will have no impact on California operations because the compensation from the merger comes entirely out of Anthem’s pockets.

Both WellPoint and Anthem will hold shareholder meetings on June 28.
WellPoint Health Networks Inc.
Headquarters: Woodland Hills (Los Angeles County)
Membership (March): 15.4 million
Chief executive: Leonard Schaeffer
2003 revenue: $20.4 billion
2003 net income: $935.2 million
2003 CEO compensation: $28 million, including $14.5 million from exercising
stock options.

Anthem Inc.
Headquarters: Indianapolis
Membership (March): 12.5 million
Chief executive: Larry Glasscock
2003 revenue: $16.8 billion
2003 net income: $774.3 million
2003 CEO compensation: $25 million in cash, plus a grant of options to buy

Sources: WellPoint Health Networks Inc., Anthem Inc., American Medical Association.
E-mail Victoria Colliver at [email protected]

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