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Modern Healthcare

Blues boom; Anthem, WellPoint deal proceeds despite challenges

Consumer Group challenges merger

by Laura B. Benko
January 12, 2004

The proposed merger of Blues plan titans Anthem and WellPoint Health Networks is moving along slowly but surely, even as worried providers, lawmakers and investors continue to mount challenges to thwart the controversial deal.

Officials at both companies said Anthem's $16.4 billion acquisition of WellPoint-which would create the nation's largest for-profit health insurer with 26 million members and $27 billion in assets-is on track to close by midyear as planned (Nov. 3, 2003, p. 6). The mega-merger, first announced in late October2003, requires formal approval from federal and state regulators, as well as from both companies' shareholders and the Blue Cross and Blue Shield Association.

"We're in the process of completing all of our filings,'' said Deborah New, spokeswoman for Indianapolis-based Anthem. ''It's still early in the process, but we're confident we'll obtain all the necessary approvals'' on time.

The insurers expect to complete their filing with the Federal Trade Commission and the U.S. Justice Department by midmonth. Then they plan to turn their attention to an array of state paperwork. The companies must seek ''change of control'' approval from Puerto Rico and each of the nine states where WellPoint operates under the Blues trademark or its Unicare and HealthLink
brands. They must also file general notifications in at least nine other states.

''Obviously, it's taking a little longer than other deals we've done,'' said Ken Ferber, spokesman for Thousand Oaks, Calif.-based WellPoint, which closed on its $906 million acquisition of 800,000-member Cobalt Corp. in September 2003 after less than four months. ''But we're right on schedule.''

Only after all state and federal approvals are secured will the insurers seek a formal blessing from their shareholders, Ferber said. No date has yet been scheduled for a shareholder vote.

That process could be complicated, however, by a class-action lawsuit filed in November 2003 on behalf of WellPoint shareholders that threatens to torpedo the deal unless the final merger agreement is overhauled to investors' satisfaction.

The lawsuit, filed in Superior Court of Ventura County, Calif., claims that WellPoint's board breached its fiduciary duties by approving the merger while in possession of nonpublic information about the insurer's third-quarter results. WellPoint released its quarterly earnings-reporting a 17% increase in net income to $246 million, or $1.68 per share-on Oct. 27, 2003, the same day Anthem announced its plan to acquire the company.

The lawsuit seeks to block the merger unless WellPoint rescinds the terms of the current agreement and ''implements a process for obtaining the highest possible price for stockholders,'' according to WellPoint's third-quarter report filed with the Securities and Exchange Commission last month. The current deal calls for Anthem to pay WellPoint stockholders $23.80 per share in cash plus one Anthem common share for each WellPoint share held.

Lawyers at Milberg Weiss Bershad Hynes & Lerach, which filed the lawsuit, didnot return phone calls seeking comment last week. Ferber declined to comment, saying the insurer was still reviewing the lawsuit.

Meanwhile, the Union of American Physicians and Dentists has urged California Attorney General Bill Lockyer to launch an investigation into the merger, calling it ''a perfect storm for inflation of healthcare costs.'' Anthem and WellPoint have said the deal would lead to better services and greater efficiency, but critics have said it could limit consumer choice and lead to higher premiums if the new publicly traded insurance giant puts shareholder interests over patient care.

''The new emphasis will be profit, profit, profit, not healthcare,'' union President Robert Weinmann wrote in a Nov. 13, 2003 letter to Lockyer. ''This acquisition and other acquisitions or mergers of this kind are bad public policy, violate the spirit of antitrust, and make the usual and customary use of the word 'greed' seem like an understatement.''

The 5,000-doctor union, which also questioned what it called the ''bloated'' $135 million compensation package earmarked for WellPoint Chief Executive Officer Leonard Schaeffer, echoed concerns voiced by the Foundation for Taxpayer and Consumer Rights, which in November 2003 called on the FTC to investigate the merger on the grounds that it would unfairly enrich executives at the expense of members. The FTC has not yet responded.

A similar probe helped derail WellPoint's planned $1.37 billion acquisition and conversion of not-for-profit CareFirst, Owings Mills, Md., last year. Maryland regulators blocked the deal after determining, among other things, that CareFirst CEO William Jews stood to receive $39.4 million as part of the transaction.

Several other consumer and provider groups, including the American Medical Association, and members of Congress have also sent letters to the FTC, urging the commission to ensure that the merger would not harm consumers or spark a flurry of Blues plan conversions. ''We are concerned that the combining of the financial assets and market power of Anthem-WellPoint would further increase consolidation and make it even more difficult for individuals to have access to affordable health insurance,'' four Democrats on the House Ways and Means Committee's health subcommittee wrote in a Nov. 6, 2003 letter.

The Blues association, which has approved a number of Blues plan mergers and conversions in recent years, has yet to weigh in on the matter. A spokesman for the trade group said he did not know when the deal would be reviewed.

Anthem and WellPoint have set a ''walk-away'' date of Nov. 30, before which either party can choose to back out of the deal if it has not yet closed. The defector would face a termination fee of $550 million, or 3.35% of the purchase price.