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Los Angeles Times

Concern Voiced on HMO Merger;

Proposed takeover of WellPoint by Anthem 'is not in the best interest' of Californians, state insurance chief says.

by Robert Salladay, Times Staff Writer
June 10, 2004

SACRAMENTO -- Insurance Commissioner John Garamendi said Wednesday that an acquisition that would affect millions of Blue Cross of California customers "is not in the best interest" of the state and indicated that he might withhold his approval.

Garamendi doesn't have the ability to block the proposed $15.5-billion purchase by Anthem Inc. of WellPoint Health Networks Inc., which runs Blue Cross of California.

But Garamendi could deny Indianapolis-based Anthem's request to buy Blue Cross Life & Health Insurance Co., a subsidiary of Thousand Oaks-based WellPoint, and that could complicate the deal.

During a hearing before a joint Assembly and Senate committee examining the deal, Garamendi said he was concerned that the combined company could engage in "cherry-picking" to weed out severely ill customers, bleed Blue Cross of about $1 billion in assets and damage the bottom line by paying its top healthcare executives hundreds of millions of dollars in stock and cash.

"It's a potential that this merger may not pass muster," Garamendi said. "It may not."

Both Anthem and WellPoint strenuously denied that the deal would change anything in California except possibly WellPoint's top managers and the letterhead.

They said that the combined company's 26 million customers wouldn't see premium increases and that executive compensation packages -- estimated at $356 million if 293 WellPoint executives were forced out within three years -- wouldn't change the bottom line of Blue Cross of California because the compensation would be paid by Anthem.

The goal, the two companies said, was to reduce administrative and computer costs. But Blue Cross of California would remain the same because Anthem has no customers in California, they said -- adding that in order to keep the Blue Cross license, they would have to keep Blue standards the same.

"The benefits and services Blue Cross of California customers will have the day after the merger will be the same as the day before," said Larry Glasscock, chairman and chief executive of Anthem. "The merger will not change any existing contract terms or benefit packages."

Garamendi said he would evaluate the deal in terms of how it would affect the insurance company, but he also wanted to look at the entire merger with skepticism -- "if it is premised primarily on increasing the already significant wealth of a privileged few."

He said he would make a decision soon.

State Sen. Jackie Speier (D-Hillsborough) said the executive compensation package was "obscene."

Company representatives countered that the overall payout would be in line with comparative large-company mergers and only about 2.2% of the total multibillion-dollar deal itself.

The joint Assembly-Senate hearing was organized after complaints that the Department of Managed Health Care, which is controlled by the Schwarzenegger administration, was planning to approve the acquisition without public oversight.

On Wednesday, HMO regulators indicated that they were open to holding their own oversight hearing, although their authority is limited to reviewing the merger and its effect on customers.

"This is a publicly traded corporation," Cindy Ehnes, director of the Department of Managed Health Care, said earlier this week. "We are trying to make sure in this transaction ... that we have tended to our concern that money not be moved upstream."

At the joint hearing, Speier said that if the Schwarzenegger administration was "committed to true sunshine" in government, it should have another hearing.

Consumer activists also said they were dissatisfied.

"Gov. Schwarzenegger and state regulators have failed to adequately address serious questions about how the proposed merger will affect patient care," said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights. "The merger must be delayed until those questions are answered."
Times staff writer Lisa Girion contributed to this report.