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Calif. hearings may stall WellPoint-Anthem deal

by Kim Dixon
June 10, 2004

CHICAGO, June 10 (Reuters) - California politics may stall but will not likely kill health insurer Anthem Inc.'s (ATH.N: Quote, Profile, Research) $16 billion bid to buy rival WellPoint Health Networks Inc. (WLP.N: Quote, Profile, Research) , analysts said.

Some lawmakers and other critics of the deal in California this week blasted big pay packages for executives and worried about escalating premiums from the deal, which if approved will create the biggest U.S. health insurance company with 27 million members.

At a five-hour legislative hearing this week in Sacramento, the state's insurance commissioner worried that the new company would neglect treating the poor and raise premiums to afford high pay to executives.

"We face a multibillion transaction that will result in extraordinary financial benefits for a handful of managers and directors and is bound to change the status quo with regard to insured Californians," insurance commissioner John Garamendi said.

If the deal goes through, executives at WellPoint, the first of a handful of Blue Cross plans that have gone public in recent years, may receive between $150 million and $350 million. Those funds represent either severance for those who leave or retention bonuses for those who stay on, according to documents obtained by the Foundation for Taxpayer and Consumer Rights, a public interest group.

Managed health care companies have been consolidating to build membership, as job growth lags the economic recovery in the United States.


Experts have said the deal would pass regulatory muster because in general there is little overlap in the companies' geographic customer markets.

California is the last of 11 states in which the companies operate which must approve the proposed merger. Federal officials have already cleared the deal, but California lawmakers can hold it up, analysts said.

"We think the California regulators will try to use the State Assembly hearings as political leverage over Anthem and WellPoint to extract concessions," Prudential analyst David Shove told investors in a research note.

For example, the state could require the newly merged company to only gradually raise premiums for individuals and small businesses, Shove said.

Anthem Chief Executive officer Larry Glasscock, responding to the criticism about executive pay, told the panel that the company expects to retain 280 executives out of the 290 or so that could qualify for those payments.

But Jerry Flanagan, a spokesman for the consumer group, said $150 million would be the minimum paid out to WellPoint executives who choose to stay.

Critics hope the two California agencies that oversee managed health care and insurance, hold hearings, which would surely delay approval because company shareholders are set to vote on the deal on June 28.

"The merger should be delayed until these questions are answered," Flanagan said."It's becoming unlikely this will be worked out by the 28th."

Still, the political 'noise' is not likely to kill the deal, which the companies have said they expect to close in the middle of this year, Wall Street analysts said.

"I can't send an alarm bell right now," said Richard Foote, an analyst at Samuel Ramirez & Co. "In the event something goes wrong, I figure the companies will figure out some sort of legal structure to ultimately complete the deal."