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Los Angeles Daily News

WellPoint, Anthem union decried


CalPERS, Angelides denounce proposed merger

by Evan Pondel
June 15, 2004

The nation's largest public pension fund said Monday that it would oppose the proposed merger of WellPoint Health Networks and Anthem Inc., citing excessive pay packages that compromise shareholder value.

The California Public Employees' Retirement System, which owns almost 722,000 shares of Thousand Oaks-based WellPoint, questions the hundreds of millions of dollars that executives would supposedly reap should Anthem and WellPoint combine. CalPERS announced its position at a press conference Monday in Sacramento with state Treasurer Phil Angelides, who also denounced the $16 billion marriage of the two companies.

Sean Harrigan, president of the CalPERS Board of Administration, characterized the deal as "the worst example of pigs at the trough.

"We are extremely troubled by this proposed merger; it is the height of irresponsibility," he said.

Though CalPERS owns less than 1 percent of WellPoint's total outstanding shares, the pension fund is attempting to set a precedent before shareholders vote on the transaction June 28. CalPERS' concern stems from the potential payouts to WellPoint executives under the transaction's "officer change in control" plan. WellPoint Chief Executive Leonard Schaeffer would be entitled to $76 million in severance, stock options and enhanced retirement benefits if the deal goes through, according to analysis by CalPERS.

"This is egregious by any account, and it will come out of the pockets of health care consumers and shareholders," Angelides said at the press conference.

The California Department of Managed Health Care released a document last week that illuminated some of the compensation packages WellPoint executives could receive should the merger win final approval.

Ken Ferber, a spokesman for WellPoint, said the rules governing compensation packages were established 10 years ago and "the company made it public back then.

"We've talked about it at every investors meeting, and we would have appreciated it if the treasurer told us about his concerns before the press conference," Ferber said.

In a letter written to Angelides hours after the press conference, WellPoint highlighted several details surrounding the transaction. "We would like to add some clarity to the discussion," the letter said. "Anthem, not California health insurance customers, will fund any payouts to WellPoint executives as a result of the merger."

Other issues mentioned in the letter include the expectation of Indiana-based Anthem to retain most of WellPoint executives and that Blue Cross of California will remain financially strong under Anthem's leadership.

The Department of Managed Health Care has the ability to block the proposed transaction if WellPoint's California-based subsidiary Blue Cross is jeopardized. So far, the deal has received 10 out of 11 required state insurance regulatory approvals with only California remaining.

CalPERS is urging the Department of Managed Health care to schedule a public hearing on the merger. Harrigan said the agency should approve the deal only if the "excessive executive compensation packages are eliminated."

Aside from lofty compensation packages, the transaction is drawing concern that it will hurt the patient. If combined, WellPoint and Anthem could set the bar for health care premiums nationwide.

"And then premiums will be driven up to pay for executives' golden parachutes. That means there will be less money around to provide for patient care," said Jerry Flanagan, lead health care advocate for the Foundation for Taxpayer and Consumer Rights.

Despite these woes, Wall Street remains confident the deal will survive. Richard Foote, analyst with Samuel A. Ramirez & Co. in New York, said the information surfacing could weigh moderately on WellPoint shares.

"But I think resoundingly shareholders will approve the deal," he said.

WellPoint shares declined $1.11 to close at $112.60 Monday on the New York Stock Exchange.

Evan Pondel, (818) 713-3662 evan.pondel@dailynews.com