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Indianapolis Star

Anthem talks disappointing, regulator says

California insurance commissioner lays out conditions for his OK of WellPoint takeover.

by Jeff Swiatek
July 7, 2004

California's insurance commissioner laid down his conditions Tuesday for approving Anthem Inc.'s takeover of WellPoint Health Networks, calling the companies' response to his demands so far "disappointing."

John Garamendi said he doesn't want the two companies' policyholders to have to pay for $4 billion that Anthem will borrow to buy WellPoint. He also wants the companies to make an investment or donation of $200 million to $600 million to uninsured Californians, an amount equal to what WellPoint executives individually will reap from the merger.

"Anthem has said California policyholders are not going to pay for this deal. My question is, 'Show me.' What they've offered is disappointing," Garamendi said in a 50-minute news conference he called to voice his concerns about the proposed $16.4 billion deal.

Garamendi's agency is one of two regulatory bodies in California still considering whether to approve the deal, which would give Indianapolis-based Anthem control of California's largest health benefits company. Its more than 7 million members would make up a fourth of the combined companies' business.

All other states with a regulatory say in the merger have approved it.

Anthem responded to Garamendi's comments with a short statement saying, "We'll continue to work with the Department of Insurance and the Department of Managed Health Care to . . . finalize (the merger) to everyone's mutual satisfaction."

But some analysts and consumer groups said Garamendi's comments may indicate the state's approval could become harder to get.

The commissioner "has taken a pretty aggressive stance" against the merger, said Gerald Kominski, professor of health services at University of California at Los Angeles. "The longer it drags out . . . it seems like the state and insurance commissioner in a sense are going to get the upper hand" in negotiations with Anthem and WellPoint, he said.

Regulatory scrutiny of insurance mergers is increasing in many states as regulators and politicians realize that what happens to private health insurers can have "spillover effects" on government health programs for the poor, uninsured and elderly, said Kominski, who serves as associate director of UCLA's Center for Health Policy Research.

Garamendi's news conference "feels to me like he's getting closer to saying no to the deal altogether," said Jerry Flanagan, consumer advocate at Foundation for Taxpayer and Consumer Rights, a nonprofit consumer group that has opposed terms of the merger.

Garamendi said the value of merger-related bonuses, severance payouts and stock options that 293 WellPoint executives are in line to collect could pay for comprehensive health insurance benefits for one year for 170,000 to 577,000 children under the California Healthy Families Program.

Garamendi's comments came three days before the California Department of Managed Health Care holds a public hearing on the merger in Sacramento, and a week after shareholders of both companies overwhelmingly approved the deal.

At two earlier public hearings, Garamendi voiced his skepticism about the combination, saying it could saddle California's WellPoint policyholders with new merger debt and that the executive compensation is excessive.

The merger brings "no discernible benefit to policyholders in this state," he said. "My approval is resting solely on Anthem-WellPoint restructuring this deal in such a way as to benefit California policyholders."

Announced last October, the merger calls for Anthem to buy WellPoint by exchanging one share of stock for every WellPoint share, plus $23.80 in cash. The deal would create the nation's largest health benefits firm, based in Indianapolis.

Garamendi's say in the merger is confined to Anthem's application to take over WellPoint's BC Life & Health Insurance Co., which represents about 10 percent of WellPoint's business in California. Most of WellPoint's business in the state comes from its Blue Cross unit, which is regulated by the Department of Managed Health Care.

The commissioner said he won't dictate a specific program that he wants Anthem and WellPoint to support. The Healthy Families Program has been cited as a possible recipient in one proposal being considered by a special legislative committee scrutinizing the impact of the merger on Californians.

The lack of agreement between California regulators and the companies led to a near doubling Tuesday, to $2.40 a share, in the arbitrage profit, or "spread," built into WellPoint's stock price. This indicates growing doubt about the merger.

Investors seeking to profit on the difference between WellPoint's current price and the per-share takeover price by Anthem now could see twice as much profit as they were in line to get last week if the transaction goes through.

Anthem has said it looks to complete the merger by mid-year.
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