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by Marie Suszynski
Jul 12, 2004

SACRAMENTO, Calif. (BestWire) - Without a director present and no questions from the public, a consumer group has called the July 9 public meeting by the California Department of Managed Health Care to discuss the proposed $16.4 billion merger of WellPoint Health Networks Inc. and Anthem Inc. a "sham."

The Department of Managed Health Care, which hasn't come out with concerns about the merger as the Department of Insurance has, reviewed its regulatory authority over the deal during the public meeting on July 9. Under the Knox-Keene Health Care Act, the department has broad power to regulate health plans and ensure policyholders' interests are protected, the department said in meeting notes released before the meeting.

The department said some "critical functions" of Blue Cross, which is a company of WellPoint, should remain in the state, which Blue Cross has agreed to follow. The functions include that of the medical director to monitor the appropriate scope of clinical services; clinical decision-making and policy, including determining formularies; the prior authorization and referral process;grievance processes, including independent medical review; and the administration of the provider dispute resolution mechanism.

Ken Ferber, a spokesman for WellPoint called the meeting "procedural and very informative" because it was done in an apolitical environment.

However, the Foundation for Taxpayer and Consumer Rights called the meeting a "sham" and called on legislators and regulators to derail the deal. The group criticized the department's director, Cindy Ehnes, for not attending the meeting and said the state only discussed preset agenda items and didn't take questions from the public.

"There was very little public about the public meeting," said Jerry Flanagan, a spokesman for the foundation. Ehnes was appointed director of the department in March by Gov. Arnold Schwarzenegger and hasn't attended any of the three public meetings and hearings that were held about the merger, Flanagan said. "The public should have the opportunity to ask questions to the director and have the decision-maker hear those concerns," he said.

The foundation is alleging that Blue Cross' special tax status has allowed it to avoid paying about $500 million in gross premium taxes since 1994.

In response, WellPoint said the foundation is grossly misrepresenting the tax status of Blue Cross. In a letter to Sen. Deborah Ortiz, WellPoint said Blue Cross has paid all required state taxes since 1996, and its tax payments have been audited by the state. In 2003, Blue Cross and BC Life paid $89.6 million in taxes to California, which WellPoint said it believed was far more than any other health insurance company operating in the state. Over the past five years, the company paid more than $299.4 million in state income taxes and premium taxes.

The foundation also is calling on the department to release some 500 pages of documents related to the merger, Flanagan said.

Now that both regulatory agencies have held a public hearing or meeting on the merger, it's a waiting game for the companies as two California regulators--Ehnes and Insurance Commissioner John Garamendi--make a decision on the deal.

WellPoint is working on coming to an agreement in principle on an investment program to benefit a group of Californians, which has been requested by Garamendi, who has expressed concerns about the deal's executive compensation package.

Garamendi wants the company to invest an amount equal to the executive compensation, both stock and cash, for executives of WellPoint and its California companies, Blue Cross of California and Blue Cross Life & Health Insurance Co. The amount is to be determined, but he said it would be somewhere between $200 million and $600 million, which would be enough to insure 170,000
to 577,000 children through the state's Healthy Families program (BestWire, July 6, 2004).

WellPoint is discussing putting forward a percentage of its investment portfolio for the program, Ferber said. However, the company wants the investment to be prudent and responsible, able to make a return on the investment, not harmful to the company's shareholders and one that wouldn't create a concern of the company's fiduciary responsibilities under the law, he said.

Subsidiaries of WellPoint (NYSE: WLP) are rated A (Excellent), A- (Excellent) and B++ (Very Good) by A.M. Best Co., while subsidiaries of Anthem (NYSE: ATH) are rated A and A-.

On the afternoon of July 12, WellPoint's stock was trading at $109.95 a share, up 0.88% from the previous close. Anthem's stock was trading at $88.41 a share, up 1.10% from the previous close.