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The Indianapolis Star

Politics or protecting policyholders?

As Anthem's merger stalls, different theories arise about the holdup

July 18, 2004

Only one barrier stands in the way of Indiana becoming home to the nation's largest health benefits company and one of the largest companies in the United States.

But what an obstacle it is: the state of California, comprising 35.5 million people, 156 million square miles, a complex insurance regulatory process and one ambitious insurance commissioner.

State officials have yet to approve the $16.4 billion merger of Indianapolis-based Anthem and WellPoint Health Networks of Thousand Oaks, Calif.

The reasons and reaction to the deal's holding pattern range from pleas for calm -- this is the simply the way California does business -- to worries that John Garamendi, the Democrat insurance commissioner who must sign off on the deal, is looking to grab attention for an intended run for governor in 2006.

Garamendi, 59, the elected head of the state's department of insurance, has become the public face of the opposition.

The former state legislator proclaimed at the state's first public hearing on the merger in June that it "is not in the best interests of California."

He also blasted the $147 million to $356 million that WellPoint executives will reap in bonuses and severance payouts.

After Anthem promised not to use California policyholders' money to pay for the executive compensation, Garamendi demanded Anthem funnel about $400 million to a California program to give health coverage to the uninsured.

That had one Wall Street analyst, Patrick Hojlo of Credit Suisse First Boston, referring to "California's extortion attempt" in an investor report he sent out in July.

Even Jerry Flanagan, consumer advocate for the nonprofit Foundation for Taxpayer and Consumer Rights, which has questioned the merger's impact on policyholders, sees Garamendi's proposal as "more of a payoff to the state to get approval. It's not as if they (WellPoint or Anthem) owe that debt to the state."

Hojlo said he didn't think Garamendi will succeed in making Anthem fund the program for uninsured Californians. "There does not appear to be any legal precedent for him to impose such a stringent requirement on the deal," Hojlo wrote.

Garamendi, who briefly put his name in the running last summer as a replacement for ousted governor Gray Davis, "probably has his eye on a higher elected office. It's probably why he's become outspoken" on the Anthem-WellPoint deal," said Jack Kyser, chief economist for Los Angeles Economic Development Corp.

Not so, said Byron Tucker, Garamendi's communications director. "Anybody who has attended the hearings can tell the commissioner cares deeply about this issue, that this merger, which has steamrolled across the nation, offers consumers no benefits."

Reason to object

Garamendi's sensitivity to consumer reaction may be particularly acute because of the political fallout he faced in the early 1990s after allowing the seizure and sale of Executive Life, then a major California pension and annuity insurer.

The French buyers turned out to be fronts for a French government-backed company, which profited from selling junk bonds belonging to Executive Life. Garamendi was accused of not protecting the interests of the thousands of people who had Executive Life annuities.

Another reason for California's close scrutiny stems from the large numbers of its residents -- about 60 percent -- who are enrolled in health maintenance organizations, a form of health insurance plan that controls its members' choices of doctors and hospitals and other health care decisions more closely than looser-structured plans do.

Unexpected opposition?

So many Californians are covered by HMOs that the state has set up a separate regulatory body for them, the Department of Managed Health Care, whose director was appointed by Republican Gov. Arnold Schwarzenegger. The managed care agency also has yet to rule on the merger.

For his part, Schwarzenegger has been a nonentity in the merger talks. His media office simply refers calls about the merger to the Department of Managed Health Care.

Gil Ojeda, director of the California Program on Access to Care, a health care advisory arm of the University of California, believes Anthem and WellPoint underestimated the resistance they would meet in California. Approvals breeze through in nine other states and Puerto Rico.

"They didn't understand what they were getting into," he said. "They assumed the DOI (Department of Insurance) was not going to be a player in the process."

WellPoint spokesman Ken Ferber denies WellPoint misunderstood the degree of scrutiny coming from its home state regulators.

"There were no surprises," he said. The slower approval process is due to the fact that "California is one of the most highly regulated states in health care in the nation," he said.

Some believe old rivals of WellPoint also may be using the merger to even scores.

Among the merger's most fervid critics is the California Medical Association, which has a pending lawsuit against WellPoint and other large insurers over alleged underpayment of doctor reimbursements and other issues.

WellPoint has had "bumpy relations with (health care) providers" in California in the past and they may view the merger as "one last chance to take a whack at (WellPoint Chief Executive) Leonard Schaeffer and WellPoint," said Baumgarten, the health care consultant.

But Ferber said WellPoint and Anthem "don't pay attention to a lot of the political noise" surrounding the merger proposal -- even though it threatens to delay the closing of the deal beyond Anthem's midyear target.

The fact that the two regulatory agencies -- one headed by a Democrat, the other by a Republican appointee --- are negotiating together with Anthem and WellPoint shows that "there's no (political) partisanship in the regulatory process at all," Ferber said.

Neither agency has indicated when it will render an opinion on the merger. But Anthem and WellPoint officials said they remain optimistic.

"We continue to believe we can resolve this to everyone's satisfaction," said Anthem spokesman Ed West.
Contact reporters Bill Theobald at (317) 444-6602 or [email protected]