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Sacramento Bee

Garamendi won't let health insurers merge

by Lisa Rapaport -- Bee Staff Writer
Jul 25, 2004

California Insurance Commissioner John Garamendi on Friday rejected a $16.4 billion merger to create the nation's largest health insurer, saying the proposal was bad for California consumers.

Garamendi's decision was the final regulatory step required for the merger between WellPoint Health Networks Inc. and Anthem Inc., leaving company officials to either challenge his decision in court or try to structure a new merger plan.

The giant merger was already approved by shareholders, the U.S. Justice Department and officials in 10 of 11 states where clearance from insurance regulators was needed. It was also cleared Friday morning by the California Department of Managed Health Care.

"I cannot in good conscience approve this transaction. I do not believe it is in the best interests of California consumers, and I am therefore denying it," Garamendi said just hours after the deal was approved by the DMHC.

Garamendi said he turned down the deal because it would be financed by millions of dollars in premiums paid by California patients and he believes it overcompensates top executives.

"It's shocking that the insurance commissioner, who has control over only 4 percent of our combined business (revenue) in California, could take the position he did," said Leonard Schaeffer, chief executive of Thousand Oaks-based WellPoint.

Larry Glasscock, who heads Anthem, based in Indianapolis, added, "We are looking at our options up to and including litigation."

A source familiar with the companies' deliberations said the insurers plan to file suit against Garamendi next week in Los Angeles Superior Court, alleging that he overstepped his regulatory authority by denying the deal.

To pass muster with DMHC, the companies agreed to invest $100 million in expanding access to health care in rural and poor communities; to spend $17 million bringing quality scores on the state's HMO report card in line with other insurers; and to devote $15 million over three years to boosting enrollment in the Healthy Families insurance program for poor Californians.

In addition, Cindy Ehnes, director of the DMHC, said WellPoint subsidiary Blue Cross of California was told to build up $1.4 billion in reserves over the next three years, limiting its ability to use patient premiums to finance the merger. To ensure that California premiums dollars do not pay for the merger, the DMHC will also audit Blue Cross quarterly, Ehnes said.

"The department has upheld our responsibility to protect California consumers," Ehnes said.

But Garamendi said it would be impossible for the DMHC to prevent California policyholders from financing the merger.

For weeks, Garamendi also has complained about excessive bonuses and buyouts for executives in the merger, which he estimated at $600 million. Company officials said it's closer to $250 million.

When the merger was first announced in October, many in the industry said it might be a boon to consumers.

The merged company, to be called WellPoint and headquartered in Indianapolis, would have 28 million members nationwide, including more than 7 million members in California.

That could be big enough to command price breaks from hospitals, doctors and drug makers, driving down the price of insurance premiums, some said.

On the other hand, such a dominant player in the insurance market could undersell its competitors to put them out of business, leaving patients with fewer insurers to choose from and allowing premiums to increase unchecked by the market.

Fear of just such a market monopoly emerging after the WellPoint deal had California consumer groups praising Garamendi and criticizing the DMHC.

"Not only do California consumers owe Garamendi a debt of gratitude, they owe him a debt of $4 billion," said Jerry Flannagan, of the Foundation for Consumer and Taxpayer Rights, referring to the funds he estimated would be paid by Californians to finance the merger.