News CoverageSan Jose Mercury News (California)
Garamendi puts brakes on insurance giants' merger
by Barbara Feder Ostrov, Mercury News
Jul 24, 2004
Insurance giants Anthem and WellPoint Health Networks shared a wild ride on California's regulatory rapids Friday: Even as the state's top HMO official approved Anthem's $16.4 billion acquisition of Thousand Oaks-based WellPoint, Insurance Commissioner John Garamendi rejected it as "one lousy, bad deal for California health care consumers."
The conflicting decisions left the deal -- which would create the nation's largest health plan -- in limbo. While consumer advocates hailed his decision Friday, insurance executives and Wall Street analysts accused Garamendi, who plans to run for lieutenant governor in 2006, of political grandstanding.
Garamendi, an elected official and Democrat, has authority over WellPoint's life insurance and preferred provider health insurance business. Gov. Arnold Schwarzenegger appointee Lucinda Ehnes, director of the state's Department of Managed Health Care, regulates a much larger portion of WellPoint's operations: its Blue Cross of California HMO business, serving more than 3.3 million Californians.
Anthem and WellPoint contend Garamendi overstepped his authority, and they may sue, merger experts said. The companies may also choose to sell the part of the WellPoint business Garamendi oversees and go ahead with the deal, although one Wall Street analyst said he believed that could be difficult because Garamendi must approve the sale.
The stock prices of both companies fell Friday before trading was suspended at their request. Anthem shares fell 1.3 percent, while WellPoint shares dropped 1.7 percent.
While Ehnes kept a low profile during negotiations with insurance executives, Garamendi harshly criticized the merger, calling an estimated $200 million to $600 million in bonuses and stock options for executives "extravagant.'' Garamendi was the nation's last holdout in the deal, which has been approved by shareholders and insurance commissioners in all other affected states.
Bigger not better
"Bigger is not always better,'' Garamendi said. "It is unconscionable that a handful of executives will walk away with hundreds of millions of dollars in executive compensation at the same time that 6 million Californians are unable to afford insurance. This transaction highlights the profound contradictions in our current health care financing and delivery system.''
Ehnes said Friday the Department of Managed Health Care had gained concessions from Anthem and WellPoint that led the HMO watchdog agency to approve the deal. Among them:
-A new $17 million program to improve mental health and reduce childhood obesity;
-A $15 million effort to enroll more children in California's Healthy Families low-cost health insurance program;
-A $100 million investment to improve access to health care in rural and poorly served regions; and
-Protections for Blue Cross policyholders should the merged company change its insurance offerings.
The companies also assured Ehnes that California policyholders would not pay for the costs of the merger, estimated at $4 billion including executive bonuses and stock options.
Consumer advocates did not believe California Blue Cross members would be spared their share of the merger costs. Jerry Flanagan, an advocate with the Foundation for Taxpayer and Consumer Rights, praised Garamendi "as the only regulator in the state to stand up to WellPoint and Anthem and say, 'Enough is enough.' ''
But the companies felt "deceived'' by Garamendi and plan to try to overturn his decision, in the courts if necessary, said WellPoint spokesman Ken Ferber.
"Every single thing he asked for, we gave him,'' Ferber said. "He never gave us any indication there would be a denial. There's clearly a political agenda.''
Then again, some observers say, WellPoint and Anthem could offer Garamendi more concessions, and potential lawsuits might be settled before anyone steps inside a courtroom.
"I can't imagine that this won't settle,'' said Jeff Bergman, an analyst with Greenwich, Conn.-based Milton Partners. "I think the concessions offered were pretty good.''
State Treasurer Phil Angelides said Ehnes, appointed to DMHC by Gov. Arnold Schwarzenegger, should not have approved the deal.
"Gov. Schwarzenegger has chosen to protect an outrageous unearned payday for a handful of WellPoint executives and to send the bill to California families and employers struggling to pay the soaring cost of health insurance," Angelides said.
A spokesman for the governor declined to comment on the merger rulings, referring calls to DMHC. Ehnes said the governor was not involved in her decision.
WellPoint and Anthem stock prices fell before trading was suspended when the companies told the New York Stock Exchange of Garamendi's plan to reject the merger. WellPoint dipped 1.7 percent to close at $109.78, and Anthem dropped 1.3 percent to close at $88.80, both on the New York Stock Exchange.