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Associated Press

Calif. insurance commissioner rejects Anthem-WellPoint merger

by JIM WASSERMAN, Associated Press Writer
July 23, 2004

SACRAMENTO, Calif. -- State Insurance Commissioner John Garamendi rejected a proposed $16.4 billion merger Friday between health care giants Anthem Inc. and WellPoint Health Systems Inc., causing a drop in stock prices and stalling the deal.

His announcement came just hours after a state agency signed off on the proposed merger that would create the nation's largest health insurer.

Garamendi said the deal will pull millions of dollars out of California, lower health care quality for consumers and give too much severance pay to executives while 6 million state residents lack health insurance.

"I cannot in good conscience approve this transaction," he said during a San Francisco news conference. "I do not believe it is in the best interests of California policyholders."

Garamendi said it was an extraordinary deal for executives, a reasonable one for stockholders, but lousy for the state.

Anthem Chief Executive Officer Larry Glasscock said Garamendi's disapproval creates an uncertain timetable to absorb Wellpoint and insure a combined 28 million people. During an Indianapolis news conference he said there's no plan
to give up on the deal.

"I believe that this transaction is going to happen," he said.

Prices of both company stocks fell Friday before trading was suspended at the request of the two firms. Anthem shares fell 1.3 percent while WellPoint shares dropped 1.7 percent. Garamendi's announcement was timed after the close of the New York Stock Exchange, but Anthem spread the word early that he had phoned them with his decision.

Glasscock also said he was considering suing Garamendi and executives at both companies accused the insurance commissioner of playing politics for personal gain.

"We find it unbelievable that an elected official who claims to protect consumer interests would put his own political ambition over the welfare of the people he is sworn to serve," said WellPoint Chief Financial Officer David Colby.

The state Department of Managed Health Care's announcement earlier in the day removed one of two significant roadblocks remaining to merge Indiana-based Anthem and Thousand Oaks-based WellPoint, parent of Blue Cross of California.

Anthem plans to move WellPoint operations to its Indianapolis headquarters, but has repeatedly maintained it will leave Blue Cross operations largely intact in California.

Garamendi has been one of the merger's leading critics, demanding the companies contribute $600 million to California's uninsured population as a condition of his approval.

Friday, he charged that the deal would pull $400 million a year out of California for three years and an unlimited amount afterward to help Anthem finance the WellPoint takeover. He also criticized a $76 million payout to WellPoint Chief Executive Officer Leonard Schaeffer, who would lose his job. Garamendi said that amount could provide a year's worth of insurance coverage for 47,000 children.

The U.S. Department of Justice and nine other affected states and Puerto Rico have already approved the merger.

Cindy Ehnes, director of California's managed health care agency, announced the Schwarzenegger Administration's support for the deal.

"We have negotiated a pact that is a good deal for consumers and sends a strong message that California is a state with a competitive and healthy marketplace where business is welcome," she said.

Ehnes said WellPoint and Anthem agreed to numerous concessions for the change in ownership of Blue Cross of California, which insures 7 million Californians.

Among them, Blue Cross will invest $17 million in mental health and child obesity programs, up to $100 million over 20 years for health care in rural and underserved communities and $5 million over three years to increase enrollment in the state's Healthy Families Program.

Ehnes said the merger received the highest level of scrutiny.

The department, initially reluctant to schedule a public hearing on the merger, held a July 9 hearing, where most testimony was sharply critical of the deal.

Leading Democratic officials, including Garamendi and state Treasurer Phil Angelides both called the executive compensation package obscene, though both companies maintained the package follows industry standards.

Angelides led efforts by institutional investors, including California's large pension funds, to withhold support from the deal. But 97 percent of company shareholders voted June 28 to approve the merger.

The company maintains that Blue Cross customers in California would not pay for the executive payouts or other merger costs.

Other critics suggested that Blue Cross has underpaid insurance taxes by $500 million since it became a for-profit corporation in 1994. Blue Cross officials called the charge a blatant lie, but the Foundation for Taxpayers and Consumer Rights said it would sue to recover the money.

Other states that approved the deal are Texas, Illinois, Wisconsin, Virginia, Delaware, Missouri, West Virginia, Georgia and Oklahoma.
On the Net:

California Department of Managed Health Care:

Anthem, Inc.:

WellPoint Health Systems, Inc.: