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Los Angeles Times

Anthem Sues in Bid to Save WellPoint Deal

by Marc Lifsher, Times Staff Writer
August 4, 2004

Anthem Inc. on Tuesday sued state Insurance Commissioner John Garamendi for allegedly overstepping his authority when he blocked part of Anthem's $17-billion acquisition of WellPoint Health Networks Inc. But some experts said the health insurer may have a hard time persuading a judge to overrule Garamendi.

Anthem is asking a Los Angeles County Superior Court to set aside Garamendi's July 23 decision to reject the company's application for control of a WellPoint subsidiary, Blue Cross Life & Health Insurance Co. Although it affects only a small part of the deal, Garamendi's move threw the entire transaction into limbo.

Garamendi based his decision in part on broad concerns about the effect of the deal on healthcare in the state. Thousand Oaks-based WellPoint insures 7 million Californians -- most of them through its Blue Cross of California operation.

In its lawsuit, Anthem contended that the commissioner was trying to set broad healthcare policy instead of narrowly interpreting insurance law.

Anthem executives noted that Garamendi was holding up a deal that already had been vetted by the California Department of Managed Health Care and regulators in nine other states and Puerto Rico, where the two companies now operate. Also, federal and California officials have ruled that the creation of the nation's largest health insurer wouldn't violate antitrust laws.

Garamendi said he was ready for a legal battle if that was what it took to protect California consumers. The acquisition, he said, would result in debt of more than $3 billion, probably saddling policyholders in the state and elsewhere with higher premiums, lower benefits or both.

The California insurance code provides a clear mandate to deny a merger that the commissioner deems "not fair and reasonable to policyholders," Garamendi said.

He added that he would reconsider if Anthem agreed to put as much as $600 million toward healthcare programs for the poor -- an idea that a company spokesman said was "not something under our consideration as of today." Garamendi said the $600 million was about equal to the potential value of severance packages being offered to WellPoint executives.

Garamendi could be on sound legal footing, said Nicholas Roxborough, a Los Angeles attorney who specializes in complex insurance law cases.

"If there's a legitimate financial concern for consumers, the commissioner has the right to exercise his authority and not approve the deal," he said.

What's more, judges often defer to regulators, especially elected officials, said Jamie Court of the Foundation for Taxpayer and Consumer Rights in Santa Monica, which opposes Anthem's acquisition of WellPoint.

For his part, WellPoint Chairman Leonard Schaeffer disputed Garamendi's notion that premiums would inevitably rise as a result of the acquisition. He maintained that the combined company would have more than adequate financial resources to handle the resulting debt and payouts to executives.

"We don't need to raise one rate one cent" to fund the acquisition, he said in an interview.

He pointed out, too, that WellPoint and Anthem had guaranteed to state regulators that the new company would not use any of its California funds to pay for the executive bonuses. In addition, he said, no extra funds from California, beyond what has been passed along historically to corporate coffers, would help finance the debt.

Schaeffer asserted that these weren't pie-in-the-sky promises because the combined company would have plenty of other cash to meet its obligations. "Mathematically," Schaeffer said, "you don't need the California" funds to make things work.

Anthem officials said they were optimistic that they would get a favorable ruling by late this year or early 2005.

"We will be asking for an expedited timeline," said Edward A. West, a spokesman at Anthem's Indianapolis headquarters. "The deal can't close until we get this resolved."

West said Anthem was committed to keeping Blue Cross Life & Health, the only part of the deal regulated by Garamendi.

Anthem's stock fell 94 cents to $81.36, while WellPoint lost 72 cents to $99.81, both on the New York Stock Exchange. Shares of both companies have declined about 10% since July 23.

Wall Street analysts said they did not expect the legal delays to be insurmountable. "I don't think a time lag, per se, is a threat to the merger," said Kathleen Shanley of Gimme Credit Finance in New York.
Times staff writer Rick Wartzman contributed to this report.