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The New York Times

California Backs Merger of 2 Giant Blue Cross Plans

November 10, 2004

Anthem and WellPoint Health Networks, two giant Blue Cross plans, finally won approval yesterday from California's insurance commissioner for their $16.4 billion merger, which would create the nation's largest health insurer. The two companies had to promise to spend $265 million to help improve health services in the state.

Anthem and WellPoint, which together will cover 28 million people in 10 states and Puerto Rico, said they were talking to regulators across the country ''to complete the merger as quickly as possible.''

They had earlier approvals from regulators in other states and shareholders based, in some instances, on a timetable calling for completing the deal by the end of this month, analysts said. Recently, there were reports that some officials in the other states were reconsidering their approvals in view of California's demands.

Ed West, an Anthem spokesman, said the company spoke yesterday to one state official, John Oxendine, the Georgia insurance commissioner, to tell him about the California agreement.

''There may be some small concessions in other states but I think this is fairly a done deal,'' said Shellie Stoddard, a health care bond rating analyst at Standard & Poor's. Jamie Court, president of a California patients' advocacy group, the Foundation for Taxpayer and Consumer Rights, suggested that ''every state insurance commissioner will be trying to see what they could get from this deal.''

The California commissioner, John Garamendi, initially blocked the deal in July, saying that it represented a big payoff to company executives and that the costs might be passed along to health plan members. He said in a telephone interview yesterday that the $265 million pledge was equivalent to the compensation that Leonard D. Schaeffer, the chief executive of WellPoint, and other company officials would reap in the merger. The companies said that they would not be raising the premiums that members pay.

For his part, Mr. Schaeffer said in an interview that he did not have a problem with the arrangement. ''We are very pleased that both the Department of Managed Health Care and the Department of Insurance in California have approved the deal,'' he said.

Anthem and WellPoint agreed to double a $100 million commitment already made to the Managed Health Care Department. The additional $100 million will be invested in upgrading California hospitals and other health services. The companies also agreed to spend $35 million in direct contributions to health care clinics in underserved communities; $15 million to support nursing training programs in community colleges; and $15 million to recruit low-income people for the state-subsidized healthy families program.

Mr. Garamendi's department has authority over only a small portion of WellPoint's California business -- mainly for a dwindling number of people with traditional fee-for-service health insurance.

But he said the agreement on payments for preventive measures, like screenings for breast cancer, colorectal cancer and diabetes, would involve 45,000 physicians and would affect their practices in dealing with over a million enrollees in health maintenance organizations and other network-based managed care plans.

Under the deal, Anthem is buying WellPoint. Larry C. Glasscock, chief executive of Anthem, will become chief executive of the new company, which will be based in Anthem's home city, Indianapolis, and use the WellPoint name. Mr. Schaeffer will be the chairman.

Mr. Glasscock said that Anthem had agreed to end its lawsuit trying to overturn Mr. Garamendi's denial of approval for the merger last July.

Ms. Stoddard at Standard & Poor's said that much of the $265 million would be spread over 20 years.

She said the new holding company was likely to receive a BBB-plus debt rating, a step down for WellPoint, because of the large amount of good will in the transaction. Companies report good will on their books to cover the difference between the price they paid and the value of the assets of the acquired company.

Mr. West at Anthem said he could not say what the good will amount was but that details would be reported soon.

Curt Morrison, an analyst at Morningstar, said the price of the deal was on the high side. He said insurers were finding it ''difficult to get sizable membership growth,'' prompting mergers so administrative costs could be spread out.

''There is a strong trend toward consolidation in the industry,'' he said. ''I expect it to continue.''

Charles A. Boorady, an analyst at Smith Barney, said in a report to investors yesterday that WellChoice in New York, the parent of Empire Blue Cross and Blue Shield, and Health Net, based in California, were likely takeover candidates.

WellPoint shares rose $8.93, to $113.90. Anthem rose $4.73, to $91.23.

The merger was announced in October 2003.