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Modern Healthcare

Not everyone's happy; Anthem closes $16.4 billion deal for WellPoint

by Laura B. Benko
Dec 06, 2004

It's official: There's a new world order in the health insurance industry.

After 13 months of controversy and regulatory setbacks, Anthem last week finally closed its $16.4 billion acquisition of WellPoint Health Networks, creating the nation's largest health insurer with 28 million members and more than $28 billion in assets. The new company now operates under the name WellPoint, with Blue Cross and Blue Shield plans in 13 states and headquarters in Anthem's hometown of Indianapolis.

With the completion of the merger-by far the largest in recent managed-care his-tory-some 50 million Americans, or more than one-fifth of the nation's insured population, are now covered by one of two companies: WellPoint and 22 million-member UnitedHealth Group.

But how that consolidation of power will affect patients and providers, if at all, remains hotly debated among industry observers (Nov. 3, 2003, p. 6).

With its enormous size and resources, ''The company has incredible potential to hold down industry costs,'' said Phillip Seligman, a healthcare analyst with Standard & Poor's Equity Research Services.

Jerry Flanagan, an advocate with the Foundation for Taxpayer and Consumer Rights, isn't so optimistic. ''The last decade of HMO mergers has taught us that when fewer HMOs dominate the healthcare market, quality goes down, premiums go up, and patients get shortchanged,'' he said.

The new WellPoint is certainly poised to benefit from its beefed-up size.

Analysts expect the company to land more national accounts with large employers while wielding even greater bargaining clout with providers. The deal is also expected to generate savings of $150 million next year and at least $250 million annually after that.

Larry Glasscock, president and chief executive officer of the new WellPoint, said the merger would benefit consumers by creating a greater choice of products and cutting healthcare disparities in various markets.

''The tremendous opportunity we have to help transform our industry is to really serve the underserved and uninsured,'' Glasscock told reporters last week. ''I believe it's going to be a very important part of our future.''

He added that while the merger would not lead to reduced prices, the new company would likely be able to slow the rate of premium increases by spreading its costs over a much larger membership.

Since first announcing their merger plans in October 2003, the companies had repeatedly assured state regulators that policyholders would not subsidize the billions of dollars in transaction costs through higher premiums or reduced services. Still, continued misgivings by insurance commissioners in California and Georgia delayed completion of the deal, which had originally been scheduled for July 1.

Georgia Insurance Commissioner John Oxendine signed off on the merger last week, but only after the companies agreed to pledge $126.5 million to improve rural healthcare in the state. Under the deal, the new WellPoint will provide $100 million over 20 years to help the state's rural health centers expand and upgrade their equipment and $11.5 million to finance telemedicine centers at 40 Georgia hospitals and clinics. It will also include telemedicine as a covered benefit for at least three years, at a projected annual cost of $5 million.

Georgia had been one of 10 states to initially clear the acquisition. But it withdrew its approval after California Insurance Commissioner John Garamendi opposed the deal this summer because of concerns the merger would unfairly enrich WellPoint's top executives. Garamendi ultimately approved the merger last month after wresting $265 million in investments from the companies to improve healthcare in the state (Nov. 15, p. 10).

Despite the concessions, consumer advocates remained outraged by the large payouts many WellPoint executives will enjoy as a result of the merger. Some 293 managers and directors stand to receive retention or severance bonuses that the company has estimated could total as much as $600 million in cash and options.

''The merger is a nine-figure Christmas gift for company executives at a time when patients have to fight for basic healthcare coverage,'' said Flanagan, whose group filed a lawsuit against WellPoint Health Networks for allegedly failing to pay hundreds of millions of dollars in gross premium taxes.

One executive in line for a retention bonus is David Colby, who was WellPoint Health Networks' chief financial officer and will retain the title at the combined company. Anthem's CFO, Michael Smith, resigned immediately after the merger's closure, according to a Securities and Exchange Commission filing. Smith was Anthem's second-highest paid executive last year, earning $17.5 million in total dollar compensation.

The merged company plans to announce its new executive management team within the next several days.