Health plan mega-mergers stalled

California Insurance Commissioner John Garamendi and the Medical Society of New Jersey have initiated similar fights on opposite coasts. Both are trying to stop billion-dollar health plan mergers that they believe do nothing but enrich corporate fat cats at the expense of patients.

Their fight could either be a quixotic tilting of windmills against the inexorable forces of corporate consolidation, or be the mouse that roared to stop the trend to ever-larger health plans. For the moment, the once-inevitable mergers of Anthem Inc. with WellPoint Health Networks, and UnitedHealth Group with Oxford Health Plans -- an expansion of health plan market power that has alarmed the American Medical Association and physicians across the country -- are no longer quite so inevitable.

On July 23, Garamendi issued an order denying Indianapolis-based Anthem's attempt to acquire BC Life and Health Insurance Co., a subsidiary of Thousand Oaks, Calif.-based WellPoint, effectively quashing a $16.4 billion merger between Anthem and WellPoint that would create the nation's largest private health plan.

On Aug. 2, the Medical Society of New Jersey filed a writ against state regulators and United that stayed the Minnetonka, Minn.-based company's $3.7 billion acquisition of Trumbull, Conn.-based Oxford. This acquisition would make the nation's second-largest private health plan even larger.

Both Garamendi and the New Jersey society cited issues like potentially excessive market power, lavish executive bonuses and other factors they believed made the deals a bane for policyholders and patients.

However, before Garamendi's action, federal regulators, regulators in 10 other states where the companies do business, the companies' shareholders and the California Dept. of Managed Care, which has regulatory authority over WellPoint's Blue Cross of California subsidiary, all approved the Anthem-WellPoint deal.

Garamendi has authority only over less than 10% of WellPoint's California operations.

And no regulator objected to the United-Oxford merger; the New Jersey society said what triggered its action was that its state regulators took only three days, when they were allowed 45 by state statute, to review the deal before becoming the last authorities to approve it, on July 29.

"We had to draw a line in the sand," said Michael Kornett, the New Jersey society's executive director.

The fight begins

It's a line the health plans are ready to cross.

A "shocked" Anthem CEO Larry Glasscock during a July 27 conference call promised legal action against Garamendi. On Aug. 3, Anthem sued Garamendi in a state court in Los Angeles to get his decision overturned.

Garamendi said the deal appeared to have no benefit to California policyholders, whom he said would foot the bill for $3.4 billion of the $4 billion in cash Anthem needed to close the merger. Also, Garamendi cited state filings showing Anthem would pay "$200 million to $600 million" in cash and stock-option bonuses to WellPoint executives for ceding their authority to Anthem. The California Medical Assn., at state insurance hearings, testified in favor of denying the merger.

Glasscock said an Anthem-WellPoint merger would benefit California, and he has promised a 20-year, $450 million commitment to enhancing its services to California's underserved population. But Garamendi said he doesn't believe Anthem, which has grown by acquiring Blue Cross Blue Shield plans nationwide, is being forthright, and wants to hear what they have to say under oath.

"C'mon guys, let's go to court," Garamendi said. "At the end of the day, this is the lawsuit I want."

How hard United will fight the Medical Society of New Jersey's legal action is unclear. United told reporters on Aug. 2 that it considered the merger complete, and at press time had filed no response to the society's filing in a state Superior Court in Trenton.

However, the society said that, by statute, its filing stays the merger until a judge rules -- likely by October -- whether it may proceed. Kornett said a filing can be made even after a merger is already closed. State regulators as of press time had not filed a response to the society's action, nor had they commented publicly about it.

Kornett said the society felt it had to act because if it didn't, United or someone else may have continued to gobble up what few health plans are left in New Jersey. United, like Anthem, has been an aggressive acquirer of health plans, including, in the last year, spending a total of about $3.5 billion for plans in Maryland, Indiana and Wisconsin.

Financial markets seem to be treating Garamendi's and the New Jersey society's bids as mere annoyances. Movement on the companies' stocks has been minimal, except for a drop initially when analysts, after Glasscock's conference call, put out word that Anthem would be stuck in court to defend its merger.

"The reality is the basic concept of any kind of insurance is having a large risk pool," said Howard Berliner, ScD, a professor of health policy at the New School of New York's Milano Graduate School. "There's a lot of market interest in consolidation."

And there's a view, which Glasscock articulated explicitly during a July 23 news conference, that Garamendi blocked the Anthem-WellPoint deal to raise his political profile. On July 16, a week before he blocked the deal, Garamendi, a Democrat, announced he would run for lieutenant governor of California in 2006. Garamendi denies that politics played a role in his decision.

Kornett said it's important to make sure the mergers aren't allowed to sail through unchallenged.

"We're the last line of defense," he said. "We just had to do something."