California backs Anthem-WellPoint merger, but hurdle remains

The state insurance commissioner's approval avoids potentially protracted litigation. But the deal has yet to win approval in Georgia.

By Robert Kazel — Posted Dec. 6, 2004

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Its merger deal with WellPoint Health Networks stalled in court, Anthem opened its wallet wider and won a California regulator's approval by showering a variety of state health programs with at least $265 million in pledged contributions.

California Insurance Commissioner John Garamendi in November announced that he had dropped his opposition to the Anthem-WellPoint merger, which would create the largest private-pay health plan in the United States as measured by number of members. Anthem said it would drop its lawsuit against Garamendi, filed after he turned down the merger in July.

At press time, Anthem needed the approval of one more state regulator, in Georgia, to close its merger, which would create a company called WellPoint based in Anthem's hometown of Indianapolis.

One reason Garamendi had turned down the Anthem-WellPoint merger was his distaste for bonuses, estimated at $265 million, that would be paid to company executives once the merger closed. That's why Anthem promised $265 million to health programs in California.

The company also promised to increase its pledge to match the exact amount of executive bonuses if they grew larger than $265 million.

Anthem previously had offered state officials more than $100 million in investments in health programs to sweeten its proposal. The current pledge includes Anthem spending $200 million over 20 years for patients in medically underserved communities in California. Anthem also agreed to spend $35 million for expansion or improvement of health clinics in disadvantaged areas. In addition, Anthem would double its current expenditures on quality measurement and improvement programs, including wellness initiatives, disease management and physician incentive plans, for WellPoint's California subsidiary, Blue Cross Life & Health Insurance. That would amount to a minimum outlay of $25 million, Garamendi said. Money also would be used for grants to colleges for nursing education, Anthem spokesman Jim Kappel said.

The company also agreed that Blue Cross of California -- currently owned by WellPoint -- would be periodically measured by the state using a newly created "medical care ratio," a gauge of medical spending and quality investments compared with total premiums collected, to guarantee that a higher proportion of its premium funds will be spent on quality assurance and care.

After Garamendi approved the deal, Kappel said Anthem was going back to each state regulator who had approved the merger to explain the concessions made to California. The money would come from "cash on hand," he said, and not from insurance customers in other states.

Garamendi said his primary mandate was to be sure California policyholders wouldn't pay for the merger through premium increases. He remained "appalled" by hundreds of millions of dollars that have been promised to WellPoint executives for golden parachute payments in connection with the merger, he said. But Garamendi said the beefed-up monies for health care in the state will help to make those payments, which he called "greedy," more palatable.

The California Medical Assn., which opposed the merger earlier in the year, applauded the settlement that Garamendi reached with Anthem, saying the infusion of money for medical care would be good for patients and physicians. Plans by the state to monitor what WellPoint spends on patient care also is welcome news, the association said.

Garamendi "showed courage and foresight and innovation" in requiring Anthem to ante up more monetary concessions for public health before he approved the merger, said CMA spokesman Peter Warren.

Several state insurance commissioners were said to be looking at their approval of the merger to evaluate whether to rescind their consent.

Most notably, the merger hinges on a decision by Georgia Insurance Commissioner John W. Oxendine. He approved the deal in June but rescinded it the next month after Garamendi's original decision to reject the deal. Oxendine said he needed time to consider if the transaction would turn out differently than originally described in hearings in Georgia.

After Garamendi changed his mind in response to Anthem's new offer, Anthem CEO Larry Glasscock met with Oxendine to propose financial incentives for Georgia. But Oxendine rejected the offer, said Glenn Allen, spokesman for the commissioner.

"He felt Georgia consumers deserved more than what was offered," he said. Allen said he didn't know what proposal Anthem had made, nor did Oxendine wish to make it public.

A year ago, Oxendine married a regional sales executive for Blue Cross of Georgia, owned by WellPoint. Despite some criticism within Georgia, Oxendine said he would not recuse himself from examining the Anthem-WellPoint deal because of his wife's employment and her ownership of WellPoint shares. Blue Cross has said 32 of its executives could receive bonuses averaging $425,000 if the deal closes, but that Ivy Oxendine would not be one of the recipients.

Talks between Oxendine and Anthem were continuing at press time.

Oxendine "is working on it, and he's going to get it done as rapidly as possible," Allen said.

It appears that other regulators will not change their minds. In recent weeks, Missouri regulators expressed concern that a $10 million extraordinary dividend requested by a WellPoint-owned HMO in that state would help finance the merger in California. The department ultimately approved a reduced extraordinary dividend of $6.5 million, McConnell said.

But insurance officials in Missouri have no intention of reopening its approval of the merger, which was given in March, and seek money from Anthem for the state, he said.

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