KHN Morning Briefing

Summaries of health policy coverage from major news organizations

California Insurance Commissioner Approves Anthem-WellPoint Merger

California Insurance Commissioner John Garamendi on Tuesday approved the proposed $18.4 billion merger of Anthem and WellPoint Health Networks, removing the "biggest hurdle to a deal announced more than a year ago" and "paving the way for creation of the nation's largest health insurer," the Los Angeles Times reports (Girion/Peltz, Los Angeles Times, 11/10). The proposed merger, announced in October 2003, would combine the companies under the name WellPoint and establish headquarters in Indiana. The proposed merger would create the largest U.S. health insurer, serving 28 million people in 10 states and Puerto Rico (Kaiser Daily Health Policy Report, 10/28). Anthem CEO Larry Glasscock will be CEO of the new company, and WellPoint CEO Leonard Schaefer will be the chair (Freudenheim, New York Times, 11/10). Anthem and WellPoint shareholders, as well as a number of entities with direct regulatory authority -- such as the Department of Justice, the California DMHC, nine other states and Puerto Rico -- already approved the merger (Kaiser Daily Health Policy Report, 10/28). The transaction must again be reviewed by the California Department of Managed Health Care, which first approved the deal in July. DMHC oversees 90% of the companies' members in the California, and Garamendi oversees the remaining 10% of members (Girion/Peltz, Los Angeles Times, 11/10).

Earlier Opposition
Garamendi in July rejected part of the proposed merger because he said that Anthem would use as much as $400 million annually in health insurance premiums paid by California residents to finance the merger in the first three years and an unlimited amount after that time (Kaiser Daily Health Policy Report, 10/28). When he first announced his opposition to the deal, Garamendi said the merger and expenses related to executive severance packages would cost California policyholders as much as $600 million through higher premiums. Garamendi on Tuesday estimated total acquisition costs for the companies at as high as $4 billion (Colliver, San Francisco Chronicle, 11/10). In August, Anthem filed a lawsuit against Garamendi that sought to overturn his decision not to approve the proposed merger (Kaiser Daily Health Policy Report, 10/28). Glasscock said Anthem has agreed to drop its lawsuit challenging Garamendi's initial opposition (New York Times, 11/10).

Paying for the Deal
Anthem spokesperson Ed West said the company would not raise members' premiums to pay for the merger but rather would use savings related to the merger and would absorb other expenses into the regular cost of business. The companies also agreed not to help pay for the merger through increases in premiums for members of Blue Cross Life & Health, the WellPoint subsidiary that Garamendi oversees (Steen, San Jose Mercury News, 11/10).

Concessions for California
Under the deal, Anthem agreed to commit $265 million toward various California health projects -- more than double the amount it previously had indicated it would give. State health care clinics for low-income residents will receive $35 million from Anthem, and $30 million will be divided among nursing training programs and initiatives to recruit low-income residents for the state's SCHIP program, called Healthy Families (New York Times, 11/10). Anthem will direct another $100 million in its investment portfolio over the next 20 years to upgrading hospitals and other general health services in California, on top of an additional $100 million the company already had promised for California's rural and underserved communities. Anthem also will increase expenditures on patient care from the current 80% of every premium dollar. According to the Los Angeles Times, the industry average is 85% (Girion/Peltz, Los Angeles Times, 11/10). Anthem additionally agreed to work with the state insurance department to improve its programs for breast cancer, asthma, diabetes and other diseases. Anthem agreed to increase the total payout to community health projects if its executives receive more than $265 million in compensation as a result of the merger, keeping the two totals equal (San Jose Mercury News, 11/10). Garamendi said he believed the $265 million pledge would be equal to the amount of compensation for company executives (New York Times, 11/10). Some analysts have said that the compensation could be as high as $600 million, when counting accelerated stock options (Girion/Peltz, Los Angeles Times, 11/10).

Community Effect
The Los Angeles Times on Wednesday examined the impact of the deal on California's health clinics for low-income residents. According to the Los Angeles Times, the money "wouldn't go far" in helping the "extreme health needs" of people in a state that has as many as 6.5 million uninsured residents (White, Los Angeles Times, 11/10).

Garamendi Remarks
Speaking Tuesday at a health clinic for low-income residents, Garamendi said the final deal -- which reached during "intense" negotiations last week -- builds on commitments already negotiated with the state DMHC (Rundle/Fuhrmans, Wall Street Journal, 11/10). "Last week Anthem and WellPoint returned to my office and presented a revised offer of settlement," Garamendi said, adding, "I demanded more and after long negotiations, Anthem has made additional concessions and contributions that will assure that California health care consumers will realize benefits from this transaction" (Veiga, AP/Hartford Courant, 11/10). Garamendi said the new deal is "a significant improvement" over the initial proposal. He added, "While I remain concerned about the consolidation and enormous size of this company ... Californians will not pay for the merger and Californians will directly benefit" (San Francisco Chronicle, 11/10). He noted that his concern about the consolidation of health insurance companies "are beyond the normal scope of my review" (Giron/Peltz, Los Angeles Times, 11/10).

DMHC Review
California DMHC Director Cindy Ehnes on Tuesday said in a statement, "Blue Cross did not consult with us prior to their agreement with (Garamendi). We will now review its provisions to ensure that each and every California ratepayer receives the same protections." A DMHC spokesperson said Ehnes wants to be sure the new deal will not result in higher premiums for WellPoint members under her jurisdiction (San Francisco Chronicle, 11/10).

Other States' Response
After Garamendi announced that he would not approve the proposed merger, insurance regulators in Georgia, Missouri and Texas raised new concerns over the solvency of WellPoint and the terms of the merger (Kaiser Daily Health Policy Report, 10/28). However, those regulators now are "widely expected" to approve the deal, the Los Angeles Times reports (Girion/Peltz, Los Angeles Times, 11/10). The new agreement must be reviewed by all the states, and "the deal's cost could rise if other states weigh in with financial demands of their own," the Wall Street Journal reports (Wall Street Journal, 11/10). Georgia Insurance Commissioner John Oxendine, who in July rescinded his approval of the merger, on Tuesday said in a statement that he is "reviewing these new developments and evaluating their impact on Georgia customers" (Girion/Peltz, Los Angeles Times, 11/10). A spokesperson for Oxendine's office said the state could still ask for additional conditions for the deal (Wall Street Journal, 11/10). Officials in Delaware, Illinois, Missouri, Virginia and other states that had approved the merger on Tuesday were analyzing whether Garamendi's terms would affect their approval. According to the Los Angeles Times, none of these states "indicated that the deal was in jeopardy."

Done Deal?
Tom Burnett, president of Merger Insights, said he expects the merger to be completed by the end of November (Girion/Peltz, Los Angeles Times, 11/10). Company officials said they were in discussions with regulators and hoped "to complete the merger as quickly as possible," the New York Times reports. Shellie Stoddard, a health care bond rating analyst for Standard & Poor's, said, "There may be some small concessions in other states, but I think this is fairly a done deal." Jamie Court, president of the California-based Foundation for Taxpayer and Consumer Rights, said she thinks "every state insurance commissioner will be trying to see what they could get from this deal" (New York Times, 11/10). Joseph France, an analyst at Banc of America Securities said, "It isn't entirely clear what the cost is, much less what other states might want, but it's only money. The bar to the deal closing was more regulatory and political" (Wall Street Journal, 11/10).

Companies' Reaction
"All of us at WellPoint are pleased with the very thorough approach that both [DMHC] and the [insurance department] took to ensure that our merger would best serve the interests of Californians," Schaeffer said (San Francisco Chronicle, 11/10). Glasscock said, "We have worked diligently with Commissioner Garamendi to understand and address his concerns in order to demonstrate that this merger will truly benefit Californians" (Wall Street Journal, 11/10). He added, "Thanks to the work previously done by associates from both Anthem and WellPoint, we are well prepared to quickly and successfully integrate our two organizations" (AP/Hartford Courant, 11/10).

Group Reaction
Anthony Wright, executive director of Health Access California, said the deal "at least assists the goal of trying to make Blue Cross be better, not just bigger." Jerry Flanagan, health care policy director for FTCR, said, "I think Garamendi got a good deal for the patients that he was elected to protect" (San Jose Mercury News, 11/10). Flanagan added, "Nationally, what Garamendi's negotiations have done is set a bar for future mergers that says company executives have to give back as much as they take" (San Francisco Chronicle, 11/10). Jack Lewin, CEO of the California Medical Association, called Garamendi's insistence on raising the company's compensation for California "laudable and extremely creative." Lewin added, "Garamendi acted responsibly when other states rolled over in the face of this merger."

Critics
Some observers said the deal still might result in extensive "change-in-control" payments for WellPoint management, "leaving California Blue Cross customers in a precarious financial position," the Los Angeles Times reports. State Treasurer Phil Angelides said, "While I greatly appreciate the good work that Commissioner Garamendi has done on behalf of California consumers and underserved communities, I remain deeply troubled by this merger's excessive golden parachutes for executives." According to the Los Angeles Times, critics also said that the merger could "force employers to pay more for coverage and pressure hospitals and doctors to cut their fees, eventually resulting in inferior service." But Schaeffer has said that the size of the new company would allow it to accelerate the development of a new medical database that would lower costs while improving the quality of care. Joy Grossman, associate director for the Center for Studying Health System Change, said that the true impact of the deal is "something that only time will tell" (Girion/Peltz, Los Angeles Times, 11/10).

Financial Analysts
Stoddard of Standard & Poor's said the new company likely would receive a BBB-plus debt rating -- which would be a downgrade for WellPoint -- because of the large difference between the price Anthem paid for the merger and the value of WellPoint's assets. Curt Morrison, an analyst at Morningstar, said the price of the merger may have been high, but insurers are finding it "difficult to get sizable membership growth" without consolidation. "There is a strong trend toward consolidation in the industry," Morrison said, adding, "I expect it to continue" (New York Times, 11/10). On the New York Stock Exchange Tuesday, shares of Anthem rose $5.10, or 6%, to $91.60; WellPoint shares rose $8.93 to close at $113.90 (AP/Hartford Courant, 11/10).

Editorial
While there is "no doubt that worthy health care causes in California will benefit" from the deal, it is "a lot less clear whether all the millions [Garamendi] has extracted from the insurers will make up for the damage the deal could do to California consumers," a Los Angeles Times editorial states. According to the editorial, Anthem in 2001 also said it would not raise premiums, but the company is raising rates by 14.7% to cover "increased costs." According to the editorial, Garamendi "may have squeezed as much from Anthem as his authority allowed," but the deal still "looks only marginally better than it did in July, when Garamendi denounced it as a sop to 'the outrageous and extraordinary greed of executives.'" The editorial notes that there are "no standards governing health care acquisitions" in the state, and it recommends Gov. Arnold Schwarzenegger (R) form a commission that could track health care costs and "keep Californians from being surprised if the new Anthem/WellPoint uses its formidable clout to jack up premiums" (Los Angeles Times, 11/10).

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