HEALTH CARE FIRM WILL SUE GARAMENDI.

Byline: Evan Pondel Staff Writer

WellPoint Health Networks Inc. said Monday it plans to sue California Insurance Commissioner John Garamendi after the state regulator blocked part of the company's $16.4 billion merger with Anthem Inc.

WellPoint officials would not articulate the nature of the lawsuit, though ``we do question the grounds of his decision,'' said Michael Chee, a spokesman for the Thousand Oaks-based company. The lawsuit is among several options the company began mulling after Garamendi refused Friday to allow the transfer of WellPoint's Blue Cross Life & Health license to Indianapolis-based Anthem.

Even though BC Life only represents about 10 percent of WellPoint's business in California, Garamendi's decision materially affects the deal and will require a complete overhaul of the proposed merger.

The state's departments of Managed Health Care and Insurance have been reviewing the proposed transaction to determine whether California policyholders would be hurt by a combined WellPoint and Anthem. The Managed Health Care department approved the merger Friday, but Garamendi continued to balk, consequently altering the course of an almost year-long approval process.

WellPoint and Anthem attempted to appease Garamendi's request to invest $600 million in California's uninsured by offering $465 million in concessions and deferring executive stock options - valued at $100 million - for three years.

Additionally, WellPoint's Blue Cross subsidiary agreed to devote 2 percent of its investment portfolio to improving health care access in rural and underserved communities.

WellPoint does not intend to make further concessions, Chee said. ``Our focus is the challenge that Garamendi himself has presented.''

The commissioner's battle cry stems from the $600 million in cash and stock options WellPoint executives will likely receive should the deal go through. WellPoint has made assertions that Garamendi also has gubernatorial aspirations, furthering his agenda to portray a ``do-gooder'' persona.

The commissioner denies these claims, and said Monday that he was ``elected by the people to protect the consumer.

``I have been very clear, that the deal as structured is not fair or reasonable to the policyholder.''

Garamendi said he expected a court challenge. ``I am comfortable a judge would agree with my decision.''

WellPoint and Wall Street have suggested that Garamendi abused his authority, providing fertile ground for litigation. But the commissioner is confident a judge will find he acted in appropriate fashion, especially given the deal's dynamics.

``The law that requires me to approve or disapprove an acquisition is very clear. Two of the six criteria say that a merger should not prejudice the interest of the policyholder and that the deal is fair and reasonable for the policyholder,'' Garamendi said. ``And I was looking at the policyholders of BC Life and Health.''

WellPoint expects to announce its grounds for a lawsuit later this week. Kenneth E. Scott, a professor of law at Stanford, said the company will likely face an uphill battle. That's because proving a regulator stepped out-of-bounds with respect to his authority is rather tricky.

``Arguing before an appeals court that he has committed an abuse of discretion is not an easy kind of appeal to win,'' said Scott, who specializes in regulated industries. ``It all depends on how clear the statute is, and a lot of these statutes are pretty vague.''

The unknown is also disconcerting to investors. WellPoint shares declined $4.57, or 4 percent, to close at $105.21 Monday on the New York Stock Exchange. Anthem shares lost 64 cents closing at $88.16 on the same market.

Adam Miller, analyst with Williams Capital Group in New York, said it would be in the best interest of both companies to not pursue litigation.

``At the end of the day there is a much bigger risk (in) going through the court system,'' Miller said. ``It would be much better if negotiations were open again between Garamendi and the company.''

The commissioner said he would review future proposals from Anthem and WellPoint.

The only other option would be for WellPoint and Anthem to restructure the deal in such a way that bypasses Garamendi.

Evan Pondel, [phone]

evan.pondel(at)dailynews.com