WellPoint outfoxed in war over merger with Anthem.

WELLPOINT Health Networks Inc. has legions of well-paid attorneys, as well as one of the most respected managed care executives in Leonard Schaeffer.

But what is the bottom line regarding WellPoint and its partner, Anthem Inc., now that their $16 billion merger has been put on hold?

Insurance Commissioner John Garamendi got the best of them, at least for now.

"They did get outfoxed," said Adam Miller, an analyst with Williams Capital Group. "Everyone is just shaking their heads."

A little over a week ago, Garamendi announced that he would not approve the sale of WellPoint's BC Life & Health, a unit that would have accounted for just 4 percent of the combined company's total business. As insurance commissioner, that is the only authority Garamendi had over the deal, with the state Department of Managed Health Care having the rest.

In announcing his decision, Garamendi cited the "extraordinary" compensation package of up to $600 million in severance and retention payments that WellPoint executives were in line to receive, as well as concerns that California policyholders would be burdened with higher health care premiums to pay the combined company's $3.4 billion debt.

But though the DMHC approved its larger end of the deal, Garamendi turned out to have lots of leverage--something that may not have been clear to the companies or to analysts who had been downplaying his authority.

The deal can't go forward without either Garamendi's approval, or by the companies' somehow getting all elements of the deal out from under his jurisdiction.

Some analysts have suggested that WellPoint either sell or spin off BC Life & Health, but Miller contends that either option would result in a "material change" in ownership that would again require Garamendi's approval--something ] he would likely be loathe to give in the context of the larger deal.

"WellPoint should have spun it off first prior to (announcing) the Anthem deal," Miller said. "(Garamendi) holds all the cards right now or most of them."

And that's probably why when WellPoint and Anthem announced their response last week it amounted to a planned lawsuit that will challenge the authority of the commissioner to make his decision. They also made a public commitment to keep the deal in its current form.

Garamendi has been sued by insurers in court before and lost--most recently over his efforts to rein in California property and casualty insurers--but this time the odds may be with the commissioner.

"I only think there is a 25 percent chance of the deal going through right now," Miller said.

Criticizing AIDS Deal

The AIDS Healthcare Foundation has made an international name for itself as an advocate for patients and an opponent of high AIDS drug prices, but it's coming in for some severe criticism of its own.

The Los Angeles-based medical care provider had filed an antitrust action earlier this year against Abbott Laboratories in U.S. District Court in Los Angeles (as well as a state lawsuit) after the Illinois company announced a 400 percent price increase for an important AIDS drug, Norvir.

However, on July 16 the foundation announced it was dropping the lawsuits in exchange for funding from Abbott that it estimates will allow it to serve an additional 10,000 patients, mostly in Africa, over the next few years.

"If they had won a concession that would have helped the broader community it would have been one thing," said Thomas Gegeny, chairman of the steering committee of the AIDS Treatment Activists Coalition. "Yes, they are getting badly needed treatment dollars from Abbott for people who would otherwise not get it, but they are obviously looking out (just) for themselves."

The price increase created a furor among activists, sparking a federal hearing, a complaint to the Federal Trade Commission, investigations by several state attorneys general and two purported class action lawsuits.

The AIDS Healthcare Foundation has defended its deal with Abbott, saying there are enough other AIDS advocates to fight the Norvir price increase.

"Just because we have settled doesn't mean the issue is going to go away," said Tom Myers, the foundation's general counsel. "We are not only advocates. We provide treatment, and this agreement will bring as many as 10,000 patients into treatment who otherwise might not have it."

While it dropped its suits against Abbot, the foundation continues to pursue legal action in Los Angeles federal court over GlaxoSmithKline PLC's pricing of its AIDS drugs.

Management Overhaul

Financially troubled St. Vincent Medical Center has completed an overhaul of its management team--and it's more than sprinkled with former executives from Tenet Healthcare Corp., which is in the process of selling off 27 hospitals statewide.

The overhaul started in February when the Daughters of Charity Health System brought in Gustavo Valdespino, a senior vice president at Tenet, to be chief executive. It was recently completed with the appointment of the last of six senior vice presidents, including another four from Tenet.

Among the appointments were two former executives at Tenet's USC/Norris Comprehensive Cancer Center and Hospital who jumped ship to take similar positions at St. Vincent. They are Jerry Clute, chief operating officer and James Hughey, chief financial officer.

"A lot of things we are working on are pure corporate culture," said St. Vincent business development director Ron Yukelson, who also came from Tenet. "The senior management team is clearly focused on turning the hospital's situation around."

St. Vincent, the city's oldest hospital and a leader in transplant medicine, has thus far announced only one significant operational change: the opening of a standby emergency room later this year. The ER will not take ambulance runs but will be open to walk-in traffic from surrounding residents.

Valdespino was out of town and couldn't be reached for comment.

Here and There

The Valley Industry and Commerce Association has formally endorsed Proposition 71, the November ballot's stem cell initiative that would provide $3 billion for stem cell research ... MemorialCare Medical Centers, which includes Long Beach Memorial Medical Center, has been named among the "most wired" hospitals nationwide by the Hospitals & Health Networks ...

The University of California, Irvine's Graduate School of Management has formed the Health Care Management and Policy Center for the study of health care policy. The university describes the center as an "effort to create collaborative channels for cutting-edge, interdisciplinary management." One of the center's goals is to hook up business students, doctorate candidates and executives to study healthcare economics and policy.

Staff reporter Laurence Darmiento can be reached at [phone], ext. 237, or at [e-mail].