WellPoint pushes cooperation as it faces state foes.

Despite heavy criticism from consumer groups and some leading California Democrats, officials with Thousand Oaks-based health care giant WellPoint believe they can successfully negotiate an agreement with state regulators that will allow a planned $16.5 billion merger to go forward.

"It is part of our culture to understand the regulatory and political process and to adhere to it; we consider it a core competency and a competitive advantage," said Ken Ferber, a vice-president at WellPoint, the parent company of Blue Cross of California. "At the end of the day the regulator will regulate."

The merger, approved June 28 by 97 percent of the voting shareholders of WellPoint Health Networks Inc. and Indianapolis-based Anthem Inc. would create one of the largest for-profit health care corporations in the nation, company officials said.

Under the terms of the deal, WellPoint stockholders will receive $23.80 in cash and one share of stock in the new company for every share they currently own in WellPoint. WellPoint closed at $108.90 per share June 28, up from $83.93 since October, when the merger was Announced.

The deal has been approved by federal regulators and officials in 10 states; California Insurance Commissioner John Garamendi and the state Department of Managed Health Care, part of Gov. Arnold Schwarzenegger's administration, have yet to agree to the deal.

The DMHC is set to hold a public hearing on the matter July 9, with a recommendation expected in August, department officials said. Garamendi held a hearing June 25, and negotiations between the companies and his agency's staff on the requirements, called undertakings, that the new company will be legally obligated to perform after the merger are proceeding.

Ferber said the companies expect they can come to an agreement with the California agencies.

"We do not believe the commissioner is asking for material changes (in the merger agreement) and the undertakings is part of the deal," he said. "Our intention is to work with both regulators to get the deal approved, and we have confidence we can do that. We have not heard anything from the regulators over the past eight months that there have to be changes that would threaten the actual (merger) agreement."

The merger is to be financed by $700 million in cash, $2 billion in bends, a $1 billion line of credit, and $12 billion in stock.

The possibility that California premium payers will end up paying off that debt, however, is a concern for Garamendi.

"Every business that is now or may be a customer (of Blue Cross) is going to end up paying an extraordinary amount of money to enrich a few stockholders and executives," the commissioner said. "It's about $4 billion in cash coming out of the pockets of businesses and individuals across the nation for a financial roll-up that has little or anything to do about health care."

WellPoint, a holding company, received $280 million in profits from Blue Cross of California in 2000; $290 million in 2001, $202 million in 2002, and $300 million in 2003, according to the company. Similarly, Blue Cross Life and Health sent some $63.7 million "upstream" to WellPoint in 2000, $55 million in 2001, $60 million in 2002, and $90 million in 2003.

Executive compensation

Garamendi is especially critical of estimates that compensation for former WellPoint executives in the wake of the merger could range from $200 million to as much as $600 million in cash and stock options.

"In my mind, this is not a financial transaction," Garamendi said. "This is about consumers in California; this is about health care; and this about the 6.8 million Californians who don't have health care ... this is also about a group of 300 executives getting an amount of money equivalent to what it would cost to give 570,000 children (health insurance) for one year."

If approved, the merger would result in Anthem's Indianapolis-based holding company, which would be re-named WellPoint, Inc., controlling insurers and HMOs that serve some 28 million people in more than a dozen states.

The new holding company would own both the Blue Cross of California HMO and Blue Cross Life & Health Insurance Company, which cover some 5.18 million Californians. The HMO and the insurance company employ some 7,000 people in California, including 2,750 in Woodland Hills, 1,800 in Newbury Park, 1,400 in Camarillo, and 500 in Thousand Oaks.

Most employees are expected to remain in Southern California, company officials said.

"The number of corporate jobs moving to Indiana will be minimal, and the number of corporate losses will be minimal," Anthem CEO Larry Glasscock said.

Employees at the Blue Cross complex in Woodland Hills are concerned, but not panicking about their careers if the merger goes through.

"I've been here 16 years, and whatever is going to happen will happen," said one longtime administrative worker, who asked not to be named. "If I lose my job, I lose it, but they say we won't ... and the job market seems to be picking up."

Since the deal was announced it has been strongly criticized by opponents, especially over the terms of the severance packages for top executives of WellPoint. Particularly controversial has been the package for current WellPoint CEO Leonard D. Schaeffer, who would be entitled to a cash payout of $47.5 million and some $6 million in stock options, according to the company.

Those figures have been blasted by Democratic elected officials, including Garamendi and state Treasurer Phil Angelides, who successfully lobbied for CalPERS, the state pension fund, to vote against the merger. Angelides called the expected severance package for Schaeffer, who will lose his post as WellPoint CEO but become chairman of the beard of the new company, as "egregiously unwarranted."

Garamendi wants the equivalent of whatever amount of money is paid out to WellPoint's executives, based on the company's reports to the Securities and Exchange Commission, for investment in health care programs to serve low income communities.

"They will not have my approval until they deliver to Californians an amount equal to the executive compensation, in cash and stock," Garamendi said. "Their SEC numbers will show what it is and that's what the number will be, so it is really up to then], isn't it?"

Broker support

Supporters of the merger include some health care providers and Blue Cross-affiliated insurance brokers, some of whom testified at Garamendi's hearing.

"There are justifiable concerns but some of these things are unfair," said George Geldin, a Westlake Village broker who serves on a health care roundtable group sponsored by WellPoint.

"Most of my clients don't like rate increases and are unhappy about it, but the insurer's costs have to be passed along through the premiums," he said. "Business people understand how business is, and WellPoint is just trying to manage their risk pool and make a profit."

Consumers' groups, which have been critical of Anthem's record in other states, expect the merger will be approved in California after the companies agree to provide additional investments in health care for the poor.

"I think Garamendi is trying to do his job and protect the consumers of California, and is really concerned that the amount of money that is going to go into these executive compensation packages is going to come out of California premiums," said Laurie Sobel, a Consumers Union attorney who specializes in the health care industry. "This is the last thing the (companies) need to move forward with the merger, so that gives California some more leverage; if they need to pay some money to get it approved maybe they will."

Other health care experts agree the merger will go forward.

"I think it is reasonable to invest in the health care of California, and to invest significantly," said Daniel Zingale, head of the DMHC under Gov. Gray Davis and currently a member of the state Agricultural Labor Relations Board. "With a transaction of this magnitude, (Garamendi's request) does not strike me as an inordinately large amount."

The DMHC hearing on the merger is scheduled from 10 a.m. to 9 p.m. July 9 at the Secretary of the State's building, 1500 11th Street, in Sacramento. For additional information, call 916-445-7401.