California Insurance Commissioner John Garamendi on Friday blocked part of Anthem Inc.'s planned acquisition of WellPoint Health Networks Inc., a move that could stall the entire $17.5-billion deal.
Garamendi's rejection came only hours after the state Department of Managed Health Care cleared the way for Anthem to acquire WellPoint's Blue Cross of California operation, which represents 90% of the Thousand Oaks-based company's business in the state.
The split decision creates further uncertainty over Indianapolis-based Anthem's proposed purchase of WellPoint. The combination would create the nation's largest health insurer, with more than 27 million customers -- 7 million of them in California.
The deal has become a political football in California and is being closely watched on Wall Street, where investors reacted with dismay to the possibility of a court battle. Opponents such as state Treasurer Phil Angelides have been especially riled by plans to pay WellPoint executives up to $600 million in cash and stock options once the deal is completed, contending that this compensation could lead to higher premiums for consumers.
Although Blue Cross Life & Health, the WellPoint subsidiary that falls within Garamendi's jurisdiction, represents only 10% of WellPoint's California business and about 4% of the overall deal, it's a potentially lucrative operation that Anthem may be reluctant to forgo, industry observers said.
WellPoint and Anthem executives said they were blindsided by Garamendi's announcement. They said they believed they'd met every one of his demands, including a guarantee that health insurance premiums paid by Californians wouldn't be used to finance the acquisition. The insurers said they also agreed to spend up to $450 million over 20 years on programs to improve healthcare for rural and poor Californians.
"We were shocked, literally shocked, that the insurance commissioner who oversees less than 4% of the combined business told us he was going to deny it," WellPoint Chief Executive Leonard Schaeffer said. "If you look at what the merger does, it's really very, very good for California."
But Garamendi said the companies' promises wouldn't outweigh the harm the deal would bring to policyholders in the form of higher premiums, lower benefits or both.
"This may have been an extraordinarily good deal for officers and directors and a reasonable deal for shareholders," he said, "but this is one lousy deal for California healthcare consumers."
Garamendi said the companies' actual proposal didn't measure up to their pledges. The promised $450-million investment, he said, is actually $100 million reinvested three times over 20 years. He also maintained that $1.2 billion from the two Blue Cross plans in California could be sent to the corporate parent in the first three years after the acquisition -- and more in subsequent years.
Despite the setback, Schaeffer and Anthem CEO Larry Glasscock said they remained committed to the deal and were reviewing their options.
One alternative would be to take Garamendi to court in an effort to force a reversal of his decision. Executives from both companies said Garamendi had overstepped his authority. WellPoint General Counsel Tom Geiser characterized the decision as "a clear abuse of discretion."
Garamendi said California's insurance code gave him the power to deny any deal that would be unfair, prejudicial or unreasonable to policyholders. This transaction, he said, was all three.
"We believe the law is clear that I have the discretion and that the law is there to protect the policyholder," he said. "I guess we'll see them in court."
If the companies take Garamendi to court, it could delay the transaction for months and depress the value of their shares until a ruling is made, analysts said. On the other hand, they added, the deal could move forward as early as Monday if the companies avoid a legal fight and sell the disputed Blue Cross Life & Health subsidiary to a third party or spin it off to shareholders.
Anthem's stock fell $1.20 to $88.80, and WellPoint's shares slid $1.92 to $109.78 on the New York Stock Exchange on Friday morning. Trading was then halted for the rest of the day as word began to trickle out that Garamendi would reject the deal.
In approving the acquisition of Blue Cross of California, Cindy Ehnes, acting director of the Department of Managed Health Care, said it "was a good deal for consumers and sends a strong message that California is a state with a competitive and healthy marketplace where business is welcome."
A number of professional groups and healthcare advocates who have opposed the acquisition accused Gov. Arnold Schwarzenegger of putting the interests of out-of-state corporations over the needs of California policyholders. They also had criticized the governor when Ehnes' department initially signaled it would approve the deal without a public hearing.
A spokesman for Schwarzenegger declined to comment Friday.