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Healthy Skepticism

June 14, 2004

Here's a real worst-case scenario: In October 2002, doctors found a tumor in the brain of Diana Peek, a 43-year-old former secretary in Mt. Vernon, Ill. Her insurer, which charged her just $162 a month for individual coverage, had recently been taken over by Thousand Oaks-based WellPoint Health Networks Inc. According to a story in Business Week, the insurer announced that it would soon stop providing individual health coverage in Illinois. Her tumor was declared a "preexisting condition" and she was forced into a plan that covered a smaller share of her care while nearly tripling her monthly premium, to $472. Peek's car and home were repossessed, and her neighbors and daughter struggle to cover her treatment costs.

Peek's saga, though an extreme case, is worth recalling as state officials review a proposed deal in which Anthem, an Indiana-based company, is moving to buy WellPoint, which insures nearly 7 million Californians through its Blue Cross of California subsidiary. The merger would create the nation's largest provider of managed healthcare, with 26 million members.

Anthem and WellPoint say the combined company's customers wouldn't see premium increases because of the deal and that executive merger compensation -- estimated at $143 million to $356 million, depending on how many of the 293 WellPoint executives are forced out over three years -- wouldn't affect Blue Cross of California because the compensation would be paid by Anthem.

In a Senate hearing last week, state lawmakers showed healthy skepticism. Legislators want more specific guarantees from Anthem that, among other things, it will continue serving the low-income Medi-Cal population that WellPoint now insures. Legislators don't have much leverage but hope that their assent or objections will influence shareholder votes June 28.

California does have strong laws and detailed regulations requiring HMOs to cover "medically necessary" services, but in the older fee-for-service market it is harder to bar what WellPoint was accused of doing in Illinois to Peek and others: dumping the costliest individual policyholders and "cherry-picking" the cheaper healthy ones under cover of a merger.

Doctors groups and patient advocates allege that health insurers nationwide are increasingly using mergers to move their products out of highly regulated agencies (such as California's Department of Managed Care) and into scarcely regulated ones (such as the state Department of Insurance).

Anthem says the debt-laden $15-billion deal will "make the resulting company stronger." But state Insurance Commissioner John Garamendi, at the hearing last week, warned that the takeover might bring no "identifiable benefits [while creating] potential risks for California."

If cost-cutting becomes a top priority after the merger, there is little to keep the burden from falling on policyholders. That's why state lawmakers, as they consider whether to bless or try to block Anthem's deal, should seek more binding promises.

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