Top brass from WellPoint Health Networks were put on the defensive last week at a special legislative hearing in California over the company's much-criticized plans to pay out as much as $600 million to its executives after the completion of its pending mega-merger with Anthem.
According to documents made public on the eve of the state's only scheduled hearing on the merger, WellPoint intends to pay 293 executives $147 million to $356 million in cash bonuses and severance pay depending on how many stay or leave after the merger. The executives also hold $251 million in stock options, which would vest immediately if they were fired or quit within three years of the deal's closing.
The disclosure and concerns that the merger would raise costs and reduce patients' access to care prompted California Insurance Commissioner John Garamendi to label the deal "not in the best interest" of the state.
"Where does all the money come from to pay these huge bonuses? Ultimately, of course, the consumer pays for such excesses through higher premiums or lower payments to providers, which can translate into reduced benefits or degradation in quality," Garamendi testified at the hearing. "We should look with skepticism on a transaction if it is premised primarily on increasing the already significant wealth of a privileged few."
While Garamendi doesn't have the ability to block the proposed merger, he could complicate the deal by denying Anthem's request to buy WellPoint's 6.7 million-member Blue Cross of California subsidiary. Out of the 11 states that have a direct say over the deal, California is the only one that has yet to grant approval.
WellPoint and Anthem hope to complete the $16 billion deal June 28. The merger would create the nation's largest health insurer with 28 million members nationwide.
State lawmakers convened the joint Assembly-Senate committee hearing after consumer groups complained that the Department of Managed Health Care planned to approve the deal without public comment. The department is now considering whether to hold its own hearing-a move that could potentially delay the deal's closing.
Anthem and WellPoint officials strenuously denied that the merger would result in higher premiums, fewer services or lower reimbursements in California. They also said WellPoint's executive compensation packages would not cut into Blue Cross' reserves or raise its administrative costs because they would be paid by Anthem.
But physician and consumer groups urged HMO regulators at the hearing to withhold judgment on the deal until it is determined how WellPoint's payment packages would affect premiums, reimbursement and medical care. According to a recent study by the California Medical Association, Blue Cross has consistently spent less than 80% of its annual revenue on medical care, less than all other major California insurers.
"The CMA has no quarrel with rewarding health-plan executives monetarily for the successes they have achieved," said Steve Thompson, CMA vice president of government affairs, who testified at the hearing. "But the law demands that there should be at least some proportionality-that is, the return should be commensurate with the level at which the plan achieved its core mission" of delivering quality care to its members.
Alleged corporate excesses at Blues plans have become a point of contention in several states (May 17, p. 6). Last year, Maryland regulators blocked CareFirst Blue Cross and Blue Shield's proposed sale to WellPoint after determining executives would unduly profit from the deal. And now, Blue Cross and Blue Shield of Rhode Island faces a raft of bills to limit its executive pay and reserve levels.
Under WellPoint's "change in control" plan, established in 2001, executives who remain with the company after it is acquired are entitled to retention bonuses equal to one year's salary and bonus. Half of the retention bonus would be paid one year after the closing of the deal, with the other half paid the following year.
Executives who are fired or "constructively terminated" within three years of the deal's completion would receive a lump-sum severance payment equal to two to three times their salary and bonus. Executives are constructively terminated if their title, status or pay is reduced or they are required to relocate more than 35 miles from their workplace.
WellPoint Chairman and Chief Executive Officer Leonard Schaeffer will step down as CEO once the merger is approved. Schaeffer, 58, would leave with $82.3 million in severance and retirement pay and $248.6 million in stock and options, all of which would vest immediately. WellPoint spokesman Ken Ferber said only $42 million of Schaeffer's payout is directly related to the merger; the rest represents incentives accrued since he became CEO in 1986.