Anthem's long-delayed merger with WellPoint Health Networks could close as early as this month, some industry observers said, though the final price tag may rise if insurance regulators in other states demand last-minute concessions similar to the ones the insurers granted the Golden State last week.
California Insurance Commissioner John Garamendi withdrew his months-long opposition to the $16.4 billion deal after wresting $265 million in investments from the companies to improve healthcare in the state. Garamendi had effectively stalled the merger in July, when he refused to sign off on the sale of WellPoint's BC Life & Health Insurance unit, arguing that it would raise costs for Californians while unfairly enriching WellPoint's top executives. Anthem had sued to overturn the ruling but dropped the lawsuit last week.
"I remain concerned about the concentration and enormous size of this company, but I can now say that Californians won't pay for the merger and will directly benefit through the new programs being developed and the contribution of over a quarter of a billion dollars," Garamendi said at news conference last week.
The settlement removes the biggest obstacle to the merger, though some industry observers speculated that it could prompt other states to weigh in with their own financial demands. The 10 states that had already granted their approval are now giving the deal a final once-over in light of the new terms extracted by Garamendi.
"Other states are going to be taking a hard look at the concessions granted to California," said Patrick Hojlo, a healthcare analyst with Credit Suisse First Boston. "We think they'll ultimately allow their approvals to stand, although they are now within their rights to seek their own concessions, (albeit) much smaller than what California got."
The first to do so was Georgia Insurance Commissioner John Oxendine, who last week rejected a new financial proposal by Anthem. "He felt that Georgia citizens deserved better than what was offered," said state Insurance Department spokesman Glenn Allen, adding that Oxendine was working with staff to develop a new proposal with "more appropriate commitments to the state."
Oxendine originally approved the merger in June without requesting any concessions, but rescinded his order a month later after Anthem pledged $100 million to California in an attempt to appease regulators there. WellPoint covers 3.1 million members in Georgia, its second largest market after California.
Anthem last week began contacting insurance officials in the 10 states that have a direct say over the merger, notifying each of Garamendi's decision. "We're working to answer any questions they may have and determine what may be necessary in order to close the deal as quickly as possible," said Anthem spokesman Jim Kappel.
Kappel said he could not project when the deal might close. But Danny Saenz, Texas' deputy insurance commissioner, said Anthem had indicated that it expected to complete the merger by the end of the month. Saenz said his office would maintain its original approval as long as the deal closed by Dec. 31.
The California Department of Managed Health Care, which approved the merger in July, said it would revisit the transaction in light of last week's developments. The agency regulates WellPoint's Blue Cross of California unit, which accounts for 90% of the insurer's membership in the state. "Blue Cross did not consult with us prior to their agreement with (Garamendi). We will now review its provisions to ensure that each and every California ratepayer receives the same protections," department Director Cindy Ehnes said in a statement.
An Anthem-WellPoint marriage would create the nation's largest health insurer with 28 million members and $40 billion in annual revenue. It would operate under the name WellPoint with headquarters in Indianapolis.
The deal had initially sailed through the approval process, winning OKs from shareholders, the Federal Trade Commission, the Blue Cross and Blue Shield Association and regulators in 10 states and Puerto Rico. But Garamendi hit the brakes after it was disclosed that WellPoint's top executives stood to receive $147 million to $600 million in bonuses and severance pay from the merger (June 14, p. 8).
Under the deal, Anthem doubled its original pledge of $100 million, and agreed to additional investments of $35 million for clinics in underserved communities, $15 million to expand enrollment in public programs such as Medicaid, and $15 million for nursing programs at community colleges. The companies would be forced to make further investments if executive compensation resulting from the merger exceeds $265 million.