Anthem-WellPoint Merger Hits Regulatory Snag In mid-2004, a California insurance regulator refused..

Anthem-WellPoint Merger Hits Regulatory Snag

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 In mid-2004, a California insurance regulator refused to
approve Anthem Inc’s (“Anthem”) $20 billion acquisition of WellPoint Health
NetWorks Incorporated (“WellPoint”). If allowed, the proposed merger would
result in the nation’s largest health insurer, with 28 million members. After
months of regulatory review, the deal had already received approval from 10
state regulators, the Justice Department, and 97% of the shares outstanding of
both firms. Nonetheless, California Insurance Commissioner John Garamendi
denounced the proposed transaction as unreasonably enriching the corporate
officers of the firms without improving the availability or quality of
healthcare. Earlier the same day, Lucinda Ehnes, Director of the Department of
Managed Healthcare in California, approved the transaction. The Managed
Healthcare Agency has regulatory authority over Blue Cross of California, a
managed healthcare company that is by far the largest and most important
WellPoint operation in the state. Mr. Garamendi’s department has regulatory
authority over about 4% of WellPoint’s California business through its BC Life
& Health Insurance Company subsidiary (“BC”). Interestingly, Ms. Ehnes is
an appointee of California’s Republican governor, Arnold Schwarzenegger, while
Mr. Garamendi, a Democrat, is an elected official who had previously run
unsuccessfully for governor. Moreover, two weeks earlier he announced that he
will be a candidate for lieutenant governor in 2006.

Mr. Garamendi had asked Anthem to invest in California’s
low-income communities an amount equal to the executive compensation payable to
WellPoint executives due to termination clauses in their contracts. Estimates
of the executive compensation ranged as high as $600 million. Anthem
immediately sued John Garamendi, seeking to overrule his opposition to the
transaction. In the lawsuit, Anthem argued that Garamendi acted outside the
scope of his authority by basing his decision on personal beliefs about healthcare
policy and executive compensation rather than on the criteria set forth in
California state law. Anthem argued that the executive compensation payable for
termination if WellPoint changed ownership was part of the affected executives’
employment contracts negotiated well in advance of the onset of Anthem’s
negotiations to acquire WellPoint. The California insurance regulator finally
dropped his objections when the companies agreed to pay $600 million to help
cover the cost of treating California’s uninsured residents. Following similar
concessions in Georgia, Anthem was finally able to complete the transaction on
December 1, 2004. Closing occurred almost one year after the transaction had
been announced.

Case Study Discussion Questions

1. If you were the Anthem CEO, would you withdraw from the
deal, initiate a court battle, drop the BC subsidiary from the transaction,
agree to regulators’ demands, or adopt some other course of action? Explain
your answer.

 2. What are the risks to Anthem and WellPoint of delaying
the closing date? Be specific.

3. To what extent should regulators use their powers to
promote social policy?

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