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Officials Question AnthemWellPoint Merger

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Executives at WellPoint Health Networks Inc. are defending their company’s efforts to merge with Anthem Inc.

Anthem, Indianapolis, announced plans in October 2003 to acquire the bigger, Thousand Oaks, Calif.-based managed care company in a deal with a value of about $16 billion.

Executives at Anthem and WellPoint, which both hold Blue Cross and Blue Shield licenses in several states, say the deal will create a more efficient company that has the market share to be a major player in more markets.

But California Insurance Commissioner John Garamendi and officials at the California Public Employees’ Retirement System are raising questions about a disclosure that 293 WellPoint executives could collect more than $600 million in severance payments, enhanced retirement benefits and stock option benefits if the deal goes through.

CalPERS analysts have predicted that Leonard Schaeffer, WellPoint?s chairman and chief executive, would be entitled to $76 million in deal-related compensation.

WellPoint “and its executives should be required to publicly clarify the exact amount of these bonuses and stock options,” Garamendi said in a statement about the executive compensation plans.

Garamendi has asked California lawmakers for more authority to review the Anthem/WellPoint deal and WellPoint executive compensation practices.

Sean Harrigan, president of the CalPERS board, has called the WellPoint executive compensation package “beyond the realm of excessive.”

CalPERS owns only 721,840 shares of WellPoint stock and 612,938 shares of Anthem stock, but it says it is trying to persuade other shareowners to help it oppose the merger.

In addition to questioning the Anthem/WellPoint deal executive compensation provisions, Garamendi has worried about the possible effects of the deal on California consumers.

Anthem’s plans for Blue Cross of California, WellPoint’s main California operating company, are “not transparent,” Garamendi testified at a hearing of the California Senate Insurance Committee, according to a written version of his remarks.

Anthem could shift the entire California market, which depends on heavily regulated health maintenance organizations, toward more lightly regulated preferred provider organization plans that offer inferior benefit packages and make consumers pay higher out-of-pocket costs, Garamendi said.

But David Colby, WellPoint?s chief financial officer, points out that Anthem, not WellPoint, will cover the cost of any deal-related bonuses and severance benefits.

Anthem expects to retain most WellPoint executives, and that probably will hold the actual change-in-control executive compensation costs to about $200 million, Colby says.

Executives also could cash in up to $251 million in unvested options, but the executives have earned those options themselves over the years and have a legal right to exercise the options early if they are terminated, Colby says.

In any case, the deal-related executive compensation is part of a fully disclosed executive compensation program that has been in place for years, Colby says.

Colby adds that the Anthem deal will help California residents by making WellPoint a stronger company that will be better equipped to improve its operations and negotiate for discounts from drug manufacturers and other providers.

Reproduced from National Underwriter Edition, June 18, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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