INTERVIEW – Policy of Engagement John Garamendi, deep into his second stint as state insurance commissioner, stakes out his turf as he wrestles with WellPoint on its proposed merger in a bid to make his department a top consumer protection agency By BRAD SMITH Staff Reporter As an all-conference lineman at the University of California Berkeley, John Garamendi had a choice when he graduated from Cal in 1966: professional football or public service. Instead of the gridiron, Garamendi and his wife Patti chose the Peace Corps, spending two years in Ethiopia. He then earned an MBA at Harvard and went on to serve for 16 years as a Democratic lawmaker in the state Legislature, representing much of the San Joaquin Valley. Garamendi also served as a deputy secretary in the Department of the Interior during the Clinton Administration, and is midway through his second term as state insurance commissioner. He was the insurance department’s first elected commissioner, and took the reins of the agency for the second time in 2003, after former Commissioner Chuck Quackenbush, a Republican, resigned under fire after an investigation by federal and state authorities over his part in the expenditure of some $13 million in payments insurance companies made to the agency in lieu of fines after the 1994 Northridge earthquake. Although Quackenbush was never charged, investigators found millions had been spent on television advertisements featuring Quackenbush and grants to an array of community organizations. When he was sworn into office in 2003, Garamendi promised to make the Department of Insurance “the best consumer protection agency in the nation.” In the past year, he has been deeply involved in reform of the state’s Workers’ Compensation insurance system. Garamendi has also garnered attention for his criticism of the planned $16.5 billion merger of Thousand Oaks-based health care giant WellPoint Health Networks Inc., who’s Blue Cross Life & Health insurance subsidiary is regulated by Garamendi’s agency, and Indianapolis-based Anthem Inc. The merger is to be financed by $4 billion in cash and debt and $12.5 billion in stock. Among the elements of the deal will be a possible $200 million or more in compensation for WellPoint’s executives, including current CEO Leonard D. Schaeffer, who is entitled to a cash payout of $47.5 million and some $6 million in stock options. Question: What have you asked of the companies in the Anthem and WellPoint M & A; as an undertaking prior to the agency’s approval? Answer: I’m demanding that they invest in low income communities; the principal point is this merger has no discernable benefit to California health insurance consumers. Certainly there are many costs to Blue Cross premium payers and providers, hospitals, doctors and clinics, and my demand concerning their executive compensation in making these investments is really the result of my outrage at this extraordinary, reprehensible, executive compensation package it has been very difficult to get the details on this, but it appears the nature of the merger is a change of control for both companies in the nature of their executive compensation programs. We are finding there are similar expenses and benefits for Anthem executives, which only reinforces the point I’ve been making all along that there are no discernable benefits to providers and consumers of Blue Cross products in California. There is an extraordinary cost they will have to bear, across the nation, for this. They will have to pay $4 billion for this deal. Q: Is that fair to a business plan that has passed muster with the federal government and 11 other states? A: The (U.S.) Justice Department chimed in but they have no authority. The authority over this acquisition of Blue Cross Life & Health rests with me, and the law clearly states that I have the authority to make the determination about the positive and negative impacts this has on policy holders. It is clear from the statements from the SEC filings for the merger that the policy holders are going to be paying $4 billion for this deal: there’s no other place for this money to come from … so my demand to Anthem is that they say they are going to protect the consumers, so show me how you’re going to do this. Thus far they have not, and thus far I’m disappointed. They say the executive compensation is not going to be paid for by California policy holders, but the SEC filings clearly say they are. Q: Is this “Garamendi standard” going to be the criteria for all M & As;? Has it been? A: This is the first that I’ve had to deal with, and there are many different kinds of mergers and acquisitions, and many different types of insurance, and the deals vary from one to another. We’ll take each acquisition on its own merits, if indeed there are merits, but it is very clear that this one is not in the interest of policyholders as it is proposed. Q: On a different issue, Gov. (Arnold) Schwarzenegger recently signed a workers’ compensation reform bill, and Gov. (Gray) Davis signed something similar last year; are these results the best California businesses can expect? A: The reform package is a very significant improvement for both business and for truly injured workers. It, for the most part, follows the road map we laid out last year and will result over time in significant reductions to the costs for employers and increased efficiencies and effectiveness of the system for both employers and injured workers, and for seriously injured workers it will be a far better system with better benefits. For those who abuse the system, whether workers, employers, or (health care) providers, this bill is not good news for them because they are going to have a very different program that will make it much more difficult for them to cheat the system. Q: Are their other possible improvements in the mix? Additional legislation or new regulations that would provide lower rates and better services? A: On the regulatory side of it, the administrative director in the Department of Industrial Relations has very critical responsibilities in writing regulations and enforcing those regulations. That’s a task that remains to be done and clearly the governor chose to take that responsibility rather than put it in law. All the savings in SB 899, the bill Gov. Schwarzenegger signed, depend on his Administration’s actions in writing appropriate regulations and enforcing those regulations, and there is a need (to) strengthen the fraud provisions that were left out of the bill. These are provisions I asked the Legislature and Governor to put in the bill, but they were not. Hopefully this will be done. One further point is there are two sets of legislation, one passed last fall that clearly resulted in over $5 billion in savings and a 15 percent decrease (in workers compensation premiums), and that bill was signed by Gov. Davis. The second bill was promoted by Gov. Schwarzenegger, and that resulted in an immediate 3-4 percent reduction (in premiums) and additional reductions later when the regulations are completed the regulations still need to be resolved, and this was (Schwarzenegger’s) legislation. He wrote it. Q: How much of a factor do you believe insurance costs are to business when they consider investing or expanding in California? A: Historically, insurance costs have been ignored by CEOs; they just haven’t paid attention to it, but in the last three or four years, because of the extraordinary cost of health insurance and workers comp, they are paying attention to it and it’s a significant factor in the economic health of California. It always has been important, but it has become a recognized big deal. Now it’s right in front of these CEOs and therefore has serious implications on job growth and economic growth in the state of California the cost of doing business in the state clearly has resulted in some companies leaving the state and making decisions to locate elsewhere. Q: Your agency also oversees the California Organized Investment Network, which is designed to encourage insurers to operate in poor and underserved communities, including places like the Northwest San Fernando Valley. How is that program going? A: It is an effort to replicate what banks are required to do by law, that is invest and participate in low income communities through the Community Reinvestment Act; the COIN program is a voluntary effort, administered by the department. Initially, participation was moderate, but in the last two years participation has fallen off, perhaps as a result of the downturn of the economy. The fall-off has been a serious concern to me. (so) I’m personally promising the industry that we will support a CRA for the industry should the industry fail to increase investments and participation in low income communities in California. It’s a carrot and stick approach and I am perfectly prepared to use the stick if the carrot doesn’t result in additional participation. SNAPSHOT: John Garamendi Title: Commissioner, California Department of Insurance Born: Jan. 24, 1945 Education: University of California, Berkeley, 1966; Harvard University, 1970 Career Turning Point: Two years as a Peace Corps volunteer in Ethiopia Most Admired Person: His wife, Patti Personal: Married, six children and nine grandchildren