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Maine.gov > PFR Home > Insurance Regulation > Hearing Decision Index > Document 106 : INS 99-14 : Hearing Decision

STATE OF MAINE

DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION

BUREAU OF INSURANCE

 

IN RE: APPLICATION OF ASSOCIATED HOSPITAL SERVICE
OF MAINE, d/b/a BLUE CROSS
AND BLUE SHIELD OF MAINE, TO CONVERT TO A STOCK INSURER AND VOLUNTARILY LIQUIDATE AND DISSOLVE 		)
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IN RE: APPLICATION OF ANTHEM HEALTH PLAN OF MAINE, INC.,
TO ACQUIRE TO ACQUIRE THE ASSETS OF ASSOCIATED HOSPITAL SERVICE OF MAINE, d/b/a BLUE CROSS AND BLUE SHIELD OF MAINE, AND RELATED TRANSACTIONS

Docket NO. INS 99-14 (CONSOLIDATED)

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)		 ANTHEM INSURANCE COMPANIES, INC.’S RESPONSE TO SECOND DISCOVERY REQUEST OF SUPERINTENDENT OF INSURANCE

 

 

December 17, 1999

Applicants, Anthem Insurance Companies, Inc., on behalf of its subsidiary to be formed, Anthem Health Plans of Maine, Inc., d/b/a Anthem Blue Cross and Blue Shield (collectively "Anthem"), hereby responds to the Second Discovery Request of the Superintendent of Insurance, dated December 3, 1999, as follows:

The following responses by Anthem are subject to the objections and clarifications previously filed by Anthem on December 10, 1999. To the extent that any additional responsive documents are located in the future, Anthem reserves its rights to object to producing such documents to the extent covered by the attorney-client and or work product privileges.

Asset Purchase Agreement

  1. Please provide a detailed Schedule of included and excluded liabilities and assets as of the transaction date. To the extent the value of any liability, asset, or anticipated liability cannot be definitively quantified at this time, please provide a good faith estimate.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by Associated Hospital Services of Maine d/b/a Blue Cross Blue Shield of Maine ("BCBSME").

     

  2. Please provide a copy of the fairness opinion of SalomonSmithBarney and documentation substantiating the supporting criteria, including any related valuation analysis. Please provide a copy of any correspondence between SalomonSmithBarney, and BCBSME leading up to the award of the contract as well as the contract.
    Response: Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  3. Section 2.01 of the Asset Purchase Agreement does not include Patriot Mutual’s interest in Machigonne, Inc. as part of the "Assets to be Sold". Therefore, why is the cost of "buying out" Patriot Mutual’s interest in Machigonne deducted from the total consideration to be paid for the assets of Blue Cross Blue Shield of Maine?
    Response:  Anthem agreed to pay $120 million (subject to escrows and adjustments) to purchase a pool of assets consisting of (a) the "Assets to be Sold" under the Asset Purchase Agreement (which includes the 57% interest in Machigonne owned by BCBSME), and (b) the 43% interest in Machigonne owned by Patriot Mutual. Section 8.03(n) links the two transactions by making it a condition to the closing of the Asset Purchase Agreement that there be a companion closing in which Anthem buys the 43% interest in Machigonne from Patriot Mutual. In other words, the purchase price offered by Anthem contemplated the acquisition by Anthem of 100% of the stock of Machigonne, Inc. BCBSME can only sell the 57% interest in Machigonne that it owns; the remaining 43% is held by Patriot Mutual and cannot be among the assets sold by BCBSME. So a portion of the $120 million must go to Patriot Mutual to acquire its 43% interest.

     

  4. With regard to the Asset Purchase Agreement, Section 2.03 appears inconsistent with Section 2.06 in that under Section 2.06 the Purchaser delivers to the Seller Total Consideration less amount required to pay, in full, the Patriot Notes. Amounts required to pay, in full, the Patriot Notes were not adjustments specified in Section 2.03 and Section 2.07. Furthermore, the Patriot Notes were not deemed Excluded Assets per Section 2.01. Please clarify.
    Response:  The Patriot Notes are Excluded Liabilities pursuant to 2.02(ii). As such, all obligations to repay principal and interest remain with BCBSME. Payment from the purchase price proceeds is the preferred method to satisfy these obligations.

     

  5. Please provide all Exhibits and Schedules to the Asset Purchase Agreement not provided to date including, but not limited to:
    (a) each of the seven management service agreements/contracts for Patriot Mutual Insurance Company and Patriot Life Insurance Company as listed in Exhibit 5.06;
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.
    (b) Exhibit 8.03(e) – Third Party Consents;
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.
    (c) the "Acquisition Documents," having the meaning given in Section 1.01;
    Response:  The Acquisition Documents consist of the following (status is noted parenthetically):
    1. the Asset Purchase Agreement (agreement was previously provided);
    2. Quitclaim Deeds (not yet drafted);
    3. Assignment and Assumption Agreements (draft of Bulk Reinsurance Agreement was previously provided (final version to be executed at closing); trademark and service mark assignment agreements (not yet drafted; to be executed at closing); no other Assignment and Assumption Agreements are contemplated at this time)
    4. Escrow Agreement (draft was previously provided; to be executed at closing);
    5. Financial Statements for BCBSME (please see documents attached to BCBSME’s response to question #12)
    6. Final Closing Financial Statements (to be prepared after closing);
    7. Closing certificate of Anthem BCBS (not yet drafted; to be executed at closing);
    8. Secretary Certificate of Anthem BCBS (not yet drafted; to be executed at closing);
    9. Incumbency Certificate of Anthem BCBS (not yet drafted; to be executed at closing);
    10. Legal Opinion of Anthem BCBS (draft was previously provided; to be executed at closing);
    11. Closing certificate of BCBSME (not yet drafted; to be executed at closing);
    12. Secretary Certificate of BCBSME (not yet drafted; to be executed at closing);
    13. Incumbency Certificate of BCBSME (not yet drafted; to be executed at closing);
    14. Legal Opinion of BCBSME (draft was previously provided; to be executed at closing);
    15. Third party consents (to be obtained from third parties and delivered at closing);
    16. Certificates of Existence and Good Standing regarding BCBSME (to be obtained at closing from governmental authorities).
    (d) Seller’s then current business plan (as presented to Purchaser) as identified in Section 5.01(c);
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.
    and
    (e) All written materials, including but not limited to management communications, workpapers, Board minutes, internal memoranda, et cetera regarding the condition to closing that Purchaser acquire Patriot Mutual’s interest in Machigonne, Inc. as identified in Section 8.03(n).
    Response:  Anthem’s interest in the transaction with BCBSME, and its willingness to value the transaction at $120 million, was conditioned upon Anthem’s simultaneous acquisition of Patriot Mutual’s 43% interest in Machigonne, Inc. Other than certain attorney-client privileged communications regarding Machigonne’s joint ownership and all preliminary versions of the Asset Purchase Agreement, the only documents addressing Section 8.03(n) of the Asset Purchase Agreement are listed as follows and attached hereto:
    1. Letter from L. Ben Lytle of Anthem to BCBSME dated February 12, 1999 (AN-00240 to AN-00255)
    2. Letter from David R. Frick of Anthem to BCBSME dated April 30, 1999 (AN-00256 to AN-00277)
    Anthem also incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  6. Please provide a copy of the Disclosure Schedule to the Asset Purchase Agreement and all exhibits, schedules, and attachments thereto.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  7. Please provide a copy of the Reference Balance Sheet dated December 31, 1998, identified in Article I of the Asset Purchase Agreement as set forth in Section 3.06(a)(i) of the Disclosure Schedule.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  8. Please provide a list, by general ledger account, of the amounts of the liabilities relating to or arising out of the Excluded Assets, as referred to in Section 2.01(b)(i) [Note: The subsection should be "(c)", because the previous subsection is also "(b)"] of the Asset Purchase Agreement, and amounts as of July 13, 1999, the date of the Asset Purchase Agreement. To the extent an amount can not be directly quantified, a good faith estimate should be attempted, and identified as such. To the extent such amounts cannot be definitively quantified, please make a good faith estimate.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  9. Anthem’s response to the First Discovery Request indicated that, according to BCBSME, there are no liabilities related to Patriot Mutual. Please provide additional information as to why, given no liabilities exist related to Patriot Mutual, that such liabilities are excluded from the Asset Purchase Agreement, and under what circumstances would liabilities arise related to Patriot Mutual.
    Response:  The response to the Bureau’s First Discovery Request indicated that, according to BCBSME, there currently exist no liabilities relating to Patriot Mutual. Although Anthem has no reason to doubt BCBSME’s representations, there always exists the possibility that information unknown to Anthem could surface or unknown claims could be asserted in the future (for instance, claims by policyholders related to fiduciary duty, or claims related to the services provided by BCBSME to Patriot Mutual over the years). The allocation of this risk has an economic impact on the transaction as a whole.

    The BCBSME/Patriot Mutual relationship was not and is not now under the control of Anthem, nor is it related to the business being purchased by Anthem. While BCBSME believes the risk is small or non-existent, Anthem, because it is unable to fully assess the long history of dealings between BCBSME and Patriot Mutual, must necessarily regard the risk to be more uncertain and of higher value to the transaction. The $120 million aggregate purchase price offered by Anthem was conditioned upon the elimination of any risk arising from the BCBSME/Patriot Mutual relationship. Shifting the risk to Anthem would impact the value of the aggregate assets and liabilities involved in the transaction.

     

  10. Anthem’s response to the First Discovery Request indicated that, according to BCBSME, there are no liabilities related to Medicare. Please provide additional information as to why, given no liabilities exist related to Medicare, that such liabilities are excluded from the Asset Purchase Agreement, and under what circumstances would liabilities arise related to Medicare in excess of 3% of the Total Consideration (after all adjustments).
    Response:  The response to the Bureau’s First Discovery Request indicated that, according to BCBSME, there currently exist no liabilities relating to Medicare. Although Anthem has no reason to doubt BCBSME’s representations, there always exists the possibility that information unknown to Anthem could surface or unknown claims could be asserted in the future (for instance, claims brought under the False Claims Act relating to contract performance over the years). The allocation of this risk has an economic impact on the transaction as a whole.

    BCBSME’s Medicare business was not and is not now under the control of Anthem. While BCBSME believes the risk is small or non-existent, Anthem, because it is unable to fully assess the long history of BCBSME’s Medicare performance, must necessarily regard the risk to be more uncertain and of higher value to the transaction. The $120 million aggregate purchase price offered by Anthem was conditioned upon the elimination of any risk arising from BCBSME’s Medicare business. Shifting the risk to Anthem would impact the overall value of the aggregate assets and liabilities involved in the transaction.

     

  11. Please provide a good faith estimate with supporting references and calculations of Seller’s Aggregate Tax Liability as referred to in Section 2.01(b)(iv) of the Asset Purchase Agreement.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  12. In order to identify the specific documents referred to in Section 3.06 of the Asset Purchase Agreement, please provide true and complete copies thereof. If exact copies of such documents have already been filed, then please provide a reference to such exact copies and include any other that have not been previously provided.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  13. Please provide a good faith estimate of the Closing Tax Reserve and a reasonably detailed description of the calculation assuming a closing date no later than July 31, 2000.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  14. Please provide a detailed analysis explaining the methodology and practice that will be followed for allocation of costs and expenses pursuant to the Inter-Company Services Agreement.
    Response:  Anthem and its subsidiaries provide and receive inter-company services to and from one another. As part of that long-standing practice, the entity providing services is reimbursed a reasonable charge (usually the actual costs and expenses which it has incurred) by the entity receiving such services. It is in the interests of economy, efficiency and sound business practice for the entities to share such services. The expenses incurred and payments received are allocated to the appropriate party in conformity with customary insurance accounting principles consistently applied. Such services shall consist of, but are not limited to, the following:
    • Executive Management Services
    • Accounts Payable Processing Services
    • Treasury Management Services
    • Investment Management Services
    • Payroll Processing Services
    • Human Resources/APIC Management Services
    • Legal Services
    • Financial Services
    • Strategic Management and Planning Services
    • Internal Audit Services
    • Public Affairs Services
    • Facilities Services
    • General and Administrative Overhead
    • Information Technology Services
    Also, please see the attached confidential documents (AN-01614 to AN-01621) for an analysis of the allocation of charges.

     

  15. Please provide additional support for the $5.00 reduction in purchase price per one dollar shortfall in financial projections including:
    • Example of the "Benchmark Earnings" amount assuming a June 30, 2000 close date,
    • Example of the "Closing Earnings" amount assuming the Financial Projections are realized (that is, are "Closing Earnings" annualized?),
    • Rationale for using a multiple earnings adjustment to the purchase price based on a short-term, retrospective (at closing) measurement period,
    • Rationale for using the Earnings Shortfall adjustment per Section 2.07 of the Asset Purchase Agreement in addition to the Book Value Shortfall adjustment, and
    • Discuss how; as described in Anthem’s response to the First Discovery Request, "Anthem’s assessment of the content and trends reflected in the Benchmark Projections developed by BCBSME" support the $5.00 per $1.00 Earnings Shortfall adjustment.
    Response:  Anthem is in the process of preparing a response to this question and will submit it on or before December 23, 1999.

     

  16. Please describe in detail, and provide workpapers and supporting documentation, including but not limited to Business Plans, financial pro-forma’s et cetera regarding Purchaser’s intention to move the Medicare administrative/intermediary functions performed by BCBSME to Purchaser’s Administar subsidiary. Please include, as a part of the detailed description, the impact of the intended move on post-closing employment levels as identified in Section 5.12 of the Asset Purchase Agreement.
    Response:  Anthem previously indicated that it would seek to move the Medicare administrative/intermediary functions performed by BCBSME to Anthem’s AdminaStar subsidiary. There are no workpapers or supporting documentation because, to date, no plans have been developed to implement such a move. Anthem has no current plans that would result in significant employment reductions.

     

  17. Please describe, in detail, and provide workpapers and supporting documentation, regarding Purchaser’s agreement to establish a Local Advisory Board as identified in Section 5.11(b) of the Asset Purchase Agreement. Specifically, but not by way of limitation, please include as a part of the response (i) the stated purposes of the Local Advisory Board; (ii) the term of existence of the Local Advisory Board; and (iii) other specific details regarding such Local Advisory Board.
    Response:  Anthem is in the process of preparing a response to this request and will provide a draft Advisory Board Charter on or before December 23, 1999. Among other things, it addresses the Board’s purposes, objectives, membership standards and frequency of meetings.

     

  18. Please provide copies of the following communications identified in the Asset Purchase Agreement:
    (a) all Notice of Developments that are from time to time, or that have been, provided by Seller to Purchaser as identified in Section 5.05(i), (ii), and (iii);
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.
    (b) any written request from Blue Alliance for Purchaser to continue to provide the management, administrative and other services currently covered by the Blue Alliance Service Agreements, as identified in Section 5.06;
    Response:  Anthem has not received any such written request from Blue Alliance. Anthem also incorporates by reference the response to this question prepared and submitted by BCBSME.
    (c) any notice provided by Seller to Purchaser of any proposal or offer as identified in Section 5.07(c) of the Asset Purchase Agreement;
    Response:  Anthem has not received any such proposal. Anthem also incorporates by reference the response to this question prepared and submitted by BCBSME.
    (d) the notice, accompanying proposal, workpapers and material supporting authority, valuations or opinions, provided by Seller to Purchaser regarding the amount of funds to be deposited by Seller in the Closing Tax Reserve, as identified in Section 7.06(b);
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

    and

    (e) any other written notice or communication made between Seller and Purchaser regarding matters of material significance to the fulfillment of each parties obligations under the Asset Purchase Agreement.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

Based upon clarification from counsel for the Superintendent, Anthem now understands that there are no question numbers 19-21.

  1. Please provide specific information and supporting documentation with respect to any applications, filings and proceedings associated with the consummation of the transactions contemplated by the Asset Purchase Agreement which have been or are to be made with securities regulators, antitrust regulators, other insurance regulators or otherwise. At a minimum, please provide the following type of information:
    1. copies of all filings which have been or are to be made;
    2. the process of review for each filing;
    3. the status of each filing; and
    4. copies of all rulings, orders, determinations or decisions of a substantive nature associated with each filing.
    Response:  No such filings have been made to date. Applicants will provide the Superintendent with copies when filed.

    Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Anthem and BCBSME will each file a Notification and Report Form for Certain Mergers and Acquisitions with the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) concerning the proposed acquisition. The parties anticipate making the filings in early 2000. Early termination of the 30-day waiting period will be requested. The FTC and DOJ will review the proposed acquisition to determine if it complies with federal antitrust law. The waiting period may be extended if either the FTC or the DOJ requests additional information and/or documentation from the parties, within the initial waiting period. The parties expect early termination to be granted.

    Anthem does not anticipate making any other filings in connection with the proposed transaction.

    Financial Statements

  2. Please provide copies of NAIC statutory quarterly and Annual Statements for the following companies as of the following financial statement dates:
    • Anthem Insurance Companies, Inc. (IN) as of September 30, 1999, and December 31, 1997.
    • Anthem Health Plans, Inc. (CT) as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, and December 31, 1997.
    • Community Insurance Company (OH) as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, December 31, 1997, and December 31, 1996.
    • Southeastern United Corporation (KY) as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, December 31, 1997, and December 31, 1996.
    • Blue Cross and Blue Shield of New Hampshire as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, and December 31, 1997.
    • Matthew Thornton Health Plan as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, and December 31, 1997.
    • Blue Cross and Blue Shield of Colorado as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, and December 31, 1997.
    • HMO Colorado as of September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, and December 31, 1997.
    Response:  All the requested NAIC quarterly and annual statements have been provided (AN-5000 to AN-08457). Please note that Blue Cross and Blue Shield of New Hampshire is required to file two Statutory Statements, one for the HMO business and one for all other business, so both statements are included for all periods requested.

     

  3. Please provide copies of completed statutory Risk Based Capital worksheets supporting statutory Risk Based Capital calculations for the following companies as of the following Annual Statement dates:
    • Anthem Insurance Companies, Inc. (IN) as of December 31, 1998, December 31, 1997 and December 31, 1996.
    • Anthem Health Plans, Inc. (CT) as of December 31, 1998 and December 31, 1997.
    • Community Insurance Company (OH) as of December 31, 1998, December 31, 1997, and December 31, 1996.
    • Southeastern United Corporation (KY) as of December 31, 1998, December 31, 1997, and December 31, 1996.
    • Blue Cross and Blue Shield of New Hampshire as of December 31, 1998, and December 31, 1997.
    • Matthew Thornton Health Plan as of December 31, 1998, and December 31, 1997.
    • Blue Cross and Blue Shield of Colorado as of December 31, 1998, and December 31, 1997.
    • HMO Colorado as of December 31, 1997 and December 31, 1998
    Response:  CONFIDENTIAL RESPONSE REDACTED

     

  4. Please provide a copy of the Anthem Insurance Companies, Inc. audited statutory Annual Statement as of December 31, 1998.
    Response:  Please see attached document numbers AN-00577 to AN-00599.

     

  5. Please provide copies of completed worksheets supporting Blue Cross Blue Shield Association (BCBSA) capital benchmark calculations for all companies referenced under Item #18 as of the corresponding Annual Statement dates referenced under Item #18.
    Response:  Based upon clarification from counsel for the Superintendent, Anthem now understands that this question should reference question #23. Anthem is in the process of preparing a response to this question and will submit it on or before December 23, 1999.

     

  6. Please provide copies of all Actuarial Opinions and supporting Actuarial Memoranda, including Asset Adequacy Analysis performed in support of such Memoranda, for all companies referenced under Item #20 as of December 31, 1998.
    Response:  Based upon clarification from counsel for the Superintendent, Anthem now understands that this question should reference question #23. See the applicable annual statements for all companies except Matthew Thornton Health Plan, which statement will be submitted on or before December 23, 1998.

    Financial Projections / Analyses

  7. Please provide pro-forma and projected Anthem balance sheets and income statements, both consolidated and at the Blue Cross company level and on a GAAP and statutory basis, comparable to those provided regarding Blue Cross and Blue Shield of Maine. The projections at the consolidated level should include operations from the anticipated mergers with the New Hampshire, Colorado, and Maine Blue Cross plans.
    Response:  CONFIDENTIAL RESPONSE REDACTED

     

  8. Please provide, on both a GAAP and statutory basis, company level and consolidated financial projections demonstrating Anthem’s proposed capitalization and capital adequacy for the Indiana parent company and all current and pending Blue Cross subsidiaries in Ohio, Kentucky, Connecticut, New Hampshire, Colorado, and Maine. Include in such projections comparisons of each Blue Cross plan’s capitalization compared with regulatory and / or rating agency prescribed capital benchmarks such as statutory Risk Based Capital requirements, BCBSA capital benchmarks, and S&P capital adequacy benchmarks.
    Response:  Anthem is in the process of preparing a response to this question and these financial projections will be provided, with a request for confidential treatment, by December 23, 1999.

     

  9. Please provide a copy of Anthem’s latest Consolidated Business Plan and related forecasts, including business plans and forecasts related to the assimilation and operation of the Maine, Colorado, and New Hampshire Blue Cross Blue Shield Plans, with supporting detail regarding all assumptions supporting the Plan and forecasts such as operational cost savings, medical cost trends, enrollment, and so on.
    Response: CONFIDENTIAL RESPONSE REDACTED

     

  10. Please provide a copy of any business plans for the continued viability and operation of Patriot Mutual Insurance Company and Patriot Life Insurance Company.
    Response: Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  11. To the extent not included in other financial projections, please provide a projection of anticipated debt and surplus note servicing requirements for at least the next 5 years. Include in such projection anticipated debt and surplus note servicing requirements anticipated in relation to the Blue Cross of Maine, New Hampshire, and Colorado transactions.
    Response:  Anthem Insurance Companies, Inc. has outstanding a $200MM 9.00% Surplus Note due April 1, 2027 and a $100MM 6.75% Senior Guaranteed Note due July 15, 2003. The semi-annual interest payments on the $200MM 9.00% Surplus Note are $9MM with payments dates of April 1st, and October 1st (total $18MM annually) and are payable only upon approval from the Indiana Department of Insurance. The semi-annual interest payments on the $100MM 6.75% Senior Guaranteed Note are $3.375MM with payments dates of January 15th and July 15th (total of $6.75MM annually). The total annual interest payable for these two debt instruments is $24.75MM until July 15, 2003, when the $100MM 6.75% Senior Guaranteed Note matures.

    In addition, Anthem Insurance Companies, Inc. has bank revolver debt outstanding. The total currently outstanding is $220MM on a $300MM line of credit. The company anticipates repayment of the $220MM from internally generated funds through late 2000.

     

  12. Please provide updated pro-formas for Blue Cross of Maine reflecting actual experience through the third quarter of 1999.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  13. The pro-forma financial statements for Blue Cross of Maine reflect the repayment of surplus notes to Patriot Mutual and Patriot Life in 2001. The approval of the Superintendent for those surplus notes requires repayment immediately upon the consummation of any sale of Blue Cross of Maine. Please explain the reason for the discrepancy.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

    Other

  14. Please provide a copy of the valuation report prepared by PriceWaterhouseCoopers, LLP regarding the fair value of Machigonne, Inc.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  15. Please provide clarification of the source of funds to be utilized to finance the proposed Anthem / BCBSME merger as to how much of the consideration will be financed from:
    1. Current cash (not raised by financing activities)
    2. Issuance of debt
    3. Use of commercial paper or line of credit facilities
    4. Issuance of surplus notes
    5. Use of financial reinsurance
    6. Any other financing mechanism.
    Response: The company has adequate resources to fund the proposed merger without the need for external financing. At this time the company has not made a decision as to the financing of this particular transaction; however, based on market conditions and investment maturities, a combination of the issuance of debt and internally generated funds is being considered.

     

  16. Please provide information as to the source of funds to be utilized to finance the pending Anthem mergers with the Blue Cross of New Hampshire and Blue Cross of Colorado plans as to how much of the consideration will be financed from:
    1. Current cash (not raised by financing activities)
    2. Issuance of debt
    3. Use of commercial paper of line of credit facilities
    4. Issuance of surplus notes
    5. Use of financial reinsurance
    6. Any other financing mechanism.
    Response:  Anthem had adequate resources to pay with internal funds, but because of market conditions and a desire to avoid liquidating investments, Anthem used its bank revolver and operating cash to fund the purchase of Blue Cross Blue Shield of New Hampshire and Blue Cross and Blue Shield of Colorado & Nevada. However, as described in response to question #32 Anthem anticipates repayment of the $220MM from internally generated funds through late 2000.

     

  17. Please provide copies of the Consolidated Filing, or comparable document, including the Purchase Agreement and the Form A Filing, filed in conjunction with Anthem’s proposed mergers with Blue Cross Blue Shield of New Hampshire and with Blue Cross Blue Shield of Colorado.
    Response:  Please see the following attached documents (AN-00622 to AN-00720 and AN-01606 to AN-01607) related to Anthem’s purchase of Blue Cross and Blue Shield of Colorado:
    1. Asset Purchase Agreement dated March 29, 1999;
    2. Plan of Exchange of Insurance Securities dated August 16, 1999;
    3. Plan of Conversion to a Stock Insurance Company dated August 16, 1999;
    4. Confirmation of stipulation contained in a letter from Yu Stromberg Cleveland, P.C. dated October 22, 1999
    Please see the following attached documents (AN-00721 to AN-00834 and AN-01608 to AN-01610) related to Anthem’s purchase of Blue Cross and Blue Shield of New Hampshire:
    1. Asset Purchase Agreement dated February 19, 1999;
    2. Form A dated March 10, 1999; and
    3. Amendment No. 1 to Asset Purchase Agreement dated July 2, 1999
    Anthem will provide copies of any of the exhibits, schedules and attachments for the above documents upon request.

     

  18. Please provide documentation of the proposed share service, regional, and state administrative management structure proposed for Blue Cross and Blue Shield of Colorado.
    Response:  Anthem is in the process of preparing a response to this question and will submit it on or before December 23, 1999.

     

  19. Please provide a description of Anthem’s dividend policy as regards the Blue Cross subsidiaries, both past and prospective.
    Response:  Anthem has no formal capitalization policy. Anthem often reviews the statutory capitalization of its subsidiaries on an annual basis. This review compares the current statutory surplus of each subsidiary to internal, NAIC, state, and Blue Cross Blue Shield Association capitalization requirements. Included in the review are current capital needs as well as known or anticipated changes. It also considers statutes and regulations in the subsidiary state of domicile relative to dividend payments. Should actual surplus exceed the needed capital, and such excess is within the state’s "ordinary" dividend provision, a dividend will be considered and Anthem would then provide appropriate notification to the state insurance regulator. If such a dividend is to be made and the amount exceeds the "ordinary" limit, a formal request would be made to the regulator, or a smaller dividend might be paid.

     

  20. With regard to the proposed Anthem Intercompany Service Agreement (with the former BCBSME, following closing of the merger with Anthem), please provide detail with regard to the actual terms of settlement and a quantification of reasonable charges anticipated under the agreement.
    Response:  Anthem is not able to provide that level of detail because it is not known at this time what services will be provided by or to the former BCBSME after closing of the transaction. The response to question #14 describes the basis on which charges will be allocated under Anthem’s Intercompany Service Agreement.

     

  21. Please provide copies of all Intercompany Service Agreements, if any, between Anthem and the Kentucky, Ohio, and Connecticut Blue Cross plans and schedules of actual intercompany charges effected pursuant to such Service Agreements for 1997, 1998, and 1999 (through September 30).
    Response:  Based upon clarification from counsel for the Superintendent, Anthem now understands that the scope of question #42 is narrowed such that Anthem will respond only to the extent the response does not overlap with question #52.

    The following agreements are attached as AN-00835 to AN-00888:

    1. The Associated Group (Anthem) Inter-Company Services Agreement and five supplements thereto between Anthem, f/k/a Associated Insurance Companies, Inc. and Anthem Health Plans of Kentucky, Inc. (AHP-KY), f/k/a Southeastern Group, Inc.
    2. Joinder executed by Community Insurance Company (CIC), evidencing that it is a party to The Associated Group Inter-Company Services Agreement.
    3. Midwest Health Management Agreement executed by Anthem and CIC and a second version thereof executed by Anthem, CIC and AHP-KY.
    4. Inter-Company Services Agreement between Anthem and Anthem Health Plans, Inc. concerning the provision of investment management services and treasury management services.
    5. Proposed Services Agreement between Anthem and Anthem Health Plans, Inc. concerning the provision of corporate services (Note: Approval of the Agreement is pending before the Connecticut and Indiana Departments of Insurance with whom the Agreement was filed in early December, 1999).

    While it is possible to provide historical information in this level of detail, it will be quite time consuming to prepare and not necessarily reflective of current methods of allocation. Perhaps more enlightening is the current basis used to calculate intercompany charges. Additionally, such information will not necessarily be representative of the level of charges will be applicable to Maine. Information relating to the charges of the greatest magnitude is attached. Please see the response to question #14.

    See also Anthem’s response to question #52.

     

  22. Please provide copies of all of Anthem’s borrowing agreements and surplus note agreements currently in force.
    Response:  Please see the attached offering circulars for the Anthem Insurance Companies, Inc. $200MM 9.00% surplus note due April 1, 2027 and the $100MM 6.75% senior guaranteed note due July 15, 2003. (AN-00889 to AN-01065).

    The $100MM 6.75% senior guaranteed note was originally issued by Associated P&C Holdings, Inc. and unconditionally guaranteed by Associated Insurance Companies, Inc. (name changed to Anthem Insurance Companies, Inc.). However, Associated P&C Holdings, Inc. was sold by Anthem in 1997 and the debt was assumed by Anthem Insurance Companies, Inc. Also provided is the $300MM Credit Agreement (Bank Revolver) dated October 22, 1997. (AN-01066 to AN-01125).

     

  23. Please provide a copy of the administrative services contract between Blue Cross Blue Shield of Maine and Blue Cross Blue Shield of Minnesota. To the extent not shown in the contract, please provide an explanation of or documentation of any anticipated revisions to the contract following BCBSME’s merger with Anthem, and Anthem’s plans for continued operation of the contract following the expiration date. Also, please provide projections of revenue generated by the contract, and include documentation of all assumptions supporting such projected revenue amounts.
    Response:  Anthem has no plans to alter the current administrative services contract between Blue Cross Blue Shield of Maine and Blue Cross Blue Shield of Minnesota. Anthem also incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  24. Please provide copies of all employment agreements or retirement agreements currently inforce with BCBSME management, and any agreements contemplated within the proposed merger.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  25. Please provide a schedule of total compensation (both current and deferred) paid to BCBSME senior management for 1997, 1998, year-to-date 1999, and projected for 1999.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  26. Please provide copies of all workpapers and communications documenting due diligence related to the competitive bidding process followed by BCBSME, including consideration of other offers, and criteria utilized in selecting Anthem as a merger partner.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  27. Please provide documentation of any financial, employment, administrative, premium rate, or other commitments given in conjunction with the completed Anthem transactions with the Colorado, New Hampshire, Kentucky, Ohio, and Connecticut Blue Cross plans.
    Response:  The following list of attached documents (AN-01126 to AN-01422 and AN-01611 to AN-01613) contain the commitments Anthem made in connection with its completed transactions with the Colorado, New Hampshire, Kentucky, Ohio and Connecticut Blue Cross plans:
    1. Colorado: Alliance Agreement dated March 29, 1999 (see response to Question 38 above)
    2. Colorado: Final Order Approving Plan of Exchange
    3. Colorado: Final Order Approving Plan of Conversion
    4. New Hampshire: Asset Purchase Agreement dated February 19, 1999 and Amendment No. 1 thereto (see response to Question 38 above)
    5. New Hampshire: Findings and Final Order
    6. Kentucky: Definitive Agreement of Merger dated January 28, 1983
    7. Kentucky: Recommended Findings of Fact, Conclusions of Law and Order
    8. Ohio: Agreement to Merge dated March 13, 1995
    9. Ohio: Order and Journal Entry
    10. Connecticut: Agreement to Merge dated November 8, 1996
    11. Connecticut: Order of Insurance Commissioner, State of Connecticut, dated July 31, 1997, together with attached Proposed Final Decision of the Hearing Officer

     

  28. Please provide documentation of or description of Anthem’s anticipated operation of the Maine Partners Health Plan, and Central Maine Partners Health Plan, and other managed care operations of BCBSME (HMO Maine) following closing of the transaction with Anthem. In addition, how does Anthem plan to address situations in which the Hospital owners of the Partners plans elect to exercise options to buy or sell their shares of the plans per the shareholders agreements? Please provide the substance of any discussions between Anthem and the Hospital owners and provide copies of any written communications or other written material relating to discussions between Anthem and the Hospital owners.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  29. Please identify any promise, agreement or contract by or between Blue Cross and Blue Shield of Maine, including any affiliate or successor, and any director, officer, agent or employee of such organizations, or any person acting on their behalf, concerning any severance pay, compensation, bonus or other valuable consideration for the benefit of any director, officer, agent or employee of Blue Cross of Maine or any of its affiliates other than usual and regular salary and compensation. "Usual and regular salary and compensation" does not include any salary, compensation or other economic benefit that is in any way contingent on completion of any of the proposed transactions involving Blue Cross of Maine and its affiliates and Anthem Insurance Companies, Inc. and its affiliates.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  30. Please identify any promise, agreement or contract by or between Anthem Insurance Companies, Inc., including any affiliate, successor, director, officer, agent, employee or any person acting on their behalf, and Blue Cross of Maine, including any affiliate, successor, director, officer, agent, employee or any person acting on their behalf, concerning any severance pay, compensation, bonus or other valuable consideration for the benefit of any director, officer, agent or employee of Blue Cross and Blue Shield of Maine or any of its affiliates.
    Response:  Anthem has given no such promises, agreements or contracts. Indeed, it is Anthem’s policy to even avoid discussing such arrangements with directors, officers, agents or employees at this stage of a transaction. Anthem has only agreed to honor the contractual commitments already made by BCBSME, including those addressing severance pay, compensation, bonus, etc.

     

  31. Please provide the following additional documentation pertaining to the Intercompany Services Agreement (ISA):
    1. copies of the executed signature pages of the ISA indicating all of the subsidiaries and affiliates that have executed the Agreement. In lieu of copies of the signature pages, a list identifying all subsidiaries and affiliates may be provided.
    2. any documentation which specifies, beyond the general language contained in the Agreement as filed, the types of services which the proposed entity, Anthem BCBSME, will be obligated to provide pursuant thereto, or which describes the mechanisms through which this is determined;
    3. any documentation which specifies, beyond the general language contained in the Agreement as filed, the types of services which the proposed entity, Anthem BCBSME, will be entitled to receive pursuant thereto, or which describes the mechanisms through which this is determined;
    4. any documentation which limits the provision and receipt of such services to any regional division of Anthem’s subsidiaries and affiliates or otherwise establishes or formalizes the specific regional "shared service" structure reference in Anthem’s Form A filing;
    5. any other documentation which limits the provision of, and entitlement to, such services, among Anthem’s subsidiaries and affiliates in a manner other than the above regional "shared service" structure;
    6. a statement whether the Agreement has been executed by all Anthem’s subsidiaries and affiliates, as reflected on the Company’s Organizational Chart as attached as Exhibit C to Anthem’s Form A filing;
    7. if any subsidiaries or affiliates have not executed the Agreement, please provide an explanation of the reasons therefor;
    8. in addition to documentation responsive to item (b) above, provide a statement specifying how the types of services which Anthem BCBSME would be obligated to provide pursuant to the Agreement are to be determined, and whether the provision of such services is to be limited to any subgroup of subsidiaries and affiliates;
    9. in addition to documentation responsive to item (c) above, provide a statement specifying how the types of services which AnthemBCBSME would be entitled to receive pursuant to the Agreement are to be determined and whether the receipt of such services is to be limited to a subgroup of subsidiaries and affiliates.
    Response: Entities that have signed the Agreement:
    • Anthem Insurance Companies, Inc.
    • Associated Group, Inc.
    • AllMed Financial Corp.
    • Health Care Ventures, Inc.
    • United Physicians Health Network, Inc.
    • Physicians Health Network, Inc.
    • Raffensperger, Hughes & Co., Inc.
    • Anthem Health Network of Kentucky, Inc.
    • Anthem Financial, Inc.
    • Lease Partners, Inc.
    • Anthem West, Inc.
    • Anthem Midwest, Inc.
    • Anthem Prescription Management, Inc.
    • The Anthem Companies, Inc.
    • PrimeONE, Inc.
    • Anthem Life Insurance Company of California
    • Anthem Benefit Administrators, Inc.
    • Dayton Services Company
    • Anthem Life Insurance Company of Indiana
    • AdminaStar Federal, Inc.
    • Anthem Alliance Health Insurance Company
    • Southeastern United Agency, Inc.
    • Anthem Health Plans of Kentucky, Inc.
    • The Corporate H.E.A.L.T.H. Club
    • Community Insurance Company
    • Paragon Health System, Ltd.
    • Anthem East, Inc.

    In addition, Anthem is in the process of having the Agreement signed by its subsidiaries in New Hampshire and Colorado where insurance regulators approved the Agreement in connection with the recently consummated acquisitions of the Blue Cross Plans in those states.

    (b)-(e), (h) and (i)

    It is still to be determined what intercompany services Maine might provide or what entities will provide regional services in the Northeast so Anthem cannot respond to (b), (c), (d), (e), (h), and (i). See, however, response to question #14 for a partial response to question 5(c). Finally, for (i), please refer to question #14 for types of intercompany services that Anthem BCBSME would receive.

    (f) Substantially all of Anthem’s subsidiaries and affiliates, as reflected on the Company’s Organizational Chart attached as Exhibit C to Anthem’s Form A filing, have executed the Agreement.

    (g) Anthem Health Plans, Inc. (AHP) has not executed the Agreement because the Connecticut Department of Insurance did not approve the Agreement when it was submitted at the time of the merger of Blue Cross & Blue Shield of Connecticut into Anthem. This was acceptable to Anthem because the Connecticut operations were not at that time part of an integrated regional operation. Now that the New England region is being developed, however, Anthem has filed for approval of a general services agreement in a form similar to that filed in response to question #42. In all other states in which Anthem has engaged in mergers with, or acquisitions of, Blue Cross Plans, the state departments of insurance have approved use of the Agreement. The other few subsidiaries which have not been made parties to the Agreement have been excluded because they were not expected to provide or receive services thereunder (most of these do not have active operations).

     

  32. With respect to the bulk reinsurance agreement between Anthem Health Plans (d/b/a Anthem BCBSME) and AHS Liquidating Corporation, please confirm that the effective date of the agreement is after the conversion of AHS to a for- profit stock company.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  33. Please detail the aspects of AHS’ current business which are subject to the bulk reinsurance agreement. What specific liabilities will remain with AHS Liquidating? Will AHS Liquidating be responsible for any insurance liabilities?
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  34. Please provide copies of the most current standard provider contracts for BCBSME (including HMOMaine, MPHP and CMPHP) including hospital contracts, physician contracts, and mental health provider contracts. Identify any provisions in each contract which vary from one contract to another.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  35. Please provide a copy of the most current pharmaceutical contract for each Third Party Prescription Program or other prescription benefit offered by BCBSME (including HMOMaine, MPHP and CMPHP).
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  36. Please identify all civil actions, other than claims disputes, involving Anthem Insurance Companies, Inc. or any of its insurance subsidiaries or affiliates initiated from January 1, 1997 to the present. For each action identified, set forth the names of the parties, the jurisdiction of the action, the Docket number (if any), the status, the amount set aside in reserve to cover the contingent liability, and, if settled or subject to judgment, provide a copy of the relevant legal documentation evidencing the final outcome of the action. Please include a summary of the issues in dispute.
    Response:  After consultation with counsel for the Superintendent, and consistent with its clarifications filed on December 10, 1999, Anthem is providing the requested information with the following parameters:
    1. the response will include information only for companies Anthem currently owns;
    2. the response will be based upon cases identified in Anthem’s management listing for the period during which such a listing has existed and,
    3. for the period between January 1, 1997 and the first such management listing, the response will include all cases with a reserve greater than $250,000 and any other cases that Anthem believes are significant and would assist the Superintendent’s analysis.
    Anthem is in the process of preparing a response to this question and will submit it on or before December 23, 1999. Portions of the response will be submitted confidentially.

     

  37. Please identify all civil actions, other than claims disputes, involving Associated Hospital Service (d/b/a Blue Cross Blue Shield of Maine) or any of its insurance subsidiaries or affiliates initiated from January 1, 1997 to the present. For each action identified, set forth the names of the parties, the jurisdiction of the action, the Docket number (if any), the status, the amount set aside in reserve to cover the contingent liability, and, if settled or subject to judgment, provide a copy of the relevant legal documentation evidencing the final outcome of the action. Please include a summary of the issues in dispute.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  38. Please identify and provide a summary of all criminal actions and administrative enforcement actions including, but not limited to, state insurance department proceedings and actions initiated from January 1, 1997 to the present against Anthem Insurance Companies, Inc. or any of its insurance subsidiaries or affiliates. For each action identified, set forth the names of the parties, the jurisdiction of the action, the Docket number (if any), the status and, if concluded, a copy of the relevant documentation evidencing the final outcome of the action.
    Response:  A review of operations in Connecticut, Colorado/Nevada, Indiana, Kentucky, New Hampshire and Ohio reveal the following:

    Connecticut:

    No actions

    Colorado/Nevada:

    The attached documents (AN-01622 to AN-01647) are responsive to this request:
    • Stipulation between the Colorado Division of Insurance and Blue Cross and Blue Shield of Colorado (May 1999). The matter which formed the basis for the Stipulation occurred prior to the merger with Anthem.
    • Plea agreement between United States and Blue Cross and Blue Shield of Colorado. The matter which formed the basis for the plea agreement occurred prior to the merger with Anthem.

    Indiana:

    The attached documents (AN-0423 to AN-01451) are responsive to this request:

    • AICI: Failure to respond timely to four (4) Indiana Department of Insurance complaints--$2,000.00 penalty. (December 1998/January 1999)

       

    • AICI: Violation of statute requiring Department of Insurance approval of contract language prior to issuance. Settlement of $5,000.00 (May 1999)

       

    • Anthem Life of Indiana: January 1999: Failure to file annual rate certifications for Medicare supplement forms with Florida Department of Insurance; penalty of $4000.00. A copy of the assessment is not available.

       

    • Anthem Alliance:
      • October 1998: Filed 1997 audited financial statement with incorrect bar code; fine of $1,500.00 assessed by the Oregon Department of Insurance. A copy of the assessment is not available.

         

      • May 1999: Failure to file annual rate certifications for Medicare supplement forms with Florida Department of Insurance; penalty of $6000.00. A copy of the assessment is not available.
      • September 1999: Late filing penalty of $600.00 assessed by Illinois Department of Insurance for untimely payment of a financial regulation fee. A copy of the assessment is not available.

    Kentucky:

    The attached documents (AN-01452 to AN-01603), part of which are confidential, are responsive to this request:

    • Agreed order (August 31, 1998) settling a dispute between the Kentucky Department of Insurance and Southeastern United Medigroup, Inc. (SUMI) regarding allegations that SUMI: (a) used rates and policy forms which were not filed and approved specifically for eligible associations, and (b) adjusted premium rates on a member’s birthday in violation of the Kentucky Insurance Code.

       

    • Demand for Hearing, Pre-hearing Conference Orders and Stipulations in a case currently pending in the Kentucky Department of Insurance regarding the Department’s allegations that Anthem improperly implemented its Small Group PPO rate increases that took effect on February 1, 1998. This matter is unresolved.

       

    • Demand for a Hearing in a case currently pending in the Kentucky Department of Insurance regarding the Department’s allegations that Anthem improperly handled renewals of the individual policies written between April 10 and June 30, 1998. The matter is unresolved.

       

    • Complaint entitled Commonwealth of Kentucky, ex rel., Attorney General Albert B. Chandler III v. Anthem Insurance Companies, Inc., Southeastern Group, Inc., d/b/a Anthem Health Plans, and Southeastern United Medigroup, Inc., d/b/a Anthem Blue Cross and Blue Shield, alleging that Anthem and its Kentucky affiliates violated the Kentucky Consumer Protection Act and failed to hold certain charitable assets in trust. The Consumer Protection claims were dismissed. The matter was settled in December 1999. For more details regarding the settlement, please refer to response to Question # 57.

       

    New Hampshire:

    The attached document (AN-01604 to AN-01605) is responsive to this request:

    • Stipulation and Agreement (July 29, 1999) settling a dispute between the New Hampshire Department of Insurance and BCBS of New Hampshire and Matthew Thornton Health Plan. BCBS of New Hampshire and Matthew Thornton Health Plan quoted and invoiced rates to groups with third quarter effective dates that were not approved by the Department. This matter which formed the basis of the Stipulation and Agreement occurred prior to the merger with Anthem.

    Ohio:

    No actions

     

  39. Please identify and provide a summary of all criminal actions and administrative enforcement actions including, but not limited to, state insurance department proceedings and actions initiated from January 1, 1997 to the present against Associated Hospital Service or any of its insurance subsidiaries or affiliates. For each action identified, set forth the names of the parties, the jurisdiction of the action, the Docket number (if any), the status and, if concluded, a copy of the relevant documentation evidencing the final outcome of the action.
  40. The application on file with the Superintendent indicates that AHS Liquidating Corporation (the converted Associated Hospital Service) will hold $1,000,000 in capital. Please provide detail as to how it was determined that $1,000,000 will be an adequate amount for AHS Liquidating Corporation to cover all liabilities of the former Associate Hospital Service which are not assumed by Anthem. If the $1,000,000 proves inadequate at a future date, how will the inadequacy be remedied and by whom? If, on the other hand, cash remains after all liabilities have been satisfied, to whom will the remaining cash be provided?
  41. Will any group or individual currently insured by Blue Cross Blue Shield of Maine be left uninsured by Anthem Blue Cross Blue Shield of Maine as a result of the bulk reinsurance agreement? If so, please provide detail as to who may be uninsured by the new company.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  42. Please update the business plan pro-formas for BCBSME that have been filed to include:
    • Balance sheets
    • Additional detail of the components of operating expenses within the income statement
    • Additional detail of the components of total revenues within the income statement (premiums earned only, or other revenues also)
    • Detail of change in surplus year-to-year through 2003
    • Balance sheets and income statements on a statutory basis
    • Underlying per member per month information on a consolidated basis (filed by segment) in addition to net income per member per month for 1997-2003.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  43. The underlying per member per month information in the BCBSME business plan pro-formas includes administrative costs per member per month for 1999 that are lower for each segment than the actual administrative costs per member per month as of September 30, 1999. In addition, the administrative costs per member per month per segment increase over time in most cases. Please explain how administrative costs for BCBSME will be lowered (as indicated elsewhere in the filing and in the response to the first discovery request of the Superintendent) while the administrative costs per member per month are expected to increase. As necessary, please update this portion of the filing.
  44. The Comparative Premium Rate Analysis assumes claims savings of 0.35%. Of what is the 0.35% taken? Does it reflect 0.35% of claims? Please clarify this assumption.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  45. Please provide detail as to the specific sources of the 0.35% of claims savings.
     Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  46. The Analysis refers to "systems support for clinical management and contracting" as a source of savings. Does this contemplate changes in provider contracts? If so, what types of changes are contemplated? What is the likelihood that providers will be willing to accept these changes? Please explain the basis for your conclusions and response.
    Response:  The reference in the Comparative Premium Rate Analysis to "systems support for clinical management and contracting" refers to computer hardware and software support that may be supplied by Anthem on a regional or shared service basis. Areas of expected improved performance reasonably include enhanced contract administration capacities across the board including provider contracts. It does not contemplate specific changes in the provider contracts themselves.

     

  47. CONFIDENTIAL REQUEST - REDACTED
    Response: CONFIDENTIAL RESPONSE REDACTED

     

  48. The Analysis assumes a reduction in administrative expenses through "more effective use of BCBSME personnel." Please explain in detail what this statement intends. Does this imply reductions in the workforce? If so, to what extent, in what areas of the company, and over what period of time?
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  49. CONFIDENTIAL REQUEST - REDACTED
    Response:  Anthem is in the process of preparing a response to this question and will submit it on or before December 23, 1999.

     

  50. Inasmuch as BCBSME has enjoyed certain property tax relief given its nonprofit status, is it anticipated that the company will incur increased property taxes as a result of the conversion? If so, what impact would such increases have on premium rates? Please provide the basis for your response.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  51. CONFIDENTIAL REQUEST - REDACTED
    Response:  CONFIDENTIAL RESPONSE REDACTED

     

  52. The Analysis indicates no significant impact on claim reserves due to the conversion. However, the financial forecast reflects approximately a 10% difference in claim reserves. Please explain this inconsistency.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  53. The Analysis includes comparative balance sheets for years 1996-2003 on both a conversion and non-conversion basis. Please provide corresponding income statements. In addition, please provide both balance sheets and income statements on a statutory accounting basis.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  54. In concluding that a 2% increase in premium rates under the conversion scenario would be immaterial to BCBSME’s competitiveness, what competitive rate studies or other information was utilized as the basis for such a conclusion? Please provide a copy of any documentation relied upon.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  55. The projections within the Analysis assume enrollment will be the same under the BCBSME (no conversion) scenario and the Anthem BCBSME (conversion) scenario. What sensitivity testing was performed regarding this assumption? Was the possibility of a "shock lapse" considered? Please provide documentation of any sensitivity testing performed.
    Response:  Based upon clarification from counsel for the Superintendent, Anthem now understands that the term "shock-lapse" in question # 76 means a short term spike or increase in the number of policies that customers allow to lapse due to a change in ownership of the insurer. Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  56. CONFIDENTIAL REQUEST - REDACTED
    Response: CONFIDENTIAL RESPONSE REDACTED

     

  57. CONFIDENTIAL REQUEST - REDACTED
    Response:  CONFIDENTIAL RESPONSE REDACTED

     

  58. The Analysis assumes all of Anthem BCBSME’s premium will be subject to the 2% premium tax including the HMO line of business. Please provide copies of all memoranda, documents, and opinions of counsel supporting this assumption. If a request for an advisory opinion or some other guidance has been sought from the Bureau of Revenue Services, please provide a copy of that request and any correspondence between the Applicants and the Bureau of Revenue Services.
    Response:  Anthem understands the request as seeking copies of memoranda, documents, and opinions of counsel that have been provided to Anthem. Anthem has had oral discussions with its internal and external counsel on this issue, but has not received any documents responsive to this request. There has been no correspondence with the Bureau of Revenue Services on this issue. As reported in Robert Frank’s November 4, 1999 letter to the Superintendent, for purposes of the CPRA, the analysis adopted the conservative assumption (but Anthem has not reached the conclusion) that Anthem BCBSME’s managed care and insured indemnity business, with the exception of FEP, will be subject to the 2% premium tax. Anthem also incorporates by reference the response prepared and submitted by BCBSME.

    Valuation

  59. Please provide specific citations to the sources of information and references with respect to each of the bullets on pages 15 and 16, entitled "Overview of the Health Care Insurance Industry", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  60. Please provide all documents, workpapers, and reference materials that support and/or substantiate the information with respect to each of the bullets on pages 15 and 16, entitled "Overview of the Health Care Insurance Industry", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  61. Please provide all documents, workpapers, and reference materials that support and/or substantiate the information and discussion set forth on pages 17 through 27 and Exhibit 6 of the appraisal report, including all workpapers and documentation with regard to the net operating loss carry forwards referred to on page 24 of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  62. Please provide specific citations to the sources of information and references with respect to each item of information in Appendix 3, entitled "U.S. and Maine Economic Overviews", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  63. Please provide all documents, workpapers, and reference materials that support and/or substantiate each item of information in Appendix 3, entitled "U.S. and Maine Economic Overviews", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  64. Please provide specific citations to the sources of information and references for each of the bullets on pages 28 and 29, entitled "Comparable Public Companies", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  65. Please provide all documents and reference materials that support and/or substantiate the information with respect to each of the bullets on pages 28 and 29, entitled "Comparable Public Companies", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  66. Please provide all workpapers and documents that support and/or substantiate the process followed and the criteria used by Houlihan Lokey Howard and Zukin (HLHZ) in selecting the public comparable companies used in the comparable company financial analysis with respect to the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  67. Please provide all workpapers and documents that support and/or substantiate the analysis on page 30, entitled "Comparative Risk Assessment", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  68. Please provide specific citations to the sources of information and references with respect to each of the bullets on pages 31 and 32, entitled "Comparative Risk Assessment/Observations", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  69. Please provide all documents and reference materials that support and/or substantiate the information with respect to each of the bullets on pages 31 and 32, entitled "Comparative Risk Assessment/Observations", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  70. Please explain how consideration of the "NOL" affected the selection of multiples as described on page 32 of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  71. Please provide an analysis and/or calculation that reflects how the 10% control premium, reported on page 32 of the appraisal report, was arrived at.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  72. Please provide all workpapers and documents that support and/or substantiate the analysis on page 33, entitled "Control Premium Analysis", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  73. Please provide all workpapers that reflect, explain, support and/or substantiate the analysis on page 34, entitled "Application of Public Company Evidence", and related Schedule B of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  74. Please provide specific citations to the sources of information and references with respect to data contained in Exhibits 5 through 8c of the appraisal report. In this regard, if more than one source of information was used, please specify the data to which each information source relates either by reference to specific items of data or classifications thereof as necessary for an unambiguous determination of the sources for the various data.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  75. Please provide all workpapers and documents that reflect, explain, support and/or substantiate the information and analyses contained in Exhibits 5 through 8c of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  76. Please provide specific citations to the sources of information and references with respect to each of the bullets on pages 35 and 36, entitled "M&A Target Descriptions", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  77. Please provide specific citations to the sources of information and references with respect to each of the bullets on page 37, entitled "Comparative Risk Assessment/Observations", of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  78. Please provide all workpapers that support and/or substantiate the analysis on page 38, entitled "Application of M & A Transaction Evidence," Schedule C, and/or Exhibit 12 of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  79. Please provide specific citations to the sources of information and references with respect to each of the bullets on page 39, entitled "Financial Forecast Observations," of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  80. Please provide all documents and reference materials that support and/or substantiate the information with respect to each of the bullets on page 39, entitled "Financial Forecast Observations," of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  81. Please provide specific references to the documentation and sources of information and related calculations on which the "Financial Forecast Observations" set forth in the 2nd, 3rd, 4th, 5th, and 7th bullets on page 39 of the appraisal report are based.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  82. Please provide all documents and reference materials that support and/or substantiate the "Financial Forecast Observations" set forth in the 2nd, 3rd, 4th, 5th, and 7th bullets on page 39 of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  83. Please provide all supporting and substantiating workpapers, source documentation, specific references to sources, source materials, and related calculations with respect to the discounted cash flow approach reflected on pages 40 through 42, Schedule D, and Exhibit 11 of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  84. Please provide all supporting and substantiating workpapers, source documents, and references with respect to Exhibits 1, 2, 3, 9, & 10 to the appraisal report.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  85. Please provide a copy of the two-year financial recovery plan referred to on page 25 of the confidential version of the appraisal report of HLHZ.
    Response:  Anthem incorporates by reference the response to this question submitted by BCBSME.

     

  86. Please provide copies of the forecasts and projections that were provided to HLHZ by BSBCME, as referenced in their letter dated September 15, 1999, which is part of the nonconfidential portion of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  87. Please provide all supporting and substantiating analyses, schedules, calculations, workpapers (including electronic versions to the extent applicable), and references, including consolidating balance sheets and income statements, with respect to the forecasts and projections that were provided to HLHZ by BCBSME, as referenced in their letter dated September 15, 1999, which is part of the nonconfidential portion of the appraisal report.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  88. Please provide a list, with dates, appropriate descriptions, and amounts, of the extraordinary items of income or loss that have been recognized within the last five fiscal years.
    Response:  BCBSME and Anthem interpret this question as seeking information related only to BCBSME. Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  89. Please provide a list of capital expenditures and replacements in excess of $50,000, with dates, appropriate descriptions, and amounts that have occurred within the last five fiscal years.
    Response:  BCBSME and Anthem interpret this question as seeking information related only to BCBSME. Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  90. Please provide "budget to actual" comparisons for the most recently completed fiscal year, interim year-to-date, and the budget for the current fiscal year.
    Response: BCBSME and Anthem interpret this question as seeking information related only to BCBSME. Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  91. Please provide all pricing studies and memoranda related to all significant health and managed care products, detailing product descriptions, designs, and parameters, statutory valuation parameters, premium rates, product loads and expense charges, agent compensation arrangements, and related data, and profit testing which support financial projections provided to HLHZ for purposes of HLHZ’s valuation analysis.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  92. Please provide all workpapers and documents detailing key assumptions used by BCBSME in development of the model supporting the valuation, mortality, morbidity, terms of provider contracts, medical costs, policy lapses, expense charges, statutory reserves, cash flow reinvestment strategies, investment expenses, investment defaults, and taxes.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  93. Please provide all workpapers, documents, and experience studies utilized which support the assumptions underlying the HLHZ valuation and the financial projections provided to HLHZ by BCBSME.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

  94. Please provide a description of all substantive management representations made to HLHZ and, to the extent not heretofore provided, copies of all documents reflecting such.
    Response:  Anthem incorporates by reference the response to this question prepared and submitted by BCBSME.

     

 

DATED: December 17, 1999

___________________________

James B. Zimpritch, Esq.

Jeffrey M. White

Catherine R. Connors, Esq.

Attorneys for Anthem Insurance Companies, Inc.

PIERCE ATWOOD

One Monument Square

Portland, ME 04101

(207) 791-1100

 

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on December 17, 1999 a copy of the Non-Confidential Version of Anthem Insurance Companies, Inc.’s Response to Second Discovery Request of the Superintendent of Insurance was served by United States mail, first class postage prepaid, on each of the persons listed below.

 

Robert S. Frank, Esq.

Harvey & Frank

Two City center

P.O. Box 126

Portland, Maine 04112

e-mail: frank@harveyfrank.com

(Blue Cross/Blue Shield of Maine)

 

Judith Chamberlain, Esq.

State of Maine

Department of the Attorney General

6 State House Station

Augusta, Maine 04333-0006

e-mail: judy.chamberlain@state.me.us

(Bureau of Insurance)

 

William H. Laubenstein, Esq.

State of Maine

Department of the Attorney General

6 State House Station

Augusta, Maine 04333-0006

e-mail: bill.laubenstein@state.me.us

(Office of the Attorney General)

 

Gregory A. Brodek, Esq.

Duane, Morris & Heckscher, LLP

15 Columbia Street, 4th Floor

Bangor, Maine 04401-6355

e-mail: gabrodek@duanemorris.com

(Maine Health Alliance)

 

Joseph P. Ditre, Esq.

Consumer Health Law Program

One Weston Court, Level One

P.O. Box 2490

Augusta, Maine 04338-2490

e-mail: jditre@mainecahc.org

(Consumers for Affordable Health Care Foundation/Coalition)

 

Michele M. Garvin, Esq.

Ropes & Gray

One International Place

Boston, Massachusetts 02110-2624

e-mail: Mgarvin@Ropesgray.com

(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)

 

Robert I. Goldman

Maine Council of Senior Citizens

27 Bowery Beach Road

Cape Elizabeth, Maine 04107

e-mail: Rgoldma1@maine.rr.com

(Maine Council of Senior Citizens)

 

Bonnie Post

Executive Director of the Maine Ambulatory Care Coalition

P.O. Box 390

Manchester, Maine 04351

e-mail: bdpmacc@mint.net

(Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)

 

John Dieffenbacher-Krall

Executive Director

Maine People’s Alliance

192 State Street

Portland, Maine 04101

e-mail: MPA@gwi.net

(Maine People’s Alliance)

 

Gordon H. Smith, Esq.

Maine Medical Association

30 Association Drive

P.O. Box 190

Manchester, Maine 04351

e-mail: gsmith@ctel.net

(Thomas D. Hayward, M.D.,

Maroulla S. Gleaton, M.D.,

And the Maine Medical Association)

 

Donald E. Quigley, Esq.

General Counsel

465 Congress Street, Suite 600

Portland, Maine 04101-3537

e-mail: quigld@mail.mmc.org

(Putative Intervenor Maine Medical center)

 

Sandra L. Parker, Esq.

Attorney for MHA, Inc.

150 Capitol Street

Augusta, Maine 04330

e-mail: sparker@themha.org

(Putative Intervenor MHA, Inc.)

 

Kellie P. Miller, M.S.

Executive Director

Maine Osteopathic Association

693 Western Avenue

Manchester, Maine 04351

e-mail: meosteo@mint.net

(Putative intervenor Maine Osteopathic Association)

 

Edward Miller

Executive Director

American Lung Association of Maine

122 State Street

Augusta, Maine 04330

e-mail: emiller@mainelung.org

(Putative Intervenor American Lung Association of Maine)

 

DATED: December 17, 1999

_____________________________

James B. Zimpritch, Esq.

Jeffrey M. White, Esq.

Catherine R. Connors, Esq.

PIERCE ATWOOD

One Monument Square

Portland, Maine 04101

(207) 791-1100

Attorneys for Anthem Insurance Companies, Inc.

Last Updated: August 22, 2012