In a move to increase its strength in managed care, WellPoint Health Networks late last week appeared close to announcing a merger with Health Systems International, California's second-largest HMO.
The development was clouded by a competing offer for WellPoint as well as some industry members' doubts about overcoming management and other business hurdles in forging a new company.
HSI's board met March 30 and unanimously endorsed the consolidation, according to a source who asked not to be identified. The proposed deal called for WellPoint, which is 80% owned by Blue Cross of California, to acquire HSI for $1.8 billion in WellPoint stock.
A merger of the Woodland Hills, Calif.-based companies would create the nation's largest publicly traded HMO with more than $5 billion in annual revenues and more than 4 million enrollees.
But late last week, the Blue Cross board was considering a bigger bid under pressure from regulators and consumer groups to maximize the value of a foundation it set up after its spinoff of for-profit WellPoint. Not-for-profit Blue Shield of California reportedly offered to acquire WellPoint for $48 a share in cash and stock, or about $4.8 billion.
Analysts were pointing to the speculative nature of Blue Shield's bid, which is tied to a plan to convert to for-profit status, a process that has not been a smooth one for Blue Cross or HSI.
Earlier, WellPoint and HSI appeared eager to move forward with their merger. Under the deal, HSI stockholders would receive 1.09 shares of WellPoint common stock for each HSI share. WellPoint stockholders would also receive $1.2 billion in cash, which would fund the company's foundation.
WellPoint said in a joint statement with HSI that their deal offers "distinct advantages" over other unidentified proposals, one of which reportedly was Blue Shield's first bid of $45 a share.
A big advantage for WellPoint is HSI's dominance in the state's large group commercial HMO market, analysts said. WellPoint has 2.6 million enrollees but serves only 783,000 through HMOs. Blue Shield, with 1.6 million enrollees, serves only 280,000 through HMOs.
In addition, Blue Shield failed in a first attempt to move aggressively into managed care. In November 1993, Blue Shield called off a proposed merger with Burbank, Calif.-based UniHealth America, a multihospital healthcare system.
A WellPoint merger with HSI would be an ironic twist because Blue Cross formed HSI's predecessor, Health Net, in 1977. Health Net later wrested its independence through a court order in 1986.
In 1991 Blue Cross of California tried to bring Health Net-then a not-for-profit HMO-back into the fold, making a merger offer as three other suitors bid unsuccessfully for Health Net.
A combination of WellPoint and Health Net would create a for-profit rival to giant Kaiser Permanente.
"It fundamentally redefines the largest healthcare market in the country," said Peter Boland, a healthcare consultant in Berkeley, Calif.
Barbara Wachsman, western regional practice manager at Towers Perrin's Integrated Healthsystems Consulting unit, said the deal would "eliminate tremendous overlap and duplication since these two carriers currently have many of the same provider and employer groups."
But "it's not just a question of integrating market share," Boland said. Pulling all the operating systems of these huge companies together will be tough, he said.
"The biggest challenge once the ink is dry is how to meld an executive-level decisionmaking team that can work productively together and offer the leadership to integrate a wide variety of products," Boland said.