United HealthCare Corp.'s $2 billion purchase of MetraHealth Cos. will create the largest national managed-care player to offer a full range of diversified products.
The initial cash and stock transaction, worth $1.7 billion, will be enhanced by $350 million if MetraHealth reaches certain earnings goals this year. United will pay another $350 million if its post-acquisition earnings for 1996 and 1997 reach certain levels.
That will still leave United with more than $2.3 billion in cash when the transaction is completed.
The merged company will have $8 billion in annual revenues and more than 40 million enrollees.
A definitive agreement on the acquisition was signed last week.
The acquisition will present a major challenge for United. The Metropolitan Life Insurance Co.-Travelers Insurance Co. joint venture that formed MetraHealth was completed in January. Metropolitan and Travelers, which had been slow to move their indemnity business into managed care, combined their health insurance operations in an attempt to gain market share.
But only 449,000 of MetraHealth's 10.7 million members are now in HMOs.
William W. McGuire, M.D., United's president, chairman and chief executive officer, downplayed the need to convert MetraHealth's indemnity business to HMOs.
"While an increasing number of MetraHealth's non-HMO customers are expected" to move into United HMOs, "the success of the merger is not dependent on this," he said. The merger gives United an "expanded customer base" that can be offered "a broad continuum of managed healthcare products and services."
And United "will be careful to focus.....on those markets and product areas that offer the greatest future benefit to the company and its clients."
Still, the proposed combination of three large companies expands United's geographic scope and represents "both horizontal and vertical integration. It's probably a leap beyond even the largest managed-care companies," said Peter Boland, an analyst in Berkeley, Calif.
United will now be able to provide services to national accounts, said Jean Rosenbaum, an associate at PNC Asset Management in Philadelphia.
Minneapolis-based United, whose core markets are in the Midwest, East and South, now offers far more than most HMOs. It owns and manages HMOs and offers PPOs, managed mental health and substance-abuse services, utilization management, workers' compensation and disability management services, specialized provider networks, and Medicare and managed Medicaid services.
Through the deal, it will gain indemnity products and a presence in Arizona, California, Colorado, Texas, the state of Washington and new East Coast markets.
"It's a very exciting development for the industry, but it is not without its risks," said Rosenbaum. The deal, which increases United's leverage with providers, will boost the company's earnings and is "likely to add to United's growth rate," she said.