Foundation Health Corp. and Health Systems International are discussing a merger that could mirror the planned consolidation of two California rivals.
The deal would create a $6 billion managed-care company with about 5 million enrollees.
In August, PacifiCare Health Systems, based in Cypress, said it planned to buy Fountain Valley-based FHP, creating an $8.6 billion company with 3.9 million enrollees.
Foundation is based in Rancho Cordova and HSI is headquartered in Woodland Hills.
Announcement of the Foundation talks followed news that two major West Coast not-for-profit managed-care organizations-Kaiser Permanente and Group Health Cooperative of Puget Sound-have begun discussions that could lead to a merger (See story below).
The ongoing wave of HMO consolidations is spurring providers' efforts to consolidate "in order to maintain equilibrium in the market," said Jim Lott, senior vice president at the Healthcare Association of Southern California.
PacifiCare-FHP and Foundation-HSI would be "butting heads" in several states, observed Stuart Byer, vice president at Scan Health Plan in Long Beach.
Both new giants would have operations in Arizona, California, Colorado, Florida, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and other states.
Ed Kroll, an analyst with Lehman Brothers, said he considers PacifiCare "the best-run company in the industry" and that the PacifiCare-FHP merger would create a "Medicare powerhouse" stronger than any single HMO or other merged company. But on the commercial side, Foundation and HSI together could present competition for PacifiCare-FHP, he said.
Small to medium-sized HMOs will be hurt in all this consolidation, which is creating giant competitors, he said.
The mergers are "all terribly predictable because of the economic pressures in the market, the demand to produce a higher-quality product with a limited amount of premium dollars," Lott said.
"The way you leverage the benefits out of stagnant premium dollars is to create a larger market for your dollar," he said.
In provider relations, Lott said, "We would argue that HSI management and culture needs to prevail in this merger since providers haven't been too excited about Foundation's management of healthcare."
He declined to provide details, but conceded, "It's all relative, but HSI's approach is more provider-friendly."
In California, 38 HMOs currently control 93% of the market, he said. "We anticipate that number will be between 12 and 18 in 10 years," he said.
Now more than 28 provider systems in California control about 85% of the market. In response to HMO consolidation, "we'll probably see that reduced to about a dozen or slightly more than a dozen in the next 10 years," he said.
Last week, Foundation President and Chief Executive Officer Daniel D. Crowley said in a written statement that the HMO "has been in preliminary discussions concerning a strategic combination with a third party." He said the proposed deal would be a stock transaction "on a merger-of-equals" basis.
Some newspapers identified HSI as the proposed merger partner. Although an HSI spokesman would not comment, HSI staff at the American Association of Health Plans conference in Washington last week spoke openly about merger discussions with Foundation, Byer said.
They said that Foundation's company plane flew Malik Hasan, M.D., HSI chairman and CEO, to Sacramento, Calif., for merger talks, Byer said.
Crowley cautioned that there was no assurance the discussions would lead to an agreement.
Kroll said he suspected Hasan would become chairman of the new company and Crowley would become CEO and president.
Last year a proposed merger of HSI and WellPoint Health Networks fell through, in part because of a dispute between Hasan and Leonard Schaeffer, WellPoint chairman and CEO, about who would oversee the new company's expansion.
In 1994, Foundation proposed a merger with HSI but later withdrew its offer.