The proposed $2.2 billion merger of Health Systems International and Foundation Health Corp. would give the combined company a huge opportunity to use HSI's state-of-the-art medical management system.
That system apparently was a sweetener in the deal announced last week, which would be the latest in a series of recent consolidations of managed-care giants. The merger would create a managed-care company with 5 million enrollees in 14 states and expected revenues of more than $8 billion in 1997.
HSI and Foundation said they expected the deal, a stock swap, to be completed by the end of January. The new company would be called Foundation Health Systems. Rancho Cordova, Calif.-based Foundation would become a subsidiary of Woodland Hills, Calif.-based HSI.
The companies said they anticipate saving at least $110 million a year in operating expenses from consolidating overhead and administration, merging operations such as California HMOs and combining medical contracting.
Daniel D. Crowley, chairman, president and chief executive officer of Foundation, said he shares the enthusiasm of HSI Chairman and CEO Malik Hasan, M.D., for the HSI medical management system. The system gives providers instant access to information about patients and best treatment protocols (March 4, p. 62).
In announcing the merger, Crowley said in a written statement, "I am particularly excited about HSI's fourth-generation medical management system and its medical management expertise in general, which can bring significant benefits to our members and providers."
Robert Hoehn, an analyst with Salomon Brothers, said HSI's medical management capability puts it "ahead of other California HMOs," whose similar products have become commodities in the marketplace.
HSI's system is called "fourth-generation" because it has evolved from earlier managed-care techniques, including simple discounts from providers and utilization management.
According to Kurt Davis, a Foundation spokesman, Crowley believes "healthcare is likely to move in that direction. Plans that are on the cutting edge of that will ultimately have a cost and marketing advantage over others with less efficient approaches."
Although HSI's medical management system is not what drove the deal, it was "the icing on the cake," Davis said. The companies have aggressive cultures as well as geographic and strategic similarities, he said.
HSI's electronic system-controversial since it raises issues of patient confidentiality and provider autonomy-was launched in Philadelphia in May at HSI subsidiary Greater Atlantic Health Services, an HMO with 100,000 enrollees.
The system requires a patient needing medical care to call a 24-hour call center staffed by registered nurses. Using an ordered set of decisions, the nurses, who have computer access to the patient's medical record, direct the patient to doctors or to a hospital.
The system has been successful in Philadelphia, and HSI is considering moving it to sites in other states. It will not be introduced in California until it is adapted for a capitated environment, an HSI spokesman said. Most HMO physicians in California receive capitated payments.
Foundation has health plans in seven other states that pay providers under fee-for-service, and HSI's system could be applied at those plans first, Davis said.
The Foundation-HSI merger mirrors another deal pending in California. 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. Both new giants would serve enrollees in several of the same states.
The Foundation-HSI deal is a stock swap in which Foundation stockholders will receive 1.3 FHS shares for each share of Foundation held. When the merger is complete, 61% of shares will be owned by Foundation's stockholders and 39% by HSI's.
Heading off the executive power struggle that torpedoed HSI's planned merger with WellPoint Health Networks last year (See related story, p. 8), Crowley has agreed to serve as FHS chairman for the year following the merger and then to step down while remaining a director.
Hasan will become FHS president and CEO and then chairman, when Crowley steps down. Jay M. Gellert, president and chief operating officer of HSI, will become executive vice president and COO of FHS. He will assume the president's title from Hasan after the first year.