Once again, the new year is starting off with the merger of HMO giants, announced last fall: PacifiCare Health Systems is acquiring FHP International Corp., and Health Systems International is merging with Foundation Health Corp.
The country's biggest not-for-profit HMO, Kaiser Permanente, is digesting acquisitions made last year and this year plans to combine with the biggest not-for-profit HMO in the Northwest, Group Health Cooperative of Puget Sound.
With lawmakers and regulators bombarded by consumer concerns about denial of care-fueled by negative media coverage-and with HMOs deepening their market penetration, 1997 could see the first regulatory roadblocks placed in the way of HMO mergers.
The impending PacifiCare and HSI deals would create two of the largest managed-care firms in the country, with $8.6 billion and $6.1 billion in revenues, respectively. At year-end, the deals were being scrutinized by federal and state regulators.
The Federal Trade Commission is particularly concerned about the impact on the Medicare market of the PacifiCare-FHP combination, which would create the country's largest Medicare HMO, with nearly 1 million enrollees.
Nevertheless, merger fever continues unabated, with HMO executives claiming "everybody is talking to everybody."
The trend of traditional indemnity insurers selling their group health operations to managed-care companies will accelerate, as fee-for-service insurance goes the way of the dinosaur.
Massachusetts Mutual sold its group health division to WellPoint Health Networks last year, and WellPoint expects to acquire John Hancock's group health operations this year.
According to Leonard Schaeffer, WellPoint's president and chief executive officer, more than 1,000 traditional insurance companies in the United States that offer healthcare coverage want to exit the business because they view it as unprofitable. HMOs such as WellPoint are poised to pick up the most promising of those operations and shepherd them into managed care.
The last big traditional insurance plum-Prudential Insurance Co.'s struggling healthcare unit-will likely drop this year into the arms of a more successful managed-care company, such as Cigna HealthCare.
Prudential is the last old-line insurer that remains unaligned with an HMO. Others have already linked with managed-care giants: Aetna with U.S. Healthcare, Metropolitan and Travelers with United HealthCare Corp.
Meanwhile, HMOs are having to do more with less. Third-quarter 1996 earnings for managed-care companies were down 15.5%, according to a report by WDI Capital Markets and KPMG Peat Marwick, though revenues increased 43%. Profit margins are being squeezed.
However, other forecasters predict HMO profits will rebound as companies increase prices for the first time since 1994.
Yet the name of the game in increasingly saturated markets is for HMOs to differentiate themselves through increased services and products, to distance themselves from those bad guys the news media are always writing about and to fend off government-mandated coverage requirements.