In an atmosphere of increasing scrutiny of HMO mergers, plans are learning it ain't over 'til it's over.
California regulators have reminded PacifiCare Health Systems and FHP International that although their $2.2 billion deal is approved and closed, the companies can't combine operations until PacifiCare submits a detailed plan ensuring patient protection. That means the companies will likely operate separately for a year.
On Feb. 14, the California Department of Corporations approved PacifiCare's acquisition of FHP. Within hours, the companies closed the cash and stock deal, which creates the nation's largest Medicare HMO (See chart). But the department also issued a lengthy statement detailing requirements of the Knox-Keene law governing the state's HMOs.
The requirements stipulate that the plans need approval to make any changes involving quality assurance, utilization management, enrollee services and the processing of grievances, provider contracts, senior management and drug formularies.
"The department will not approve consolidation unless it is satisfied that enrollees will continue to receive access to quality medical care in a manner that assures continuity of care, and that physicians will determine the patient's healthcare needs," said Commissioner Keith Paul Bishop.
Brian Thompson, chief deputy commissioner, said the conditions are "customary in a situation like this."
Susan Whyte Simon, a PacifiCare spokeswoman, said it's perhaps novel that regulators have spelled out the law in such detail. They are "sending very strong signals they are going to keep oversight at a higher level. It's only appropriate now that managed care is the predominant form of healthcare for Californians," she said.
After the Federal Trade Commission cleared the acquisition, state regulators held public hearings on the proposed merger. PacifiCare executives were surprised at the amount of scrutiny but "found it appropriate and humbling," Simon said.
PacifiCare will probably submit the legally required plan to integrate the two companies, called "major modifications," this summer, she said.
Meanwhile, Consumers Union, which argued against the merger on grounds that it would be detrimental to consumer choice and quality-especially for Medicare recipients in Southern California-said it is "somewhat disappointed" that the deal closed.
The department's decision "did not address the risk to Medicare beneficiaries," said Margo Hunter, a spokeswoman for Consumers Union. "But this provides a perfect opportunity to discuss how the department will handle future mergers."
The group is supporting new legislation introduced by Herschel Rosenthal, a state senator from Los Angeles, which would regulate health plan mergers in the state.
The bill would require regulators to consider whether a proposed merger protects the interests of enrollees, doesn't adversely affect competition and is in the public interest.
In a related matter, Foundation Health Corp. and Health Systems International stockholders approved the companies' pending $2.2 billion merger. The stock-swap deal now awaits approval of California regulators. 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.