In the healthcare industry's ongoing market share game, United HealthCare Corp. and Humana put providers and competing insurers on the defensive last week with their announced plans to form the nation's largest managed-care company.
"Market share is king in this game. It's critical," said Thomas Hodapp, a healthcare analyst at BancAmerica Robertson Stephens in San Francisco.
Richard Wade, the American Hospital Association's senior vice president for communi-cations, said the combination "obviously puts more pressure on pro-viders" but also could add to public concerns about HMOs and managed care.
In a stock swap worth an estimated $5.5 billion, Minneapolis-based United will acquire Louisville, Ky.-based Humana in a deal expected to close in the third quarter. Combined, the publicly traded managed-care company, which will retain the United HealthCare name and Minnesota headquarters, would have more than 19 million enrollees in various insurance products nationwide (See chart).
About 10.4 million of those enrollees are covered by full-risk managed-care plans.
That compares with 9.1 million enrollees at Kaiser Permanente, 6.3 million at Cigna and 5.2 million at Aetna U.S. Healthcare.
The Chicago-based Blue Cross and Blue Shield Association, which represents 55 health plans nationwide, could not provide a breakdown of HMO enrollees. But about 18 million individuals are enrolled in various Blues HMOs, according to industry estimates.
Industry experts said last week that the United-Humana deal would serve as a catalyst for more large-scale managed-care company mergers and leave healthcare providers with an ever more consolidated cadre of managed-care giants with which to battle over reimbursement and medical management issues.
For instance, in Florida the two companies cover nearly 2.3 million enrollees, including a significant share of the Medicare risk market. In Texas, they insure nearly
1.5 million people, and in Ohio they insure nearly 1.4 million. Particularly in Florida, those numbers spell major market clout.
United and Humana executives said last week that merging the companies would allow them to cut annual operating costs by as much as 5%, or about $200 million a year, and annual medical costs by up to 1%, or an additional $200 million.
Such savings could give the combined company more bargaining clout with employers by allowing it to make more competitive bids on managed-care contracts. That, in turn, could give it more bargaining clout with providers wanting a piece of the company's enrollment pie.
"And as in the ad campaign for `Godzilla,' size does matter," said Peter Boland, a managed-care consultant based in Berkeley, Calif.
In this case, that could be especially true in Florida, Illinois, Ohio, Texas and other states where the two merging plans have significant overlap in current operations.
Enhanced purchasing clout "is always a concern," said Gary Scott Davis, a Miami healthcare attorney who primarily represents integrated health systems and other providers. "Obviously, this changes the dynamic of the (Florida) marketplace," he said.
The full impact won't be felt until doctors and hospitals begin negotiating renewal contracts with the merged company, Scott said.
Humana and United were among the first to jump on the premium-raising bandwagon last year and were able to avoid the losses afflicting many of their competitors.
Both companies raised rates about 5% last year, with larger increases on tap this year. At United, that translated into
$460 million in net income in 1997 on about $11.8 billion in revenues.
Humana did almost as well as United, posting $173 million in net income on about $7.9 billion in revenues.
Both companies' boards have approved the agreement, which still requires shareholder and regulatory approval. David Jones, Humana's chairman and co-founder, will become a United board member. It's unclear what role Humana Chief Executive Officer Greg Wolf will play in the merged enterprise.
Under the deal, United also will assume $850 million in Humana debt. Humana made two big acquisitions of its own last year, buying Miami-based Physician Corporation of America for $400 million and Cincinnati's ChoiceCare HMO for $250 million.
Although the deal could raise antitrust concerns in Florida and several Midwestern states, observers don't see that as a major obstacle. It's possible that some businesses in states such as Florida, Illinois and Missouri may have to be divested for the deal to go through.
Overall, however, the merging health plans "have a lot of complementary businesses that don't overlap," said Robert Mains, an Albany, N.Y.-based managing director and healthcare analyst for Advest, a financial services firm.
"The timing is very opportune," Mains said, referring to Humana's recent restructuring and emergence as a managed-care company and to United's avoidance of the severe growing pains troubling national managed-care companies such as Kaiser, Oxford Health Plans and PacifiCare Health Systems.
The deal also potentially positions the combined company to play a significant role in the Medicare provider-sponsored organization business, which is expected to gear up next year. The two companies now boast a total of more than 875,000 Medicare HMO enrollees.
In January, Humana formed a PSO consulting subsidiary called MedStep to help providers launch the experimental programs. In return, Humana would get a piece of the business.