Following last week's collapse of United HealthCare Corp.'s planned acquisition of Humana, both managed-care giants are wading through the deal's wreckage for new business strategies.
The collapse of the $5.5 billion merger muddies the managed-care picture nationally and could lead Humana to seek another partner down the road-or even to revive the United combination. But it also shows how difficult it can be to put together an HMO mega-merger in an era of intense public and regulatory scrutiny.
"It's certainly cautionary for the industry, but I don't think it'll slow down the pace of acquisitions," said Robert Mains, an Albany, N.Y.-based healthcare analyst for Advest.
Unlike the more common HMO merger scenario, in which one health plan tosses a lifeline to a foundering competitor, both United and Humana are strong players, Mains said.
But United's stunning Aug. 6 admission that it was taking a $900 million, second-quarter restructuring charge sent both companies' boards into emergency meetings the weekend of Aug. 8. They ended with what the potential partners insisted was a "mutual decision" to call off the merger, which at one time was valued at $6.2 billion.
The deal would have created the nation's largest managed-care company, with more than 19 million total enrollees in all 50 states, including 10.4 million in managed-care plans. In fact, the proposed combination's marketing and negotiating clout inspired strong opposition on antitrust grounds from hospital and physician groups in several states, notably Florida and Illinois. It also attracted the intense scrutiny of state and federal regulators.
In a press release, the Florida Medical Association, for example, openly celebrated the deal's demise, after having opposed the deal.
By the morning of Aug. 10, the deal was dead, but the post-mortems were just beginning.
Officials at Minneapolis-based United blamed the huge earnings hit largely on Medicare HMO losses in several regions, reportedly including the Atlanta, Denver, Houston and Austin, Texas, metropolitan areas.
All told, United lost $565 million in the second quarter, or $2.96 per share.
In response, United said it plans to reduce its Medicare risk exposure in 35 counties in 12 unspecified markets and to shutter start-up Medicare plans in four other counties.
The company also is considering exiting a number of "noncore businesses," which could include specialty areas, such as workers' compensation, behavioral healthcare, tissue and organ transplantation and "ask-a-nurse" telephone information services.
A decision on disposing of the business units in question "will probably be made in the next couple of months," said United spokeswoman Susan Busch.
Yet, United completed on Aug. 12 the previously announced acquisition of the 38,000-enrollee Principal Health Care of Texas in Corpus Christi from a subsidiary of Principal Mutual Life Insurance Co. It also intends to complete the proposed acquisition of the 520,000-enrollee HealthPartners Health Plans of Phoenix from Phoenix-based Samaritan Health System and an affiliate of Tucson (Ariz.) Medical Center by early September, said Busch and officials of the Arizona HMO.
"(United and Humana) will just go back to what they've been doing, every six months buying some small regional plan," said Kenneth Abramowitz, a healthcare analyst with Sanford C. Bernstein & Co. in New York.
Greg Crawford, a healthcare analyst at Fox-Pitt, Kelton in New York, said Humana's operations "were headed in the right direction" pre-merger, so major changes aren't needed.
"I would expect them to bolster (operations in) current areas rather than moving into new areas," he said.
Officials at Louisville, Ky.-based Humana, which in contrast to United, posted strong second-quarter earnings, confirmed that it intends to pursue the same strategic goals it had before it agreed to the deal with United.
Humana boasted a healthy 24% increase in second-quarter earnings, with net income for the quarter ended June 30 increasing to $52 million. Revenues totaled $2.4 billion.
Calling the company "extremely well positioned" for the future, spokesman Greg Donaldson said Humana will continue to target its previously stated 1998 business goal of boosting earnings per share by 20% to 25%. Last year, Humana posted earnings per share of $1.06, up 14% from 1996's total. Its 1997 net income was $173 million on revenues of $7.9 billion.
Donaldson also identified Medicare risk contracting-a black hole for many managed-care companies so far this year-as a "core competency" that would continue to differentiate Humana from its competitors.
Humana has 491,000 Medicare enrollees, compared with about 388,000 at United. Some analysts, including Advest's Mains, speculate that the Humana deal could be resuscitated if United's stock price rebounds from its recent free fall. Humana stock closed at $15 per share on Aug. 14 compared with a high of $32 per share earlier this summer.