Why buy a gas-guzzling clunker when you can afford a fuel-efficient sedan?
That seems to be the principle at work in Blue Cross and Blue Shield of Texas' proposed $500 million cash acquisition of Aetna's NYLCare Health Plans in Texas last week.
Just a few months earlier, the Texas Blues plan had a deal in place to buy the HMO operated by Texas Health Resources, an Irving, Texas-based hospital system. That sale fell through after the Texas Blues unexpectedly lowered its bid for the HMO, which covers 314,000 enrollees in several Texas markets.
The sale of the Aetna plan, which is made up of two HMOs with a total of 551,000 enrollees, was required under Aetna's antitrust settlement with the U.S. Justice Department. The settlement allowed the company to acquire the managed-care operations of Prudential Insurance Co.
The Prudential acquisition closed last month, but speculation about what Aetna would have to divest to complete that $1 billion deal began almost immediately after the companies announced the sale last December. That speculation picked up steam after the Justice Department began its investigation in late February.
Without the divestiture of the NYLCare units, Aetna's managed-care market shares in the Dallas-Fort Worth and Houston markets would have reached 42% and 63%, respectively.
The Texas Blues in April entered an agreement to buy Harris Methodist Health Plan from THR for $100 million. But on June 11 THR pulled out of the deal after the Texas Blues dropped its bid to $89.5 million.
On June 21 Aetna's NYLCare Health Plans in Texas came up for sale. And the Texas Blues wound up as the proposed buyer.
That was a coincidence, say officials at the Blues plan, a division of Health Care Services Corp., which also owns Blue Cross and Blue Shield of Illinois.
They insist the collapse of the Harris Methodist sale was not their doing and their lowered offer for Harris Methodist wasn't instigated by the availability of NYLCare business.
"We literally thought we had a done deal (with Harris Methodist)," said Mark Lane, a spokesman for the Texas Blues.
Lane said it wasn't until late June that his company began exploring a deal with Aetna.
Tom Peck, a spokesman for THR, said, "I don't think we would make any comment about why they acted as they did."
Harris Methodist Health Plan, based in Arlington, Texas., lost $17 million on revenues of $169.2 million in the second quarter ended June 30.
By comparison, the two HMOs that make up NYLCare Health Plans in Texas posted a combined profit of $4 million on revenues of $354.7 million for the quarter ended June 30.
The collapse of the Harris Methodist deal has delayed the proposed mergerlike partnership between 13-hospital THR and five-hospital Baylor Health Care System in Dallas (June 21, p. 72).
And, while THR continues to seek a buyer for its plan, the sale of NYLCare's operations in Texas to the Texas Blues is expected to close in the first quarter of 2000, subject to regulatory reviews.
The U.S. District Court in Dallas must approve the sale as part of the antitrust agreement.
The Texas markets served by NYLCare include Amarillo, Austin, Beaumont, Corpus Christi, Dallas-Fort Worth, Houston, San Angelo, San Antonio and Texarkana.
The assets to be sold are more than those required by the settlement, which specified only that the portion of the company serving 427,000 enrollees in Dallas-Fort Worth and Houston be sold.
"We divested more because that's where the (market) interest was," said Joyce Oberdorf, an Aetna spokeswoman.
The deal would boost the Texas Blues' overall enrollment in Texas to nearly 2.7 million, including 806,000 HMO members. Aetna would continue to insure 2.4 million people in Texas, including 1.1 million HMO enrollees.