The health insurance industry continued its steady march toward consolidation last week as UnitedHealth Group announced plans to acquire Medicare giant PacifiCare Health Systems in a $9.2 billion deal that sent tremors through the provider and patient communities.
The deal--believed to be the second largest transaction in managed-care history (See chart)--would create an insurance behemoth with roughly $33.5 billion in assets and 26.2 million members nationwide, putting Minnetonka, Minn.-based UnitedHealth nearly on par with industry leader WellPoint, which touts 28.5 million members and about $40.5 billion in assets. WellPoint, Indianapolis, was created less than a year ago through the $16.4 billion merger of Anthem and WellPoint Health Networks (Dec. 6, 2004, p. 8).
The addition of Cypress, Calif.-based PacifiCare would also broaden UnitedHealth's operations in the West, where it traditionally has had less of a presence, and expand its foothold in the burgeoning Medicare market.
"United is killing two birds with one stone; they're building scale in senior services and they're building scale in California, both very important markets," said Sheryl Skolnick, an analyst for Fulcrum Global Partners. "It's a perfect fit."
Critics, however, fear the fast-consolidating industry will leave providers and patients with dwindling options. If the PacifiCare deal closes, some 55 million Americans, or almost one-fourth of the nation's insured population, would be covered by one of just two publicly traded companies, WellPoint or UnitedHealth.
"UnitedHealth has become the Pac-Man of the 21st century," said Twila Brase, president of the St. Paul, Minn.-based Citizens' Council on Health Care. "Too much power is ending up in the hands of one big player. The lives of patients ... are at stake. The public should be alarmed, not assured."
Some providers concur. "Our concern is that healthcare is increasingly being controlled by Wall Street-driven, for-profit companies, where the ultimate goal is shareholder value, not patient care," said Jack Lewin, chief executive officer of the California Medical Association. With each merger, "we're moving more toward a take-it-or-leave-it environment where doctors have less leverage and consumers have fewer coverage choices."
The merger--which involves $8.1 billion in cash and stock, plus the retirement of $1.1 billion in PacifiCare debt--is expected to close in late 2005 or in early 2006, pending approval by regulators and PacifiCare shareholders. The deal is also expected to be reviewed by the Justice Department's antitrust division.
California Insurance Commissioner John Garamendi has already vowed to closely examine the potential effects of acquisition. In July 2004, Garamendi initially blocked the Anthem-WellPoint merger, calling it "one lousy, bad deal" that would leave state policyholders with higher premiums and fewer services.
He eventually approved the deal, but only after the insurers vowed to invest $265 million in state healthcare programs and sign a sworn affidavit agreeing not to pass along any merger-related costs to Californians (Nov. 15, 2004, p. 10).
"My department has established a very clear position on healthcare industry consolidations and the effect that they may have on consumers," Garamendi said in news release issued last week. "We will apply the same close scrutiny and principles used in our examinations of previous applications."
Insurers have long looked to mergers as a way to gain greater bargaining clout with providers while reducing administrative costs and spreading their medical expenses across a larger pool of patients. But the number--and size--of deals has ballooned in recent years as double-digit premium increases have left many insurers flush with cash, and changes in the federal Medicare program have created new prospects for growth.
A stagnant job market has also stymied enrollment growth, forcing insurers to "buy" new members through acquisitions or to diversify both their geographic reach and product lines to attract large, national clients.
UnitedHealth has completed several acquisitions over the past two years, such as the purchases of Mid Atlantic Medical Services for $3.95 billion in February 2004, Oxford Health Plans for $4.9 billion in July 2004 and health savings account provider Definity Health Corp. for $300 million in December 2004. PacifiCare recently staked its claim in the burgeoning market for individual and small-group insurance with the acquisition of American Medical Security Group for $505 million (Sept 20, 2004, p. 16).
The addition of 3.2 million-member PacifiCare--which recovered in 2004 after three years of financial malaise--was a logical next step for UnitedHealth, Skolnick said. "It's typical UnitedHealth strategy," she said. "They don't buy broken companies. UnitedHealth looks for companies that have fixed themselves, so it only has to provide the finishing touches, such as new technology or improved claims adjudication."
Through the merger, UnitedHealth would gain a dominant presence in the Medicare Advantage market, which is poised to grow as Medicare adds a new prescription-drug benefit next year. PacifiCare is already the nation's largest publicly traded Medicare HMO--with some 757,900 seniors covered under its Secure Horizons brand--and it intends to become a key administrator of the drug benefit. Over the past year, UnitedHealth has also been pushing into that arena, forming partnerships with pharmacy chain Walgreen Co. and the AARP to help market its offerings. UnitedHealth currently has about 345,000 Medicare Advantage members.
The merger would also give UnitedHealth new operations in Nevada, Oregon and Washington state, as well as a broader presence in California, where it leases network access from a subsidiary of Blue Shield of California. Under the deal, PacifiCare Chairman and CEO Howard Phanstiel would remain head of the company, which would operate as a wholly owned subsidiary of UnitedHealth.
Expanding into the West has become all the more critical for large players such as UnitedHealth in the wake of the Anthem-WellPoint merger, which married nine Blue Cross and Blue Shield plans from coast to coast; WellPoint also has the benefit of being able to offer employers BlueCard, which lets employees access Blues plans' provider networks across the country.
UnitedHealth said it expects the merger to add 5 cents to 6 cents per share to earnings and to generate $75 million to $100 million in savings in the first year. Longer term, company officials anticipate $200 million to $250 million in annual merger synergies.
Analysts predicted the deal would prompt additional acquisitions by other large insurers, such as 14.4 million-member Aetna, 9 million-member Cigna Corp. and 7 million-member Humana, whose national market shares now lag far behind those of UnitedHealth and WellPoint.
Since completing a major restructuring, Aetna has begun snapping up smaller, specialty firms, such as HMS Healthcare, a network rental company that it agreed to acquire last month for $390 million.
Analysts have also speculated that WellPoint could soon make a bid for 5 million-member WellChoice, the parent of Empire Blue Cross and Shield. The New York State Court of Appeals removed a potential roadblock last month when it upheld the legality of WellChoice's for-profit conversion in October 2002.
"There's always going to be pressure to keep up with the Joneses in this industry," Skolnick said.