HIP Health Plan of New York and Group Health, New York, agreed to merge in a deal that would create a new local powerhouse -- with 5 million members in metropolitan New York -- and projected combined revenue of $7 billion. At deadline, financial terms had not been disclosed and the companies had not responded to requests for comment. The merger would give the combined not-for-profit company the increased scale and expanded product line needed to "compete with the larger, well-financed national plans," officials said. Earlier this week, industry giant WellPoint, Indianapolis, announced plans to acquire WellChoice, the New York-based parent of 5 million-member Empire Blue Cross Blue Shield, for $6.5 billion. HIP has been considering converting to for-profit status if the state passes the necessary legislation. It also agreed in August to acquire a health savings-account vendor to expand its presence in the local market for consumer-driven healthcare.
Following the announcement, Fitch Ratings placed HIP on negative credit watch, saying the merged company would have a weaker financial picture than HIP alone. Fitch does not rate Group Health. HIP reported net income of $179 million on $3.2 billion in revenue in 2004, while Group Health earned $15 million on revenue of $2.3 billion that year, according to Fitch. HIP and Group Health had capital reserves of $769 million and $191 million, respectively, as of Dec. 31, 2004. "Concerns regarding the impact on (HIP's) near-term financial profile and integration risks more than offset the long-term strategic benefits of the merger," Fitch said. The ratings agency said it expects the deal to close in the first quarter of 2006, subject to regulatory approval. -- by Laura B. Benko