UnitedHealth officials say they plan to keep Sierras current operations and management team largely in place, while enhancing its care-management and technological capabilities. The combined enterprise will have the scale, resources and commitment to offer the most comprehensive range of affordable services, UnitedHealth President and CEO Stephen Hemsley said in a news release announcing the deal.
But Silver isnt the only one who remains wary of the financial and operational havoc that large, out-of-state insurers can wreak on local markets.
Lawrence Matheis, executive director of the Nevada State Medical Association, says local providers are still smarting from the fallout of WellPoint Health Networks $16.4 billion megamerger with Anthem, the parent of Blue Cross and Blue Shield of Nevada, in late 2004. Shortly after that deal closed, They reduced payments by 50% or more to hospitals and physicians so that they could price their products for employers at or below Sierras rates, Matheis said. Since then, the race downward on payments has been dramatic, so you can see why these kinds of mergers create a lot of anxiety.
For UnitedHealth, buying Sierra is a no-brainer. The deal would give the insurer a dominant foothold in Nevada, which not only ranks among of the nations fastest growing states but is also a popular retirement destination for seniorsa demographic it has been aggressively targeting with its new Medicare products. The company already has solid market positions in the adjacent growth states of Arizona, California, Colorado, Texas and Utah, thanks to its $9.2 billion purchase of PacifiCare.
Its obviously a nice piece of the puzzle for us filling in the Southwest, and fits well with our core strategy, said UnitedHealth spokesman Tyler Mason. But more importantly, we recognized the explosive growth potential there: Seven thousand people a month are moving into Las Vegas and the south Nevada area. Theres building going on everywhere.
Sierra serves about 534,000 commercial members, primarily through employer contracts in the Las Vegas area. It also covers about 132,600 Medicare and Medicaid members in Nevada as well as 184,900 seniors through stand-alone Medicare prescription-drug plans in 30 states. UnitedHealth, the nations second-largest insurer, covers 29 million members nationwideincluding 110,000 in Nevadaand has another 5.7 million seniors enrolled in its Medicare drug plans.
Further sweetening the pot is Sierras Southwest Medical Associates unit, which encompasses 14 outpatient clinics and the states largest multispecialty physician group. Having 250 of its own doctors on staff has helped Sierra keep medical costs low and allowed it to experiment with new approaches to medical care. It also gives the company greater bargaining clout with other providers looking to join its network, says Sierra spokesman Peter ONeill, adding that while Southwest providers account for only 10% of Sierras provider network, they see 75% of the insurers members.
Its an unusual model for an insurerone that UnitedHealth is eager to use as a petri dish for developing new programs, ONeill said. They assured us that not only are they going to keep the medical group, but they are also going to look very closely at it to see if the model can be transported to other markets or whether the type of care thats being delivered here can serve as a model for other initiatives elsewhere.
The acquisition, which has been approved by the boards of both companies, is expected to close by year-end, UnitedHealth officials said. First though, the deal must pass muster with Sierra stockholders, the Justice Department and insurance regulators in California, Nevada and Texas.
That may not be so easy, some industry observers say. The American Medical Association is already calling for federal antitrust officials to reject the merger, arguing that it would give UnitedHealth control over 95% of the Las Vegas HMO market and 56% of the HMO and PPO markets combined. Statewide, the combined company would hold a 43% share of the health insurance market. Its closest competitor, WellPoint, now holds 28%.
When an insurance company achieves such market dominance, they can dictate premiums to patients and strong-arm doctors and hospitals with take-it-or-leave-it contracts. Theres no effective counterbalance, said James Rohack, a member of the AMAs board of trustees.
Goldman Sachs analyst Matthew Borsch said the companies may be forced to divest some of their regional assets in order to win federal clearance. Thats precisely what happened in late 2005, when the Justice Department required PacifiCare to sell off portions of its Arizona and Colorado operations before allowing it to consummate its merger with UnitedHealth (Jan. 2, 2006, p. 14). Under the consent decree, UnitedHealth was also required to terminate a network-access agreement with Blue Shield of California, one of PacifiCares main competitors.
The deal could also face state-level obstacles, particularly in California, where regulators have rung heavy concessions out of insurers looking to merge.
According to UnitedHealth, the market contraction resulting from the merger wouldnt be as dramatic as critics may think. Sierra operates a very strong, fully integrated staff-model HMO while we offer individual PPOs and administer benefits for large customers that are nationwide, Mason said. So across all lines of business, there really isnt the kind of dramatic concentration that the AMA seems to be fearful of.
Still, critics contend the fast-consolidating industry will leave providers and patients with dwindling options. Matheis of the Nevada medical association says that merging insurers often rearrange their provider networks, change their contract terms and replace or abandon product lines.