MINNEAPOLIS, MN — Medicare’s new prescription drug benefit begins next year, and UnitedHealth Group Inc. is spending billions to get ready.
UnitedHealth, the nation’s second-largest health insurer, plans to buy PacifiCare Health Systems Inc. in a cash-and-stock deal worth $8.1 billion. The company also would pay off PacifiCare’s $1.1 billion debt under the deal announced Wednesday.
Cypress, Calif.-based PacifiCare has jumped out as a leader in the Medicare market. Its Secure Horizons plan, which includes drug discount cards for seniors and other Medicare-related products, has 700,000 members. PacifiCare is already the nation’s second-largest private administrator of Medicare health plans after Kaiser. And the market is about to get a lot bigger – the new drug benefit is expected to cover 11 million low-income older and disabled people.
“There’s quite a few millions of lives up for grabs here,” said analyst Sheryl Skolnick of Fulcrum Global Partners. “You’ve just doubled the odds of having significant market share for United.”
Minnetonka-based UnitedHealth has built a reputation as a cost-conscious, efficiency-minded insurer. It has pressed doctors to shift to electronic billing, and has experimented with giving patients financial incentives to
use cheaper doctors. Investors have rewarded it. Over the past five years, its shares have climbed from a split-adjusted $10 a share to more than $50.
UnitedHealth insures about 22 million people and administers health plans for another 33 million people. PacifiCare covers nearly 3.2 million members of health plans and about 11.3 million members of specialty plans covering such things as dental care and behavioral health.
UnitedHealth members are concentrated in the Midwest and on the East Coast. But the combination with PacifiCare, which is strong in the Southwest, will give UnitedHealth about 3.2 million California members and 2.6 million Texas members, and about 900,000 in Colorado, Chairman and CEO Dr. William W. McGuire said in a
conference call with analysts.
PacifiCare said the merger would give its members, many of whom are elderly, nationwide access to health care, cheaper prescription drugs and other services. UnitedHealth‘s network covers more than 4,500 hospitals and 460,000 doctors and other health care providers.
The companies see Medicare services as a growth market and predicted that government-funded health care,-which already covers 86 million Americans – will continue to increase. In March, a unit of UnitedHealth said it was joining with Walgreen Co. to become a national provider of the Medicare drug benefit.
“The aging of America is incontrovertible. Health care costs for seniors will continue to rise. I really think the government has no place to go but to turn to the private sector” to provide it, said Howard Phanstiel, PacifiCare’s chairman and chief executive.
PacifiCare shareholders will get 1.1 shares of UnitedHealth stock and $21.50 in cash per PacifiCare share in the deal, expected to close in late 2005 or early 2006 if regulators and shareholders approve.
The companies didn’t say whether layoffs would ensue as they combine. But McGuire said he expects the combined companies to save $75 million to $100 million during the first year, and an additional $200 million to $250 million per year in the following two years.
Critics said the proposed deal could hurt consumers.
“HMO goliaths like WellPoint and Aetna and a merged UnitedHealth and PacifiCare are so big they don’t have to compete, and threaten patient care,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights, which has been critical of HMOs.
Skolnick said she’s concerned about UnitedHealth returning to the California market. Many California doctors are paid through arrangements that have been abandoned as too expensive in the rest of the country, she said, and it’s relatively easy for Californians to change the law through ballot initiatives.
“I would hope they retain a lot of people with California expertise, because like I said that’s the one part of this deal that I am absolutely not crazy about,” she said. “California can be a strange and interesting land for
businesses to operate in. I have to say, it makes me a little bit nervous.”
Associated Press Writer Robert Jablon in Los Angeles contributed to this story.
On the Net:
UnitedHealth Group: http://www.unitedhealthgroup.com
PacifiCare Health Systems: http://www.pacificare.com