State OKs Acquisition of PacifiCare;

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Buyer UnitedHealth will commit $200 million to improve services for the poor as part of the deal.

Los Angeles Times

SACRAMENTO, CA — State regulators Monday approved UnitedHealth Group Inc.’s planned $8.1-billion acquisition of PacifiCare Health Systems Inc. after executives gave assurances that the costs of the deal would not be borne by Cypress-based PacifiCare’s customers.

The go-ahead from the California Department of Insurance and the California Department of Managed Health Care moves the companies a step closer to completing a deal that would create a healthcare heavyweight covering 34 million people nationwide, including 12 million current PacifiCare members.

State Insurance Commissioner John Garamendi said the clincher was a pledge by UnitedHealth, the nation’s second-largest health insurer, to provide $50 million in charitable contributions and $200 million in investments to improve services to low-income people living in communities with little access to quality medical care.

The $250 million is about equivalent to the amount that the merged company would spend on bonuses, accelerated stock options and other perks for executives of the two health insurers.

The agreement, especially a stipulation that PacifiCare will pay no dividends to its parent company for four years, “provides meaningful and substantialbenefits to California consumers,” said Garamendi, who oversees PacifiCare’s insurance business.

The commissioner said he would monitor Minnesota-based UnitedHealth‘s business practices in California to ensure that all current products and services remained available and that complaints from patients did not increase.

Garamendi said the restrictions placed on the deal closely followed the template of last year’s approval of a $21-billion acquisition of Thousand Oaks-based WellPoint Health Networks — the parent of Blue Cross of California — by Anthem Inc. of Indianapolis. Garamendi required the new company, the country’s largest health maintenance organization now called WellPoint Inc., to commit $265 million in contributions, grants and investments for low-income communities.

Cindy Ehnes, whose Department of Managed Health Care regulates HMO activities, stressed that the accord “contains the strongest protections permitted by California law to protect the pocketbooks of consumers and ensures that PacifiCare maintains its ability to provide comprehensive healthcare to California employers and enrollees.”

The proposed merger now has been ratified by six states and still needs approvals from four states and antitrust regulators at the Justice Department.

PacifiCare spokesman Tyler Mason said creating a larger company “will offer enhanced technology and greater physician and hospital choice while maintaining local accountability.”

Critics, however, question whether bigger is necessarily better for California healthcare consumers. Dr. Jack Lewin, chief executive of the California Medical Assn., said his members were concerned that PacifiCare, which spends 85 cents of every premium dollar on direct patient care, could be pressured to lower that ratio.

UnitedHealth earmarks 77 cents per $1 in premiums, “and we remain concerned that the culture of underspending on medical care… will become standard at PacifiCare,” Lewin said.

State Treasurer Phil Angelides, who voted along with the entire board of the California Public Employees’ Retirement System to oppose the PacifiCare-UnitedHealth deal, said he was disappointed that the deal was approved “without the excess executive compensation package being stripped out of it.”

Jamie Court of the Foundation for Taxpayer and Consumer Rights in Santa Monica, though supportive of Garamendi’s efforts to get insurers to put money into poor communities, accused WellPoint on Monday of dragging its feet on its investment promises.

WellPoint Vice President Robert Alaniz called the accusation “off base,” noting that the loan program got underway only in September.

UnitedHealth‘s stock slid $1.29 to $61.85 and PacifiCare lost 85 cents to $89.04 on a day when shares of healthcare providers were hammered on Wall Street. Standard & Poor’s index of managed-care companies fell 2%.

Under terms of the deal, UnitedHealth would pay 1.1 of its own shares plus $21.50 for every share of PacifiCare. It also would assume $1.1 billion in PacifiCare debt.

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