UnitedHealth to buy PacifiCare in deal worth $8.1 Billion

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Looking to bolster its clout in the lucrative Medicare market and boost its West Coast customer base, UnitedHealth said Wednesday it will buy PacifiCare Health Systems for $8.1 billion.

The merger, the second-biggest ever in the sector, solidifies UnitedHealth‘s position as the No.2 health insurer behind WellPoint, which merged with Anthem last year. The deal also is the latest chapter in a wave of consolidation among managed health insurers looking to increase their bargaining power when negotiating prices with hospitals and drug manufacturers.

PacifiCare shareholders will receive 1.1 shares of UnitedHealth stock, plus $21.50 in cash, for each PacifiCare share. The transaction is scheduled to close later this year or in early 2006, pending regulatory approval.

News of the deal sent shares of PacifiCare up $4.41 to $77.09. Shares of UnitedHealth rose 27 cents to $53.50.

William McGuire, CEO of UnitedHealth, which provides services to 55 million Americans, said the deal will make health care more affordable. “The combination will benefit every participant in the health care system, including consumers, employers, physicians and hospitals,” McGuire said in a statement.

UnitedHealth will gain a competitive edge in the Medicare arena by joining forces with PacifiCare, which provides services to 9 million people, mainly on the West Coast, and is one of the biggest providers of health plans to Medicare. Roughly half of PacifiCare’s revenue comes from Medicare, says Sanford Bernstein analyst Ellen Wilson. That entree into Medicare will prove more beneficial beginning in January, when upwards of 45 million retirees become eligible to purchase the new prescription drug benefit for Medicare beneficiaries from private providers such as UnitedHealth, adds Sheryl Skolnick, an analyst at Fulcrum Global Partners.

Critics say the deal will squash competition, giving the shrinking number of insurer behemoths too much power when it comes to pricing.

“It hurts competition,” says Edward Kaplan of The Segal Co., a consulting firm that advises employers on health care issues. “The bigger the managed-care insurers become, the less likely they are to negotiate. They can more easily dictate terms to buyers.”

California Insurance Commissioner John Garamendi said his department will scrutinize the merger to “ensure the maximum protection” to Californians. Garamendi fought the WellPoint-Anthem deal and almost undid it.

Similarly, The Foundation for Taxpayer & Consumer Rights (FTCR), the group that led the fight in California over WellPoint, has launched an attack on the proposed marriage between UnitedHealth Group and PacifiCare. “Health insurers claim mergers provide better and more cost-effective care,” says Jerry Flanagan of FTCR. “But history shows just the opposite occurs.”

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