UnitedHealth to Buy PacifiCare in Push Into Medicare

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The New York Times

UnitedHealth Group, the nation’s second-largest health insurer, made a big push into the rapidly growing Medicare market yesterday by agreeing to buy PacifiCare Health Systems for $8.14 billion in cash and stock.

By adding PacifiCare’s 3.3 million enrollees, UnitedHealth will have 25.7 million members. That would make it a bigger competitor to the leader in health insurance, WellPoint, which has 27.7 million members and was created by last year’s $16.5 billion merger of WellPoint and Anthem.

But UnitedHealth‘s chief executive, Dr. William McGuire, said yesterday that gaining size was not as important in the deal as expanding the company’s presence in Medicare and in Western states where PacifiCare is strong.

If shareholders and state and federal regulators approve the deal, PacifiCare, based in Cypress, Calif., would operate as a wholly owned unit of UnitedHealth, which is based in Minneapolis. UnitedHealth would gain an array of services for the rapidly growing Medicare population, including private Medicare-subsidized insurance plans, Medigap supplemental coverage for people who subscribe to conventional fee-for-service Medicare and the new Medicare drug coverage benefit that begins next January.

During the next decade, 10 million people will join the ranks of Americans 65 and older, who now number 36.7 million, Dr. McGuire said yesterday in a telephone interview. The merger, he said, will advance ”the notion of being able to take care of people in a boundaryless world through all stages of life from newborns to the elderly across the country.”

PacifiCare currently has 705,000 Medicare enrollees through its Secure Horizons unit, which has H.M.O.’s in California, Texas, Oklahoma, Washington State, Oregon and Nevada. UnitedHealth has 320,000 enrollees in Medicare plans and 3.8 million others to whom it provides Medigap coverage under a partnership with AARP, the big advocacy group for people age 50 and older.

Wall Street analysts noted that UnitedHealth was acquiring a widely known brand in Secure Horizons while also obtaining PacifiCare’s small managed-care prescriptions unit, with 5.6 million members.

UnitedHealth has been providing drug benefits through Medco Health Solutions, a pharmacy benefits giant with 60 million people covered. Dr. McGuire said Medco would remain UnitedHealth‘s primary drug manager for commercial customers. But the prospect of the PacifiCare deal’s eventually altering that arrangement helped send Medco’s stock tumbling yesterday by more than 4 percent, closing yesterday at $50.75, down $2.15.

UnitedHealth Group and PacifiCare have filed an array of Medicare drug plans with the government ahead of next year’s start of that federal program. United already planned to offer Medicare drugs in partnership with Walgreens — both in stores and by mail.

”They have a brand portfolio that would probably make Procter & Gamble weak in the knees if it was in that business,” said Sheryl Skolnick, a health care analyst at Fulcrum Global Partners.

Under the agreement announced yesterday, each PacifiCare share will be exchanged for 1.1 shares of UnitedHealth Group plus $21.50 in cash — an arrangement that values PacifiCare at $80.05 a share, or a 10 percent premium over its closing price on Tuesday.

Yesterday, PacifiCare’s stock closed at $77.09, up $4.41. UnitedHealth‘s stock rose 27 cents, to $53.50.

Dr. McGuire, who has been chief executive since 1990, has expanded UnitedHealth with a string of acquisitions, including last year’s deals for Oxford Health Plans and Mid-Atlantic Medical Services on the East Coast. UnitedHealth last year also acquired Definity Health, a small technology-driven company that offers services for medical savings plans that have high annual deductibles and enable healthy people to accrue money for their eventual medical needs.

UnitedHealth prides itself on using databases, the Internet and technology like magnetic-swipe medical identification cards to ”save money, lower costs and make things simpler for consumers,” Dr. McGuire said. ”We are really intent on cutting down on hassle.”

Analysts noted that there are risks in expanding the company’s Medicare business because the field is subject to abrupt changes in deficit-stressed federal budgets. PacifiCare, for example, cut its Medicare business by 40 percent after Congress limited increases in payments in the late 1990’s. By 2003, the cuts had been restored, bringing profitability to PacifiCare, whose $85.7 million in net income for this year’s first quarter was up 28 percent from a year earlier, exceeding analysts’ forecasts.

”Admittedly, reimbursement has gone up and down,” Dr. McGuire said, referring to Medicare. ”We expect to be more savvy, more capable with this combination to make sure we operate through any kind of changes.”

”The government is always going to be involved in health care,” he added. ”The issue is how well a company executes in that environment. Net-net, we are comfortable that we can work with the government.”

A patient advocacy group in California that fought the WellPoint-Anthem merger last year on the grounds that the deal would raise costs and reduce choices for patients said yesterday it would call on the state’s regulators to ensure that patients continue to have access to current doctors after the acquisition.

Jerry Flanagan, a spokesman for the advocacy group, the Foundation for Taxpayer and Consumer Rights, said it would also ask regulators to limit ”big payouts” to executives in the merger. After a six-month delay in the California approval process last year, WellPoint agreed to pay $365 million toward low-income residents’ health care in an agreement to complete the merger.

Mark Lindsay, a spokesman for UnitedHealth Group, said that by creating a strong national network of physicians and hospitals, consumers would have expanded access and more choices. He added that compensation for executives would be based on pre-existing employment agreements.

Howard Phanstiel, PacifiCare’s chief executive, said that the deal would combine UnitedHealth‘s national business with PacifiCare’s ”brand prominence and deep relationships” in the West. Mr. Phanstiel will become executive vice president of the merged company, reporting to Dr. McGuire and Stephen Hemsley, UnitedHealth‘s president and chief operating officer.

Some analysts said PacifiCare would make UnitedHealth a stronger competitor in California, WellPoint‘s stronghold. But Ms. Skolnick at Fulcrum Global Partners said California could mean headaches for UnitedHealth. After a long period of moderate increases in monthly premiums in the state, she said, “premiums are rising faster than people there have a tolerance for.” She said insurers faced a difficult regulatory environment in California.

As a counter to UnitedHealth‘s move, some analysts predicted that WellPoint might seek to acquire WellChoice, the parent of Empire Blue Cross Blue Shield in New York, which competes with UnitedHealth‘s Oxford unit. WellChoice’s stock rose 90 cents yesterday, closing at $70.75.

On the prospects that other insurers may also seek a greater Medicare presence, investors bid up the stock of another Medicare specialist, Humana, whose shares rose nearly 5 percent yesterday, closing at $41.53.

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