The $8.1 billion acquisition would give the company a commanding presence in the senior-care market.
The Orange County Register (California)
By acquiring PacifiCare Health Systems Inc., Minnesota-based UnitedHealth Group stands to gain an immediate and commanding presence in the burgeoning market for senior care.
Wednesday’s announcement of the $8.1 billion acquisition comes as Medicare, the federal health program for the elderly and disabled, prepares to launch a new prescription-drug benefit next year that will be administered by private sector health plans.
PacifiCare, the nation’s second-largest provider of Medicare HMOs — after Kaiser Permanente — is well positioned to profit from the new drug program. The Cypress company has already announced plans to sell five new Medicare-funded drug insurance plans starting in January.
If the deal is approved, UnitedHealth will pick up those plans, and PacifiCare’s 757,000 senior members — in addition to its own Medicare business, which includes 345,000 senior members.
“This gives them tremendous scale and leverage in the Medicare business — both in the prescription-drug program as well as in the Medicare HMO business,” said Sheryl R. Skolnick, a stock analyst with Fulcrum Global Partners.
PacifiCare spokesman Tyler Mason said he didn’t envision any major changes. The company would stay in its Cypress headquarters — as a subsidiary of UnitedHealth — with the same health plans under the same brand names.
“Everything stays the same; it’s business as usual,” Mason said. “Members access services the same way. Product lines will continue.” He said he expects very few changes for PacifiCare employees.
PacifiCare’s chief executive officer, Howard G. Phanstiel, would become an executive vice president of UnitedHealth, based in Cypress and reporting to the company’s CEO, William McGuire.
Mason said he didn’t know yet what kind of financial package, if any, Phanstiel would receive.
Generous acquisition-related bonuses for executives at Wellpoint Health Networks were a major sticking point in its recent $16.5 billion merger with Anthem Inc.
In a conference call with Wall Street analysts, McGuire and Phanstiel downplayed concerns about over-reliance on Medicare — a problem that bedeviled PacifiCare five years ago, after Congress cut payments.
“Over the next several years, some of the (insurance) products will ebb and flow, but the aging of America is incontrovertible,” said Phanstiel. “Health-care costs will continue to rise, and I think the government has no place to go but to turn to the private sector.”
In addition to a thriving senior business, UnitedHealth will also pick up business in several states — including California, Washington, Oregon and Nevada — where it has minimal or no presence. It also gains PacifiCare’s growing drug management business, which serves 5.5 million people from its prescription filling warehouse in Carlsbad, with plans for a new plant in Kansas City. PacifiCare’s mental health unit, with about 4.6 million patients, will add to UnitedHealth‘s 22 million in that field.
Executives from both companies said they expected to cut costs by sharing administration and, in the states where the two companies overlap, medical networks. They said they expect up to $100 million in savings the first year after the merger, and up to $250 million more in the next two years.
They said they expect the deal to be completed by late 2005 or early 2006, and the contemplated savings to begin after that. They promised the savings would be passed on to customers in the form of affordable health insurance, and that operating efficiency would make the lives of their members easier.
“This is about servicing people better,” said McGuire. “There are huge opportunities, and there is going to be an effort to apply in every way we can the optimum resources to improve health care.”
But some consumer advocates were skeptical of such claims. The Foundation for Taxpayer and Consumer Rights urged state regulators to take a hard look at the deal, noting that, “patient premiums have been increasing at double-digit rates over the last several years, and less competition removes any incentives for efficiency.”
The union between Wellpoint and Anthem, which created the nation’s largest health insurer — drew strong opposition from California’s insurance commissioner, John Garamendi, who initially blocked the deal. He sharply criticized $265 million in cash bonuses for Wellpoint’s CEO Leonard Schaeffer and other executives, and he worried that the $4 billion debt incurred in the transaction would force the combined company to raise premiums.
Indeed, the state’s Department of Managed Health Care is investigating whether higher premiums at Blue Cross of California — Wellpoint’s largest business unit — are being used to finance the deal. Lynne Randolph, the department’s spokesman, said she expected an answer within two months.
Garamendi vowed Wednesday to “apply the same close scrutiny” to the PacifiCare- UnitedHealth deal as he did to Wellpoint-Anthem. Randolph said the Department of Managed Health Care would also take a close look to make sure the new company would continue to offer the same health plans and would not use premium dollars for “excessive administrative costs.”
A spokesman for state Attorney General Bill Lockyer said his agency reserves the right to “look at the potential effects on competition and the marketplace.”
McGuire said he wasn’t worried about possible regulatory hurdles. “We think this is a transaction that makes sense for the customers in California, just as in every other state, and we’re quite comfortable that the regulators and others who are involved there are interested in that first and foremost,” he said.
Local hospital executives, who negotiate constantly with health plans overprices, said the deal could be a good thing, precisely because it would create a competitive counterweight to Wellpoint, which with 7 million members — under Blue Cross of California — is the most of any insurer in the state.
“UnitedHealth is not a big player in California, so we don’t have a situation where two big California players are coming together to exert their will on (medical) providers,” said Lisa Scheer, a senior vice president for MemorialCare Medical Centers, which runs three hospitals in Orange County. “So hopefully this will create a very good, strong number two company to compete with Wellpoint.”
Joe Randolph, chief financial officer of St. Joseph Health System, which also runs three Orange County hospitals, said the proposed deal “gives us the ability to play them off against one another.”
Under the terms of the proposed transaction, UnitedHealth would pay 1.1 shares of its own stock plus $21.50 in cash for each share of PacifiCare stock. The deal values PacifiCare at about $8.1 billion — a premium of about 10 percent above its closing price on Tuesday. In addition, UnitedHealth would pay off $1.1 billion in outstanding PacifiCare debt immediately upon closing, McGuire said, putting the total deal at $9.2 billion.
Register writer Blythe Bernhard contributed to this report.
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