UnitedHealth makes offer for PacifiCare in huge health care deal

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Associated Press

Los Angeles (AP) — UnitedHealth Group Inc., one of the nation’s largest health insurers, agreed to acquire major Medicare provider PacifiCare Health Systems Inc. in an $8.1 billion deal, the companies said Wednesday.

In what would be the second-biggest merger ever in the hospital managed care industry, PacifiCare would become a subsidiary of Minneapolis-based UnitedHealth, which now covers 53.8 million people through medical insurance or insurance programs it manages for other firms.

The deal includes $8.1 billion for a stock swap and cash, UnitedHealth Group chairman and chief executive Dr. William W. McGuire said in a conference call. In addition, he said UnitedHealth would pay off $1.1 billion in PacifiCare debt immediately after the deal closes late this year or in early 2006.

The agreement requires approval by regulators and PacifiCare stockholders.

News of the deal sent PacifiCare’s stock price surging. It closed at $77.09, up $4.41 on the New York Stock Exchange. UnitedHealth, the nation’s second-largest health insurer, ended the day at $53.50, up 27 cents a share.

The agreement trails only last year’s Anthem-WellPoint merger, valued at $16.4 billion, said Richard Peterson, a senior researcher at Thomson Financial. Five of the top 10 merger deals in the health care industry have occurred within the past three years, he said.

“It seems with health care costs rising and a need to work on the margins, in a way the companies have to be more competitive and this is one option that they pursue in terms of consolidations,” Peterson said.

A combined PacifiCare and UnitedHealth represents an immediate challenge to WellPoint Inc., the nation’s largest health benefits provider.

“The question is now will there be even further consolidation?” Peterson said.

The deal would give UnitedHealth a larger share of Medicare patients. PacifiCare, which operates mainly in Western states, would gain access to the clout of a nationwide company.

“We believe that we will together advance on a critical goal — making the health care system work better for people,” UnitedHealth Group chairman and chief executive Dr. William W. McGuire said in a statement.

California Insurance Commissioner John Garamendi said the state would closely examine the deal.

“We will apply the same close scrutiny and principles used in our examinations of previous applications,” Garamendi said in a statement. “My goal, as always, is to provide the maximum protection for California’s health care consumers.”

Last year, Garamendi blocked Indianapolis-based Anthem Inc.’s proposed deal with WellPoint Health Networks Inc. for months. His agency finally approved the deal in November after the companies agreed to pay hundreds of millions of dollars for state health care improvements.

PacifiCare is one of the nation’s largest health groups with 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.

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 has a network of more than 4,500 hospitals and 460,000 doctors and other health care providers nationwide.

“It makes sense for PacifiCare to join with a strong national partner that can help us reach the next level in leveraging technology and scale to offer a broad range of competitive products and services,” Howard Phanstiel, chairman and chief executive officer of PacifiCare, said in a statement.

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.

PacifiCare had been a tempting takeover target. In April, it reported a 28 percent increase in profits for the first quarter, with income rising to $85.7 million, or 89 cents a share, exceeding analysts’ expectations.

The company said the deal could be finalized late this year or in early 2006. It did not mention if layoffs might result.

UnitedHealth has been on a buying spree, apparently beefing up its Medicare presence and geographic diversity. One of its subsidiaries announced it was joining with Walgreen Co. to become a national provider of the Medicare drug benefit that begins next year.

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