$8.1 billion deal will create insurer with 26 million members

The San Francisco Chronicle

UnitedHealth Group Inc., the country’s second-largest health insurer, said Wednesday that it will buy PacifiCare Health Systems Inc., based in Cypress (Orange County), in a stock and cash deal valued at $8.1 billion.

The transaction, which the companies hope to close late this year or early next year, would create a combined company of more than 26 million health plan members, second in size only to WellPoint Inc., which has more than 28 million members.

The acquisition of PacifiCare is expected to strengthen UnitedHealth‘s presence on the West Coast and gives the Minnesota insurer one of the country’s largest plan managers for Medicare beneficiaries. PacifiCare operates in eight states and has 3.3 million members, about half in California.

“This is really pretty exciting stuff. Both of our companies are doing really well. Together, we will be doing even better,” said Dr. William McGuire, chief executive officer of UnitedHealth, in a conference call to investors Wednesday.

Under the terms of the agreement, PacifiCare shareholders will receive 1.1 shares of UnitedHealth stock plus $21.50 in cash for each PacifiCare share.

PacifiCare’s stock closed Wednesday at $77.09 per share, up $4.41, on the New York Stock Exchange. UnitedHealth‘s stock closed at $53.50, up 27 cents.

Heath care analysts generally praised the proposed merger, which would serve as many as 55 million people.

“It’s a real powerful combination,” said Albert Lowey-Ball, president of a health management and consulting firm in Sacramento. He said the merger gives the combined company greater financial security, market share and a wider range of products.

“The great potential negative is that is increases the degree of market concentration both in California and elsewhere in terms of commercial and Medicare product lines,” Lowey-Ball said.

Last year’s $16.4 billion merger between WellPoint Health Networks Inc., parent company of Blue Cross of California, and Anthem Inc. was a source of controversy in California.

The deal stalled when California Insurance Commissioner John Garamendi refused to approve it until the company increased investments to state health programs and promised that customers would not finance purchase costs, including large executive severance packages.

In a statement, Garamendi said he would closely scrutinize the UnitedHealth-PacifiCare transaction.

“My department has established a very clear position on health care industry consolidations and the effect they may have on consumers,” Garamendi said. In Wednesday’s conference call, PacifiCare’s CEO, Howard Phanstiel, said the companies have little geographic overlap, especially in California, where UnitedHealth has just a small presence.

PacifiCare is the country’s second-largest provider of Medicare health maintenance organizations with its Secure Horizons program, which has 700,000 HMO members and 40,000 who purchase Medicare supplemental plans.

The merger would give the combined company a stronger position in the Medicare marketplace when a prescription drug benefit is added to the program on Jan. 1.

UnitedHealth “won’t have to compete with PacifiCare. They’ll have them,” said Ed Kaplan, national health care practice leader for the Segal Co., an employee benefits consulting firm. He described UnitedHealth, which has made a number of recent acquisitions, as aggressive in its sales culture.

PacifiCare has been rumored to be an acquisition target for some time. Phanstiel acknowledged that on Wednesday.

“Our board has been actively engaging with management over a two-year period in assessing, evaluating and exploring all the strategic options in an industry that’s obviously consolidating,” he said.

But whether consolidation will be good for the consumer remains to be seen.

By integrating markets, the combined company may learn more about how different kinds of medical practice patterns work in various communities, said Hal Luft, professor of health economics and health policy at UCSF.

A consumer advocacy group disagreed. “Consumers will have fewer choices, and costs will go up,” said Jerry Flanagan, health advocate for the Foundation for Taxpayer and Consumer Rights, based in Santa Monica.
—————————
PacifiCare Health Systems
Headquarters: Cypress (Orange County)
Revenue: $12 billion
Net income: $303.2 million
Membership: 3.3 million.

UnitedHealth Group
Headquarters: Minnetonka, Minn.
Revenue: $37.2 billion
Net income: $2.6 billion
Membership: 23 million

Sources: Hoovers, Chronicle research
————————–
E-mail Victoria Colliver at [email protected]