Awaiting Agency’s Scrutiny of PacifiCare
Just as the human body needs exercise to remain healthy, government regulators need frequent challenges to maintain their, well, regularity.
So we should probably be grateful that the proposed acquisition of PacifiCare Health Systems Inc. by UnitedHealth Group Inc. offers the state Department of Managed Health Care an opportunity to get limber. We ought to be a mite uneasy, too, though, because the last time the agency -- which bills itself as “the only stand-alone [HMO] watchdog agency in the nation” -- had a chance to show that it was more than a waste of office space, it was largely a no-show.
The occasion was last year’s combination of WellPoint Health Networks Inc. and Anthem Inc. This was a $15.5-billion deal to create the nation’s largest health insurer, under terms suggesting that it would drain hundreds of millions of California premium dollars out of the state, much of it into the pockets of the executives who crafted the deal.
The state agency gave this proposal what its director, Cindy Ehnes, later described as “our highest level of scrutiny” in a process that she said “allowed for public participation in this important policy matter.” Her agency held how many public hearings, exactly? One. Ehnes didn’t even bother to attend.
The only reason the agency went that far before rubber-stamping the deal was that Insurance Commissioner John Garamendi embarrassed it into mounting a public show of “scrutiny.” Garamendi had limited jurisdiction over WellPoint, but exploited it to the max, blocking the deal until the companies coughed up a few concessions.
The PacifiCare-UnitedHealth deal doesn’t raise the same issues that arose with WellPoint. PacifiCare ranks only fifth among the state’s HMOs, with 1.7 million members. WellPoint’s Blue Cross of California ranks second, after Kaiser, with 4.7 million.
The compensation flowing to executives as a result of the deal doesn’t look to be quite in the WellPoint league. Not that UnitedHealth is all that frugal: Its chief executive, William McGuire, led the compensation derby of health plan CEOs last year with $8 million in salary, bonus and perks, which puts him in a funny position when he lectures the rest of us that “there is not enough money ... to pay for the healthcare system as it operates today.”
Still, the deal is hardly innocuous. It won’t necessarily reduce the number of HMOs in California (UnitedHealth has minimal presence in California). But the further fattening of UnitedHealth, already the nation’s second-biggest insurer, could inspire more such combinations, some of which -- say a Cigna Corp.-Aetna Inc. deal -- would significantly diminish competition in the local healthcare market.
Moreover, what UnitedHealth really has its eyes on is PacifiCare’s thriving Medicare and Medigap business, which serves more than 700,000 Californians under the Secure Horizons brand. If that’s so, might UnitedHealth be inclined to pull PacifiCare out of the small-business market, where it’s currently a significant player?
McGuire told The Times after the deal was announced that he’d actually like to expand small-business sales here. He hinted, however, that he’d like to do it through new forms of health plans that might well mean imposing more risk and more expense on patients for a wide range of treatments.
That’s not to say that there aren’t some virtues in the PacifiCare-UnitedHealth combination. Stanford University’s Alain Enthoven, who often has been a critic of big-insurer buyouts, says that for a big employer with workers domiciled around the country (he cites Stanford as an example), the ability to serve them all through a multi-state company is a plus.
But he notes that California’s healthcare structure is unique, in that it relies heavily on multi-specialty medical groups that are big enough to make most referrals internally and to shoulder the financial risk of medical decisions themselves. The California Medical Assn. says it receives a low number of physician complaints about PacifiCare, conceivably because it works effectively through these groups. If the combined entity centralizes medical decision-making at its Minnetonka, Minn., headquarters, the result may be a net loss for California patients and doctors.
The real issue, though, is whether the Department of Managed Health Care is up to the task of extracting enforceable commitments from the two companies to protect residents’ interests. I use the term “enforceable” because the commitments the state received from WellPoint last year are beginning to look rather useless.
Among them was a promise that Blue Cross of California premiums wouldn’t pay for the enormous cost of that deal, which included $4 billion in debt financing. It was pointed out at the time, however, that if the companies subsequently raised premiums, the state agency would be hard-pressed to verify that the raises weren’t due to buyout costs, as opposed to increased medical expenses.
As it happens, Blue Cross soon imposed premium hikes of up to 50% on many policyholders. Ehnes got around to holding a hearing on this issue in May, where she heard company executives blame the increases on non-deal costs. But these rose by only about 16% last year, so it’s unclear why individual policyholders are paying so much more.
It seems that the department was never really equipped to keep an eye on this most critical aspect of Blue Cross’ promise. Because it doesn’t have rate-setting authority over HMOs, a spokesperson told me, it doesn’t have in-house experience matching premiums with costs. In any case, an actuary the agency hired will report his findings in a couple of months. By then, will the agency already have cleared another big buyout for takeoff?
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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com.
