UnitedHealth Agrees to Buy PacifiCare

By Debora Vrana and Lisa Girion

July 7, 2005 12 AM PT

Times Staff Writers

Insurance juggernaut UnitedHealth Group said Wednesday that it would buy Orange County-based PacifiCare Health Systems in an $8.1-billion deal that would give it a big stake in California and would accelerate consolidation of the health insurance business.

UnitedHealth, the nation’s second-largest health insurer with 22 million members, would gain ground on industry leader WellPoint Inc. and tap into PacifiCare’s strong Medicare business, positioning the company to capitalize on a prescription-drug benefit scheduled to start Jan. 1.

The deal would be the second-largest health-insurance acquisition, after last year’s $21-billion purchase of Thousand Oaks-based WellPoint Health Networks Inc. by Anthem Inc., which took the name WellPoint Inc.

Executives at both companies promised the acquisition -- greeted with applause by Wall Street -- would improve service to PacifiCare members by giving them access to UnitedHealth’s national network. They also said the companies would save money by combining technology and eliminating overlaps.

But managed-care experts and consumer groups worried the deal could mean higher costs and fewer choices for consumers.

“These mergers are driven by the health plans’ desires to increase market share and profitability, and they are responding to Wall Street needs rather than Main Street and the needs of patients,” said Anmol S. Mahal, a gastroenterologist in Fremont and president-elect of the California Medical Assn., which represents physicians.

“I don’t see this as beneficial to California consumers or employers,” said Alain Enthoven, a Stanford University business professor and expert on managed care. “I regard this as a loss and doubt there are any economies of scale to be achieved here.”

Wall Street analysts were far more enthusiastic.

“This is a great fit,” said Sheryl Skolnick, analyst with Fulcrum Global Partners in New York. “Clearly United has made a commitment to the senior [market] and it gives them added products and a bigger presence in that area.”

Through its Secure Horizons brand name, PacifiCare provides coverage to more than 700,000 seniors on Medicare, making it the nation’s largest for-profit provider of such plans. It also offers supplemental plans and heart-disease management to other Medicare recipients.

UnitedHealth executives said they were also attracted to the company’s specialty programs, such as those for prescription drugs, behavioral health, dental and vision insurance.

PacifiCare began as a nonprofit HMO in 1975 and became for-profit in 1984, rising to No. 172 on the Fortune 500 list. It serves nearly 3.2 million health-plan members and more than 11 million people in its specialty plans.

“We have now reached a point where 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,” said Howard Phanstiel, chairman and chief executive of PacifiCare, in a company statement.

PacifiCare’s senior customers will have access to UnitedHealth’s national networks, which includes more than 460,000 healthcare professionals and 4,600 hospitals, allowing members to more easily avoid out-of-network costs, company officials said.

The acquisition will cost Southern California another major corporate headquarters -- with Fluor Corp. moving from Orange County to Dallas and El Segundo-based Unocal Corp. likely to be sold.

But Cypress-based PacifiCare will remain in Orange County, operating as a subsidiary of UnitedHealth, company officials said. Insurance products would retain the PacifiCare and Secure Horizons brand names.

Most of the company’s 10,500 employees -- of whom more than 5,600 are in California -- would keep their jobs, company officials said.

Phanstiel would become an executive vice president of UnitedHealth Group, which is based in Minnetonka, Minn. He was the 20th-highest-paid CEO in California last year, making $12.2 million in salary and bonus compensation, including $8.3 million in stock options.

The deal would give UnitedHealth a larger presence in California, where it serves 900,000 clients through a license agreement with CareTrust Networks, a Blue Shield of California subsidiary.

The acquisition also gives UnitedHealth new operations in Nevada, Oregon and Washington. The two insurers overlap in Arizona and Colorado, and cost savings are expected there, executives said.

The combination of the two companies is “compelling, straightforward and powerful” and will advance “a national presence that can help address a highly fragmented healthcare system,” said William McGuire, a physician who has led UnitedHealth since 1989, in a conference call.

UnitedHealth has grown mostly through acquisitions of smaller health insurers, making nearly 10 purchases in the last few years, such as its $4.9-billion deal for Trumbull, Conn.-based Oxford Health Inc. in 2004. In that case, UnitedHealth promised state regulators to keep most of the employees for the next two years, increase charitable giving and retain management.

Under terms of Wednesday’s deal, UnitedHealth would pay 1.1 of its own shares plus $21.50 for every share of PacifiCare, representing a 10% premium over Tuesday’s closing price.

PacifiCare stock jumped as high as $83.45 early in the day, when reports of the acquisition began. Trading was halted until after the deal was announced. When trading resumed the stock pulled back from earlier levels, but still closed at a record $77.09, up $4.41.

UnitedHealth shares, also halted for much of the session, ended the day at $53.50, up 27 cents.

UnitedHealth, a longtime Wall Street favorite, is widely seen as one of the most diversified of the major managed-care companies and increasingly generates its earnings outside traditional health insurance, with its health-care data unit providing increasing profits.

In the first quarter, UnitedHealth profit climbed 41% from a year ago to $779 million, or $1.16 a share. It plans to release second-quarter earnings July 14 and has told Wall Street analysts Wednesday that it expects per-share earnings to increase 15% in 2006 from this year.

PacifiCare reported a 28% increase in first-quarter profit to $85.7 million, or 89 cents a share, from $67 million, or 71 cents, a year earlier. It will release second-quarter earnings on July 28.

Although Wall Street was pleased, consumer activists worried that the deal could mean lower payments for doctors and hospitals and more waste in the healthcare system if conditions are not set by regulators.

Employers may find they have less leverage in negotiating coverage because there are fewer providers to bargain with, said Kirby Bosley, head of the Los Angeles practice of Mercer Human Resource Consulting.

“This is a trend that has been going on for some time,” she said. “For corporate employers, they see a loss of leverage and a loss of power and the potential for costs to go up.”

If approved by PacifiCare shareholders and regulators, the acquisition could close late this year.

The deal is expected to be reviewed by the Antitrust Division of the U.S. Justice Department. Officials at the state Department of Managed Health Care and the state Department of Insurance also said they would be scrutinizing the deal.

(BEGIN TEXT OF INFOBOX)

The companies at a glance

UnitedHealth Group

Founded: 1977

Headquarters: Minnetonka, Minn.

Medical plan members: 22 million

Employees: 40,000

2004 revenue: $37.2 billion

2004 net income: $2.6 billion

PacifiCare Health Systems

Founded: 1975

Headquarters: Cypress