PacifiCare Makes Offer for S.D. HMO

PacifiCare Health Systems, a health-maintenance organization based in Cypress with more than 500,000 subscribers, announced Thursday it has made a friendly offer to acquire certain assets of troubled Western Health Plans of San Diego, which runs the 130,000-subscriber HMO called Greater San Diego Health Plans.

If consummated, the acquisition would make PacifiCare the state’s third largest HMO after Kaiser Permanente with 4 million members and HealthNet which has about 700,000 members, PacifiCare chief financial officer Wayne Lowell said.

PacifiCare, which made the bid at Western’s invitation, would not disclose the amount it offered to pay for the assets including Western’s membership, provider contracts and contracts with employers. PacifiCare’s subscriber base includes 360,000 members in Southern California with the balance in Oregon, Texas and Oklahoma.

The two parties will begin negotiating a deal today and thus have not executed a definitive purchase agreement. But no other offers for Western are currently on the table, Western’s acting president Samuel Westover said Thursday. A sale of the assets bid for by PacifiCare would mean Western’s end as a going concern, Westover said.

“Western came to us and said ‘We’d be interested in selling the company and here is the range of terms we were thinking would be appropriate’. We worked with that and responded based on (the specified terms),” Lowell said.

Lowell added that a definitive offer would depend on Western’s agreement to a “restructuring of the delivery system,” meaning a significant reduction in the number of doctors currently providing services to Greater San Diego Health Plan subscribers. That kind of restructuring could meet with resistance from some shareholders since the bulk of Western’s stock is held by the 1,500 San Diego physicians who also provide services to the subscribers.

Western Health Plans closed up 18 cents at 69 cents per share in American Stock Exchange trading while PacifiCare stock was unchanged in over-the-counter trading at $26.75.

Financial Problems

Similar to many other HMOs in the country, Western has suffered serious financial problems in recent years, resulting in several management reshufflings and scaling back of operations. With shareholder equity of negative $15.8 million as of March 31, Western has been looking for an investor or buyer for the past year.

Two other acquisition deals involving Western fell through in recent months, including a $21 million offer from a consortium of hospitals led by Sharp HealthCare and Scripps Memorial of San Diego, as well as a $15 million offer from Mercy Hospital of San Diego.

Western, whose subscribers are exclusively San Diego County residents, lost $20.2 million over a three-year period ending last June 30. For the nine months ended March 31, Western lost $7.1 million on revenue of $102.4 million. Over the past year, Western has closed its HMO operations in Riverside County and Nevada and has also closed a company-operated clinic.

Healthy Reputation

PacifiCare, by contrast, is one of the best-managed HMOs in the country, said Rae Alperstein, a health industry analyst with Bateman Eichler, Hill Richards of Los Angeles.

“They have done well at managing their costs and putting in place contracts with doctors that leave the company at less risk than some other HMOs,” Alperstein said.

PacifiCare is one of the few HMOs never to have reported a quarterly loss since going public in 1985 and PacifiCare and FHP of Fountain Valley are industry leaders in profitability in terms of percentage of revenue, Lowell said. For the first six months of its fiscal year ended March 31, PacifiCare reported a profit of $3.2 million on revenue of $284 million.

PacifiCare’s acquisition of Western would be a way of increasing its presence in San Diego, a market it thinks highly of, Lowell said. The company already has 50,000 members in San Diego County, most of whom are elderly Medicare subscribers who receive medical services through Secure Horizons, a program administered at Rees Stealy Medical Group clinics.

Times Staff Writer John Charles Tighe contributed to this story.