Fast-Growing Cost Care Inc. Sold to John Hancock : Merger: The Huntington Beach company’s acquisition by the insurance and financial giant has created one of the nation’s largest cost-management firms.

John Hancock Financial Services, the insurance and financial giant, said Monday that it has acquired Cost Care Inc., a Huntington Beach company that specializes in helping employers control fast-rising medical costs.

Boston-based John Hancock said it will merge its own, smaller health-care management business into Cost Care, creating one of the nation’s largest cost-management firms with projected revenue of about $40 million in 1990.

Officials at Hancock and Cost Care would not disclose financial terms of the transaction. Hancock purchased the Huntington Beach firm from a management team led by Lawrence Goelman, chief executive officer.

Goelman recalled Monday that he founded the company “nine years ago with myself, a physician and a secretary.”

Since then, Cost Care has grown into a major “utilization-review” firm with 360 employees and a roster of 6,000 employer clients representing 3.25 million employees and their families. Its customers include such major national firms as Merrill Lynch, Pierce, Fenner & Smith Inc., Champion International Corp. and Colgate-Palmolive Co.

Cost Care also has a very large and computerized management-information system in Huntington Beach that monitors patients and health-care services.

The company helps employers put a check on rising medical costs by monitoring medical care to prevent overuse of hospitals and other medical services, and by directing patients toward what it considers the most cost-effective treatment alternative.

Goelman, who was the majority owner of Cost Care, said he decided to sell the firm to John Hancock so that Cost Care could obtain the capital, increased visibility and access to new customers it needs to continue its fast-paced growth. In the last nine years, he said, the company’s revenues have increased at a 40% annual average.

William E. Caulfield, senior vice president of group benefit services for John Hancock, said the Boston firm bought Cost Care to increase its managed care business and expertise in the field.

Caulfield said that Cost Care has gained a reputation for its innovative screening system, which includes using physicians rather than nurses to review all cases.

“What attracted us to Cost Care is its outstanding management, business strategy, and the strength and effectiveness of its customer service,” he said. “It is the industry model for helping customers control health-care expenses.”

Caulfield noted that medical costs “continue to rise at more than double the rate of inflation and at current projected levels, by the year 2000, the nation’s annual health bill will exceed $1.5 trillion. . . .”

“Clearly, bold and innovative steps are required by health-care providers, employers, the benefits industry and consumers to help stem the tide of rising health-care costs,” he said. “The acquisition of Cost Care is a major step by John Hancock toward that goal.”

Caulfield said that after the acquisition, Cost Care will retain its identity and continue to be run by Goelman and the rest of the former management team.

“I think what you are seeing is people who really control the business--the insurance carriers--are buying the expertise they don’t have in managed care,” said Dr. Tom Mayer, a Los Angeles employee- benefits consultant. “As long as they don’t screw it up, that’s fine.”

Goelman said that he and about a dozen other senior Cost Care executives have agreed to remain with the firm for at least five years under contracts that tie their compensation to corporate performance.

“They (Hancock) want us to run the company as we have in the past,” Goelman said.

After John Hancock’s own smaller utilization-review operation is transferred to Cost Care over the next few months, Cost Care will have 500 employees and 7,500 corporate clients serving more than 5 million employees and their families.

“We will be one of the top five (utilization-review) companies in the country” based on annual revenue, Goelman said.

Besides its former medical review centers in Huntington Beach and Atlanta, Cost Care will have additional centers in Chicago and Boston. Goelman said managed-health care is an industry in the midst of consolidation.

“The whole managed-care industry is going to consolidate because of the tremendous amount of investment it takes to build networks and software packages needed to understand what is driving health-care costs,” he said.

The managed-care business is becoming increasingly complicated, he added. Once, cost containment focused simply on minimizing hospital stays, he said, but now there is a call for more cost-effective treatment for mental illness and substance abuse, and for controls on outpatient services and the use of high-tech equipment.

Goelman said Cost Care’s former owners rejected the option of selling stock to the public to raise capital for expansion. “We want to grow and we don’t want to be as concerned about maximizing our profits as about meeting our growth goals,” he said.

To compete nationally, Goelman said, a utilization-review company needs at least 5 million customers to give it “enough visibility in the marketplace.” Cost Care gains visibility by linking up with the giant Boston insurance firm, he said.

“We would like to double the size of the company in the next five years. And we can’t do that without help,” he added.

COST CARE AT A GLANCE

TOP EXECUTIVE: Larry Goelman, founder and chief executive officer.

EMPLOYEES: 500.

FOUNDED: 1981.

CLIENT BASE: 6,000 companies.

INDIVIDUALS SERVED: 3 million.

HEADQUARTERS: Huntington Beach.

BUSINESS: A utilization review company that seeks to contain medical costs by eliminating overuse of medical services and directing patients to the most cost-effective health care.

SERVICES: Pre-admission review, continued stay review, discharge planning, home health care, case management, high-risk pregnancy identification and management, workers’ compensation management, bill review, second surgical opinion, mental health and substance abuse case management, disability management, outpatient review and preferred provider organization development and management.

Source: Cost Care Inc., John Hancock Financial Services