NEWS ANALYSIS : Building a Medical Empire : Blue Shield Merger Puts Pressure on Other Providers

By JAMES M. GOMEZ

July 1, 1993 12 AM PT

TIMES STAFF WRITER

Having successfully completed the arduous task of converting the company to for-profit status, officials of Health Net until recently figured they could relax a bit.

The conversion, they reasoned, assured the big health maintenance organization’s position among the major players in the state’s health care industry.

But that assumption, and many others about health care delivery in the state, were toppled earlier this week when San Francisco-based Blue Shield of California and UniHealth America of Burbank announced a merger that would create the state’s third-largest managed-care operation.

The proposal to create a statewide, one-stop health care services conglomerate has sent shock waves through California’s health care industry and will undoubtedly force competitors to rethink their growth strategies, consider new ways to market themselves and offer more diverse options for consumers, medical industry observers said.

For Woodland Hills-based Health Net, the merger may force it to consider sooner--rather than later--selling stock to the public, or going into debt, to raise cash for acquisitions.

“I think you’ll see a lot of focus on consolidation and acquisitions by us also,” said Health Net Chief Executive Roger Greaves. “That is going to continue, and we’ve got to go with it.”

Health care experts and industry officials this week were scrambling to analyze the implications of the merger. The merged company would have revenue of about $6.8 billion and serve about 4.5 million people, rivaling the HMO giant Kaiser Permanente in size. Oakland-based Kaiser has 4.6 million members in California and 6.7 million nationwide. Blue Cross of California remains the largest managed-care organization in the state, with 5.6 million members.

A company with the broad services and geographic reach of the proposed Blue Shield/UniHealth combination cannot be ignored and should be considered in any growth plan, experts and health care executives said.

But there was little consensus on how to stay competitive. While Health Net has said it will be aggressive, other firms are more reticent to enter the fray, despite predictions that the merger will trigger a wave of buyouts.

Maxicare Health Plans Inc. in Los Angeles, for instance, is not interested in getting into the thick of things. Having emerged three years ago from bankruptcy--brought on, in part, by a massive acquisition program--Maxicare officials said they are happy with the company as a relatively small but efficiently organized firm.

Now one-eighth its original size, Maxicare spokesman Ed Coghlan said, the HMO can serve clients more effectively than larger firms.

“I think Maxicare right now has a laser-like focus on what its mission is,” Coghlan said. “We’ll continue to arrange quality care at reasonable prices.”

But considering the health care environment, Maxicare is one of several small HMOs that could find themselves targets in the trend toward consolidation.

“I think it is very vulnerable,” said John Edelston, president of Health Pro. & Assoc, a Woodland Hills health consultant firm.

Edelston and other experts said that companies such as Maxicare are likely to be swallowed up in the years ahead because they lack the components to survive solo.

The managed-care companies of the future will be so-called vertically integrated organizations. As such, they will be able to deliver “birth-to-death” services, such as birthing centers, hospitals, outpatient surgery centers, home health care units and nursing homes, said Peter Boland, editor of the Berkeley-based Managed Care Quarterly, an industry publication.

“You really have to have all these pieces together to survive,” Boland said.

FHP Inc. executive Ryan Trimble agreed. The Fountain Valley HMO, which once offered benefits only through its network of owned-and-operated hospitals and clinics, has been branching out, securing contracts with independent physician associations to expand its membership as well as to gain access to a variety of services.

But smaller companies have to take note of the Blue Shield/UniHealth merger, said Fred Rothenberg, a health care consultant in Woodland Hills. Those larger firms will inevitably have more clout when the federal government finally reveals its plan to reform the health care system, he said.

But some health care analysts don’t agree that bigger is necessarily better and that a new giant on the health care scene is going to trample the smaller players.

“Frankly, I think this whole thing is overstated,” said Ed Keaney, an analyst with brokerage Stifel Nicolaus in St. Louis.

Keaney said that for years, smaller companies have thrived in California despite the presence of Kaiser and Blue Cross, which has all but given up on its once-popular indemnity plans in favor of managed care packages.

* LET’S MAKE A DEAL: Sunrise Medical of Torrance has agreed to acquire DeVilbiss Health Care for $130 million. D2

Merging Health Organizations

The merger between Burbank-based UniHealth America and San Franicsco-based Blue Shield of California marks the largest merger of managed-care companies in state history. The merger will result in combined enrollment of 4.5 million and revenue of $6.5 billion. Charts are based on 1992 figures. Membership

Company: Kaiser

Enrollment (In millions): 6.6

Company: Blue Cross

Enrollment (In millions): 5.7

Company: Blue Shield/UniHealth**

Enrollment (In millions): 4.5

Company: Foundation Health

Enrollment (In millions): 3.3

Company: Health Net

Enrollment (In millions): 0.9

Company: FHP

Enrollment (In millions): 0.8

Company: Maxicare

Revenue (In millions): 0.3 Annual Revenue

Company: Kaiser

Revenue (In billions): $11

Company: Blue Cross

Revenue (In billions): 9.3

Company: Blue Shield/UniHealth**

Revenue (In billions): 6.5

Company: FHP

Revenue (In billions): 1.6

Company: Foundation Health

Revenue (In billions): 1.3

Company: Health Net

Revenue (In billions): 1.1

Company: Maxicare

Revenue (In billions): 0.4

Major Health Care Mergers

The merger between Blue Shield and UniHealth America will make the consolidated company the third-largest HMO in California. Other major mergers, in millions of dollars:

The Deal: Blue Shield of California and UniHealth America merge

Date: June, 1993

The Money: $6,500

The Deal: Columbia Healthcare Corp. merges with Galen Health Care Inc.

Date: June, 1993

The Money: 3,000

The Deal: United Healthcare Corp. merges with Galen Health Care Inc.

Date: May, 1993

The Money: 417.7*

The Deal: Maxicare buys HealthAmerica Corp.

Date: July, 1986

The Money: 400