Rivals Health Net, QualMed Agree to Merge : Health care: The strategic alliance would give the two HMOs a combined 1.2 million customers in six Western states.


In another sign of the ongoing consolidation of the health care industry in anticipation of national health care reform, Woodland Hills-based Health Net Inc. said Monday that it has agreed to merge in a stock exchange transaction with its once-bitter enemy, QualMed Inc. of Pueblo, Colo.

Executives of both health maintenance organizations said the benefits of creating a combined company of 1.2 million customers in six Western states led them to settle differences stemming from QualMed’s efforts last year to buy the much larger Health Net.

The proposed merger would allow Health Net, California’s second-largest HMO with about 900,000 members, to expand outside the state and would give QualMed, which has half its 350,000 members in Northern California, access to the lucrative Southern California market. QualMed also provides access to preferred provider networks in 16 states and has a strong Medicare program--an area that Health Net has been trying to develop.

While the proposed marriage of Health Net and QualMed surprised analysts, most have expected more California providers to make strategic alliances since Blue Shield of California and Unihealth America shook up the state’s competitive landscape in June with the announcement that they would join forces, creating a new managed care company with more than 4.5 million members and $6.5 billion in revenue.


“What you’re seeing is a race to expand geographically in attractive markets,” said Jeff Hendren, a health care analyst for Goldman Sachs in New York. “It’s better to be No. 1 or No. 2 than No. 5 as you go into President Clinton’s proposed health care reform.”

A merger of Health Net and QualMed would create a company with about $1.8 billion in revenue.

Under the proposed transaction, expected to close by year’s end, each share of Health Net would be converted into 3.34 shares in the new company, giving former Health Net shareholders a 65% interest. Based on QualMed’s stock price of $15.50, which was up $1.375 on Monday, the new company will have a market value of about $750 million.

The California Wellness Foundation, a nonprofit entity that was formed under a state legal requirement when Health Net converted to for-profit status, owns 73% of Health Net’s stock.


The merger agreement deal must be approved by the California Department of Corporations.

In connection with the merger agreement, QualMed on Monday dismissed a lawsuit connected with its 1992 attempt to buy Health Net in a $400-million hostile takeover.

In explaining the turnaround in relations, Health Net Chairman Roger Greaves said that during the last year, the two companies learned they had much to offer each other. “We began to negotiate, and as the months went by we decided the differences were minimal,” Greaves said in an interview.

“The merger strengthens our ability to achieve our shared goals,” said Malik Hasan, Greaves’ counterpart at QualMed. Hasan and Greaves would be co-chairmen, co-chief executives and co-presidents of the new company, which will also maintain dual headquarters.

Health Net’s rivals were not surprised by the announcement Monday, but they were reluctant to talk about its potential impact.

“We’ll continue to see consolidation like this in the industry,” a spokesman for Woodland Hills-based Blue Cross of California, which is also looking at acquisitions, said in a statement.