PacifiCare Taking Wider Role as a Provider of Managed Care : Health: Armed with a $100-million ‘war chest,’ the Cypress-based HMO is making acquisitions to expand its market share.
More than a year ago, before health care reform became the buzzword of Washington and the favorite topic of radio talk show hosts, Terry Hartshorn made what observers now see as a bold move.
Hartshorn, who then was chief executive officer of PacifiCare Health Systems Inc., initiated a $100-million stock offering to build what he called a “war chest” to arm the Cypress health maintenance organization for a predicted rash of acquisitions in the industry.
Today, his heir to that war chest, Chief Executive Alan Hoops, seems to be following Hartshorn’s well-laid-out battle plan.
With the Clinton Administration focusing on the managed care industry and its increasing role in American society, PacifiCare is flexing its financial muscle to acquire more market share and gain recognition as a national managed care provider, experts said.
On Monday, the company prepared to move into its fifth state--Florida--by tentatively agreeing to purchase a small Miami HMO that will add to last year’s $1.7 billion in revenue and more than 1 million members.
The proposed acquisition of Advantage Health Plans Inc. comes less than a week after PacifiCare, which has offices in California, Washington, Oregon, Texas and Oklahoma, said it was expanding its presence to a 12-county rural area of southwestern Oklahoma.
The move to buy privately held Advantage Health Plans not only ensures that PacifiCare is rising to the ranks of the nation’s top 10 HMOS, health care analysts said, but also gives the firm a strong foothold in an area of the country where it can best profit from its fast-growing Secure Horizons plan.
The Secure Horizons plan enrolls elderly Medicare recipients into their own federally funded HMO. Health care analysts said that the agreement to buy Advantage Health for an undisclosed sum was driven by the desire to tap into South Florida’s large elderly population.
“It looks like a very good acquisition for them,” said Kimberly A. Purvis, a health care analyst with brokerage Donaldson, Lufkin & Jenrette in New York.
Purvis said Monday’s announcement is significant because Florida has the third most concentrated Medicare population, behind California and New York.
With 18% of the Florida population receiving Medicare benefits, PacifiCare is not as concerned about Advantage Health’s commercial membership--those who are enrolled through employee benefit programs.
Advantage Health, started in 1990 by a Florida physician, has only 29,000 members. The additional membership does not significantly change PacifiCare’s standing as the seventh largest HMO in the nation.
But it does open doors for the company’s long-term future, said PacifiCare’s Hoops.
“We do have a need to do these kinds of transactions,” Hoops said on Monday. “Florida is one of the key states in the country for HMOs with national ambitions.”
The Advantage Health takeover is expected to be finalized within 90 days, Hoops said.
Other terms of the agreement were not available, but health care analysts said that it was an all-cash deal, to be paid most likely out of last year’s $100-million stock offering.
Sally Fisher, a health care analyst for Dillon, Read & Co. Inc. investment house in New York, predicted that the purchase of Advantage Health would have no effect on PacifiCare’s bottom line for 1994. The Miami company’s revenue last year was $20 million.
But by 1995, she said, PacifiCare will see profit from the deal.
Fisher also said that PacifiCare’s growth is gaining national stature.
“I personally don’t like HMOs,” Fisher said. “I happen to think you should invest in them selectively. But this is one company that has tremendous upside.”
Purvis agreed, but said she didn’t think PacifiCare was seeking to establish a national presence, even though it was establishing a national reputation.
There are areas of the country, like the Northeast, that the company should not enter, she said. “I don’t see them jumping into a bunch of new states,” she said.
Instead, PacifiCare continues to concentrate on its key markets in California and the Pacific Northwest. It is also turning up the heat in Texas, where it is a solid, if not dominant, player in Houston.
“They don’t want to spread themselves too thin,” Purvis said.
PacifiCare’s Class A common stock, traded on the Nasdaq market, closed at $32.75 a share, up 75 cents a share from Friday.
Continued Growth
PacifiCare has been buying other managed-care providers at an increasing rate. Analysts expect more acquisitions as health care reform causes further market consolidation. PacifiCare Acquisition: Advantage Health Plans, Miami Date Purchased*: October, 1993 Members: 29,000 Business: HMO
*PacifiCare Acquisition: California Dental Health Plan, Tustin Date Purchased*: September, 1993 Members: 450,000 Business: Dental/Vision
*PacifiCare Acquisition: Freedom Plan, Santa Barbara Date Purchased*: September, 1993 Members: 13,500 Business: HMO
*PacifiCare Acquisition: Health Plan of America, Orange Date Purchased*: December, 1991 Members: 130,000 Business: HMO
Business:
*PacifiCare Acquisition: Execu-Fit, San Francisco Date Purchased*: August, 1991 Members: N/A Business: Corporate health consulting
* 1993 acquisitions pending
N/A Information not available
FOLLOWING THE PLAN
Although the proposed acquisition of Advantage Health is not a major deal, it reflects PacifiCare’s conservative growth strategy of becoming a major player in the HMO industry by purchasing small firms.
PacifiCare Advantage Health Members 1.1 million 29,000 CEO/president Alan Hoops Marta Borrego 1992 net income $43.5 million $350,000 Projected 1993 revenue $2.2 billion $20 million Operations California, Oklahoma Florida Oregon, Texas Stock exchange Nasdaq Privately held
Source: PacifiCare; Researched by JAMES GOMEZ / Los Angeles Times
