The Benefits and Side Effects of Health Industry Mergers : Trend: More than $1.4 billion in deals have been announced involving O.C. companies, reflecting a bigger-is-better philosophy.
Wescott (Bill) Price III says he knows a good deal when he sees one.
But when he began searching for an acquisition target to help his health maintenance organization expand into new, potentially lucrative regions, the chief executive officer of FHP International Inc. in Fountain Valley rejected candidate after candidate.
Then he found what he believed to be a gem of a deal: TakeCare Inc. in Concord.
The Northern California HMO had what it took for Price to jump into the health care industry’s merger and acquisition frenzy. It had an efficient management team; it had a solid presence in Northern California and in Colorado and the Midwest, where FHP has no members. Best of all, Price was well-acquainted with TakeCare Chairman Jack R. Anderson and President R. Judd Jessup.
“It was a perfect match,” Price said last week after announcing a $62-a-share bid to buy TakeCare, a deal valued at $829 million. “We had been talking about it for some time, and we felt there was a smart fit here. It really puts us in a strong competitive position.”
Indeed, today’s health care industry is more than a buyer’s market--it’s a survivor’s market.
As politicians prepare to negotiate the final version of the National Health Plan, industry executives are trying to position their companies for success in what will become an increasingly competitive marketplace. A flurry of consolidations last year is expected to snowball in 1994, with more than $1.4 billion in deals already announced involving Orange County companies.
Experts have praised FHP’s decision to buy TakeCare, calling it an ingenious strategic move that would thrust the company into the nation’s top five HMOs and move it far ahead of its closest competitor, PacifiCare Health Systems Inc., to take the No. 2 spot in California behind HMO giant Kaiser Permanente.
Analysts and health experts suggest rivals such as PacifiCare, Maxicare Health Plans of Los Angeles and United Healthcare Corp. of Minnesota cannot afford to take the proposed FHP acquisition--the most expensive in the industry’s history--for granted. They said that although FHP’s proposed merger came as a surprise, no one was shocked at the idea.
“I guess we are getting to the point where not much is a surprise anymore,” said Mary O’Connell, a health analyst with brokerage Louis Nicoud & Associates in San Francisco. “The ante has really been raised.”
FHP is the latest example of an evolving health industry in which providers, drug manufacturers and medical device distributors are following a bigger-is-better philosophy: seeking greater economies of scale to cope with anticipated cost constraints.
Orange County companies have been at the heart of this push to consolidate. Among those on a buying binge:
* Newport Beach nursing home operator Regency Health Services Inc. announced in December that it was merging with Tustin competitor Care Enterprises in a $120-million stock swap that would create the state’s largest chain of nursing homes and rehabilitation hospitals. That came after Regency bought 13 nursing homes earlier in the year.
* McGaw Inc. in Irvine, a supplier of intravenous solutions and pumps, last month agreed to sell itself to Miami-based generic drug maker IVAX Corp. for about $600 million. Company officials said the merged company would broaden both firms’ product lines and become more competitive.
* Abbey Healthcare Group Inc., the Costa Mesa-based home health care company that lost a bidding war for a Boston competitor in March, ultimately purchased 31 home health agencies across the nation last year--including the $195-million purchase of Total Pharmaceutical Care Inc. of Torrance. The company, which spent more than $250 million on acquisitions in 1993, hopes to become America’s largest home health care provider by the end of this year.
* PacifiCare, the Cypress-based HMO, purchased California Dental Health Plan of Tustin in September, giving it an edge over several competitors by offering a broader range of health and dental services to employers. PacifiCare, which in 1992 began socking away cash for acquisitions, also recently announced its intention to purchase Advantage Health Plans Inc. of Miami.
* Wellpoint Inc., a Woodland Hills HMO, announced plans to purchase Irvine-based UniCare Financial Corp. to create what the companies called a “seamless package” of health care and workers’ compensation insurance.
Consolidations among health maintenance organizations should continue because these prepaid, lower-cost providers are expected to virtually take over all care for Americans under health reform. Fewer than 10 million Americans would be outside the anticipated system of managed competition and HMOs.
“We believe very strongly that the health reform process that is going on is forcing providers to form new relationships,” said Don White, a spokesman for Group Health Assn. of America, a Washington-based HMO industry organization.
The time has passed for new players to enter the HMO industry, said White, adding that many of those in business today may not be around in the near future.
“The difference will be that the companies (that survive consolidation) will be much stronger,” White said. “But even they will have to go through some more restructuring.”
Roger F. Greaves, chairman of Health Net Inc. of Woodland Hills, said he believes companies joining forces would be “definitely good for the public” because greater size should lead to increased efficiencies and, ultimately, lower costs to members and their employers.
In August, Greaves’ company announced a merger with Qual-Med Inc. in Pueblo, Colo., that would create a company with $1.8 billion in annual revenue. By comparison, the FHP-TakeCare deal would result in nearly 1.6 million members and $3.5 billion in annual revenue.
Health Net and Qual-Med’s merger negotiations have hit a snag. A jury recently awarded $89.1 million to a Health Net member suffering from breast cancer who claimed that she was denied medical care.
But Greaves also blames the delay on the sheer complexity of putting two multimillion-dollar health care companies together. He said such a consolidation process is traumatic, even when the partners seem to be a perfect fit.
Blue Shield of California and UniHealth America in Burbank were two companies consumed by the complexity of consolidation. In June, the firms proposed a mega-merger, which would have created a $6.5-billion firm with 4.5 million members.
The merger, which was welcomed enthusiastically by health care analysts and observers, fueled a major debate about the need for such consolidations.
Talks between Blue Shield and UniHealth inevitably collapsed in November because of differences between managers on both sides about how to form the new corporation, said Blue Shield spokesman Mike Odom. Blue Shield officials also wanted to retain the Blue Shield name. UniHealth, a nonprofit corporation, was faced with ironing out legal issues involving its for-profit enterprises, including its PacifiCare subsidiary.
“Consolidations of that magnitude are very complex,” Odom said. “There are lots of details and issues that need to be negotiated. It doesn’t always work out.”
But Odom partly blamed extensive news coverage of the proposal for creating expectations that the two firms could not live up to.
“In many ways the media jumped on it right away as if it were a done deal,” Odom said. “It was a difficult situation.”
The good news for FHP and TakeCare, said Doug Sherlock, publisher of Pulse, an HMO newsletter in Philadelphia, is that the issues facing them are quite different from those that scuttled the UniHealth-Blue Shield deal. Both are for-profit companies. There are few geographic overlaps in membership and the companies’ top managers are friends.
“It’s two different cultures,” Sherlock said. “They are not comparable. They won’t have any problem at all completing the acquisition.”
Sherlock said that, in the future, so-called “mixed model HMOs” will be the strongest in the industry. Mixed-model HMOs are those that provide a combination of company-owned hospitals and clinics operated by staff physicians along with networks of doctors who work under contract. FHP owns hospitals and clinics, while TakeCare contracts with medical centers and physician groups to provide care for its members.
The deal allows FHP to speed up its transition from a so-called staff-model HMO to a mixed-model operation, a move it began in earnest two years ago. By July, if approved, only half of FHP’s doctors would be company employees, down from more than 65% of them today.
“The issues that are driving health care reform are also driving companies to change now,” Sherlock said.
Some corporate executives downplayed federal reform as the primary motive for consolidation.
“I don’t think . . . people are running to do things in anticipation of what the government is going to do,” said Richard Rapp, Abbey Healthcare’s chief financial officer.
Abbey’s strategy, Rapp said, it to make Abbey a “one-stop shopping” home health care company, providing clients with both medical equipment and nursing care. That strategy assumes that the home health care provider with the most services at the lowest cost will gain a lion’s share of the market.
“Our acquisition strategy is simply a reaction to what is already going on in the business,” Rapp said. “It’s market driven.”
FHP’s Price agreed that shopping for corporations simply to hedge your bets is foolhardy and could be disastrous. FHP’s acquisition was strategically designed to add significantly to its successful Senior Plan program for Medicare recipients, according to company officials.
The company had hoped for some time to expand its 300,000-member senior plan into Northern California and Colorado. But under federal law, an HMO needs to have a traditional member signed up for every Medicare recipient it hopes to bring into such a plan.
“Making an acquisition when you don’t know what health care reform is all about is ridiculous, if that is all you are doing it for,” Price said.
But the FHP-TakeCare proposal could lead to a bidding war for TakeCare’s assets.
Pittsburgh’s wealthy Hillman Family, which owns about 16% of TakeCare stock, maintains that a third HMO is set to outbid FHP. Neither the family nor officials of either company would identify the rival HMO or give details of the alleged counteroffer. Consequently, some analysts warn that FHP may have a rockier time than expected in concluding the deal.
When asked, Price said that he is so sure of the synergy in his proposed acquisition that he will staunchly defend the deal by fighting whatever overtures are made by a competitor. It is, after all, a matter of corporate survival.
“I’d say that whoever wants to step into this deal will have to do so under great peril,” he said.
Mergers: Health Care Trend
Health care providers are combining forces to provide increased coverage and lower prices. Recent mergers affecting Southern California health care companies:
Price Company Merging with (in millions) FHP International TakeCare Inc. $829 McGaw Inc. IVAX Inc. 600 Abbey Healthcare Group Total Pharmaceutical Care 195 Wellpoint Inc. UniCare Financial Corp. 154 Regency Health Services Care Enterprises 120 PacifiCare California Dental Health Plan 20
Source: Times reports; Researched by JANICE L. JONES / Los Angeles Times
