Metropolitan Life, Travelers to Merge Health Operations : Insurance: The deal would create the nation’s largest health coverage network. Managed-care trend, reform prospects are cited.

Metropolitan Life Insurance Co. and Travelers Inc. said Tuesday that they plan to merge their health insurance operations to create a giant insurer designed to compete better in a fast-changing health care marketplace.

The deal would create the nation’s largest health insurance network, covering some 13 million people, with operations in 42 states.

Analysts said the merger is critical to Metropolitan Life and Travelers, neither of which is strong in the increasingly popular managed-care segment of health insurance. Both have found it difficult to compete with aggressive regional insurers that provide managed-care plans, such as health maintenance organizations, that hold down medical costs by negotiating steep discounts in hospital and physician charges. Many employers, in an effort to reign in rising medical costs, have been pushing more workers into HMOs.

Neither of the big insurers has been particularly successful at expanding its HMO customer base, though MetLife, with 3.1 million HMO enrollees, has a better track record than Travelers, with just 1.8 million. The strength of both companies has been in traditional “indemnity,” or fee-for-service insurance plans.

“The joint venture is really about two also-rans in the health industry trying to put something together and be somebody,” Mike Romanowski, a vice president at Conning & Co. in Hartford Conn., told Reuters.

Margo Vignola, a health care analyst at Salomon Bros. Inc. in New York, said neither Travelers nor MetLife represented much of a competitive threat to HMOs by itself but that the combined group “could become a formidable competitor if it can convert traditional indemnity customers to HMO enrollment.”

“This combination gives us a unique opportunity to create a company capable of being an innovative force in the health care industry,” said Sanford I. Weill, Travelers chairman and chief executive.

Analysts said the combination is further evidence of a wave of consolidation in health care resulting from the growth of managed care and the prospect of national health reform.

“We’re going to be seeing more deals involving these very large insurance companies that are beginning to hear the footsteps of these more innovative managed-care organizations,” said Ronald Spoltore, director of the health care practice at the Kenneth Leventhal & Co. consulting firm in Los Angeles.

John D. Moynahan Jr. executive vice president at MetLife, said the new company--as yet unnamed--will offer consumers more choices of doctors and other health providers in local communities than MetLife or Travelers could offer alone. “Managed care is very much a local business, and the conversion of our national programs to one more locally focused is a major issue we need to overcome,” he said.

MetLife and Travelers, both based in New York, said the deal will be financed with $650 million in capital. As part of the deal, MetLife would acquire Travelers’ group life and related group insurance businesses for $350 million.

The joint venture would be 50%-owned by each company.

The deal, which is subject to regulatory approvals and completion of a final agreement, is expected to close on or before Jan. 1, the firms said.

Kenneth L. Simmons, former chairman and chief executive of United HealthCare, was named chief executive of the new company. Simmons is a veteran insurance executive who is credited with improving United Health’s operations in the late 1980s.

The joint venture would be roughly a third larger in size than nonprofit Kaiser Permanente, the nation’s largest HMO.