Aetna Will Buy U.S. Healthcare for $8.6 Billion
In a merger that provides a glimpse into the future, Aetna Life and Casualty Co. said Monday that it will acquire a large Pennsylvania-based HMO for $8.6 billion to create the nation’s largest managed health care insurer.
The vast new enterprise would provide health coverage for one in 12 Americans, serving as a prototype for what experts foresee as a new generation of giant, for-profit health care conglomerates that will oversee medical care for many millions of people.
While some say such mergers will help slash the nation’s troublesome medical costs and improve overall quality of care, others contend that these health care giants will depersonalize medicine and achieve so much market dominance that they eventually will be free to raise prices.
The pairing of Aetna, of Hartford, Conn., and U.S. Healthcare, of Blue Bell, Pa., would create a company with 23 million members in 50 states, including 1.2 million in California. With 10.3 million of the total managed-care members, it would easily surpass industry pioneer Kaiser Permanente, which has 6.8 million members nationwide.
“What you’re seeing is the emergence of jumbo health plans,” said Peter Boland, a managed-care analyst in Berkeley. “Health care delivery is still local, but you now will have large national companies with a significant presence in many local areas.”
The merger needs approval from shareholders of both companies and state and federal regulators.
Aetna said it expects the deal to add $300 million to its profits within 18 months by slashing expenses and improving sales. The merger will result in job cuts, Aetna officials said, but declined to be specific. Aetna has 3,600 employees in California, mostly in San Bernardino, San Diego and Walnut Creek.
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Analysts said they did not expect the merger to have any immediate effect on Aetna’s 1.2 million members in California. Over time, the influence of U.S. Healthcare’s management and policies--regarded as innovative--will be felt more strongly as the new firm tries to convert members into its HMO programs.
Aetna fell $3.50 a share to $72 in trading on the New York Stock Exchange, while shares of U.S. Healthcare surged $6 to $51.875 in NASDAQ trading.
For Aetna--a broad-based firm with holdings in life insurance, financial services and traditional indemnity health insurance but limited experience in managed care--the deal offers a chance to capitalize on continuing efforts of employers and government purchasers of health care to shift millions of people into HMOs from less-restrictive health plans.
HMOs, which promise lower costs in exchange for limited choice of doctors, hospitals and prescription drugs, are well established in California but less well-known in many other parts of the United States. Although membership is rising fast, only about 20% of Americans are enrolled in HMOs.
The fast growth of managed care has prompted other mergers, including Minneapolis-based United Healthcare’s acquisition of Metrahealth Cos., a managed-care firm itself created by the merger of the health care units of Metropolitan Life Insurance Co. and Travelers Insurance Co. But other deals have failed, including Woodland Hills-based WellPoint Health Network’s proposed $1.6-billion acquisition of the parent company of Health Net.
U.S. Healthcare is widely regarded as one of the best-managed and most innovative HMOs in the nation. It is known for its ability to negotiate tough deals--that is, lower fees--with doctors, hospitals and other providers. The HMO also is credited for its efforts to link doctor pay not only to cost-cutting targets, but also to improvements in the quality of patient care.
The company, however, has also attracted its share of unfavorable attention. Last year, the health plan’s founder and chairman, Leonard Abramson, became a symbol of greed in the HMO industry when news reports focused on his multimillion-dollar annual salary and bonuses. One national television news show featured a helicopter view of Abramson’s sprawling estate in Pennsylvania.
Abramson’s pay in the last few years has exceeded $3 million annually, helping to fuel a fierce debate within the medical community about HMO executive compensation. His shares in U.S. Healthcare, which he founded 21 years ago with a $500,000 investment, are valued at about $850 million. In the merged company, to be called Aetna, Abramson will be a director and consultant.
Last year, U.S. Healthcare’s policies drew public attention to the issue of doctor “gag orders” when Harvard University physician David Himmelstein accused the company of firing him after he publicly accused the firm of using improper financial incentives for doctors and prohibiting doctors from discussing them with patients. The HMO later eliminated the clauses.
Aetna and U.S. Healthcare officials made liberal use of superlatives in describing the deal to securities analysts and reporters on Monday. The new company will “drive into the future boldly,” officials boasted, and will “redefine the way health care is delivered” with its “dream-team management.”
“This is literally a once-in-a-lifetime opportunity to create a model for exceptional health care for customers,” said Aetna Chairman Ronald F. Compton, who will run the merged firm aided by two top U.S. Healthcare executives.
But some experts view such mergers more critically. Victor Fuchs, a leading medical economist at Stanford University, discounted Aetna’s claims that the merger will free resources to study medical outcomes and improve patient care.
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“I don’t put much stock in that,” he said. “They’ll focus on a few things that sound good. In terms of providing high-quality medical care at a lower cost, I think these very large companies will be less efficient than smaller ones.”
The merger combines Aetna’s strengths in traditional indemnity health insurance and among large corporate accounts with U.S. Healthcare’s managed-care expertise in serving small- and medium-size businesses, said Compton, who will become chairman and CEO of the new firm. While Aetna’s membership is spread throughout the country, U.S. Healthcare is strongest in Pennsylvania, New Jersey, New York and other Eastern Seaboard states.
