Industry Seeing Larger Companies, Fewer Rivals
When Aetna Life and Casualty recently agreed to acquire competing U.S. Healthcare for $8.6 billion, analysts predicted that competitive pressures would prompt a wave of similar deals as industry leaders scrambled to build plans with a national reach.
And, on Monday, PacifiCare Health Systems Inc. proposed a $2.1-billion acquisition of FHP International, a deal that, if approved by state and federal regulators, would result in the creation of the nation’s fifth-largest health insurance company, with 4 million subscribers.
“Size does in fact matter in this industry, because size dictates the ability to set pricing,” said Peter Boland, president of Boland Healthcare Inc., a Berkeley-based health-care publishing company. “This deal significantly reconfigures the health-care industry landscape in California and the Western states.”
Aetna’s April agreement to acquire U.S. Healthcare was driven by the Hartford, Conn.-based company’s desire to enter the hotly competitive managed care market, and analysts said it could take considerable time to merge the two operations.
In contrast, analysts said that the deal involving Cypress-based PacifiCare and Fountain Valley-based FHP could show more immediate results because the two companies share similar backgrounds, strengths and growth potential.
“I see it as positive because you have two companies that, instead of hitting each other over the head, can now concentrate on growth,” said Paul Feldstein, a UC Irvine graduate school of management professor who studies health-care issues. “And, not coincidentally, it makes a much bigger company, one that another competitor would have more trouble taking over.”
In both of the proposed deals, analysts said, the bottom line is creating larger companies that can better withstand the pressure coming from customers who want lower rates and doctors and hospitals who want more money for their services.
“It can greatly increase your ability to fend off pressures from providers, for example, if you’re representing 4 million rather than 1 million people,” Boland said.
Not surprisingly, the trend toward larger companies--but fewer outright competitors--generated a negative reaction from consumer groups that are lobbying government agencies for stronger controls over the health-care industry.
“I think what this deal will mean is that the control over health care is being concentrated in fewer and fewer hands,” said Jamie Court, director of Santa Monica-based Consumers for Quality Care. “Look at it this way: Ten of the nation’s largest HMOs now control 70% of the covered lives in this business, and after this deal, it will be nine companies controlling all of those lives.”
“What I see are giants coming together and creating new forces to squeeze the doctors, hospitals and caregivers,” Court said. “And that will mean doctors will have to cut costs even further.”
State Sen. Herschel Rosenthal (D-Los Angeles), chairman of the state Senate Insurance Committee, complained that “these kinds of mergers might be good for executives in the administration of these companies, but I’m not sure how consumers are going to be helped.”
But health-care industry analyst Kenneth S. Abramowitz, with the investment firm Sanford C. Bernstein & Co. Inc., painted the planned acquisition as “good news for consumers because they’ll have larger choice when it comes to medical groups. In other words, the extra buying power that the combined Pacificare/FHP company will have will mean better quality for subscribers.”
Abramowitz also described antitrust problems as unlikely: “In California, the proposed combination would only have half the market share of Kaiser Permanente. So if they’re going to threaten PacifiCare, they’d better build a jail large enough for Kaiser.”
