Health Net Parent, Foundation Reportedly Are Talking Merger
Two of the state’s biggest health maintenance organizations, Foundation Health Corp. and Health Systems International, are in merger talks that would create a managed-care powerhouse with more than 2.5 million members in California alone, according to knowledgeable industry sources.
If completed, the combination of Health Systems, the parent of the HMO Health Net, and Foundation Health would accelerate a trend toward consolidation in the state’s health-care industry that many patient-care advocates contend is diminishing health-care choices for millions of patients in California as well as across the country.
As recently as Friday, two of the nation’s premier not-for-profit HMOs, Oakland-based Kaiser Permanente and Group Health Cooperative of Puget Sound, disclosed that they are in merger talks that could create the largest HMO in the Pacific Northwest.
Analysts said the talks between Rancho Cordova-based Foundation and Woodland Hills-based Health Systems are at least partially a response to last month’s announcement that PacifiCare Health Systems would buy its Orange County rival, FHP International, for $2.1 billion. That deal, which would create the nation’s fifth-largest HMO, is awaiting regulatory approval.
The prospect of continued consolidation provoked a warning from the California Medical Assn., a doctor’s trade group generally critical of HMOs.
“I think physicians, by and large, have been concerned with the increasing concentration of economic power in fewer hands,” said CMA Vice President Steve Thompson. “It creates an oligopolistic market where the notion of take it or leave it becomes that much more pervasive.”
The Foundation-Health Net and PacificCare-FHP deals would place the medical care of at least 9 million out of California’s 13 million HMO members under the control of only three HMOs. (Kaiser Foundation Health Plan is the largest HMO, with 4.6 million members in California. Health Systems’ Health Net unit is California’s second-largest HMO; Foundation is currently ranked fourth.)
Rumors about a Foundation and Health Systems merger heated up late last week, prompting Foundation’s shares to soar 17% in a matter of days. Foundation consequently issued a statement Monday that it is in “preliminary” discussions over a “strategic combination with a third party.”
The company did not identify the other party. Nor, it said, is there any “assurance that the discussions will lead to a definitive agreement.”
Foundation Chairman and Chief Executive Daniel D. Crowley said in the statement that the “merger of equals” would lead to significant cost savings that “would flow through to the shareholders of the combined company.”
But some observers viewed the potential deal as a takeover of Foundation by the larger Health Systems.
“I think Crowley is selling the company,” said one securities analyst. Several sources said they have been told that Crowley, whose multimillion-dollar salary and bonus packages have made him a favorite target of HMO critics, insisted on receiving an unusually generous severance package as a condition of any sale.
Crowley said in his statement that the transaction would value Foundation’s shares at an unspecified figure below Friday’s closing price of $36.125. That price perplexed many analysts on Wall Street, who have generally valued the Sacramento-area company at more than $40 a share. Foundation shares slumped $2.125 to close at $34 in Monday’s trading on the New York Stock Exchange; Health Systems rose 87.5 cents to $26.875.
Executives of Foundation and Health Systems declined to comment formally on whether the two firms are in discussions.
Foundation and Health Systems are each among the nation’s 10 largest HMOs. Like most managed-care firms, they have been actively scouting for mergers that would allow them to increase their market share.
In this case, the potential merger partners have been part of a long-term three-way courtship.
In late 1994, Foundation had proposed acquiring Health Systems for more than $1.5 billion. Health Systems rebuffed the offer and, several months later, announced it would pursue a merger with WellPoint Health Networks, a big Southern California managed-care firm controlled by Blue Cross of California. That deal collapsed in late 1995.
In recent weeks, sources confirmed that Foundation was holding merger talks with WellPoint. Those discussions apparently fizzled.
As rumors about Foundation have circulated recently, analysts have said that either Health Systems or WellPoint would be logical merger partners.
But analysts noted Monday that Foundation specifically said that the transaction would involve “pooling-of-interests” accounting. That would eliminate WellPoint as the merger partner because as a condition of its $3-billion reorganization earlier this year, WellPoint agreed not to do a merger on pooling-of-interest terms for two years.
