PacifiCare, FHP Merge Into an HMO Giant

In a move likely to stir further controversy over health-industry mergers, state regulators Friday approved PacifiCare Health Systems Inc.’s planned $2.2-billion buyout of rival managed care company, FHP International Corp.

The two Orange County companies promptly wrapped up the deal, forming one of the largest managed health-care companies in the nation with expected revenue of $10 billion a year.

Within hours, they announced that about 400 jobs nationwide would be eliminated from the two companies, 150 of them in Orange County. Representatives of consumer and doctor groups, disappointed after pleading with the state in public hearings last month to block the merger, vowed to support legislation to safeguard patients as such mergers sweep across the HMO industry.

“Members deserved more” explanation for the approval, said Margo Hunter, a staff member of the Consumers Union. She criticized the state Department of Corporations for “rubber-stamping the merger.”

She faulted the agency for failing to describe how it concluded that access, continuity and quality of care for members wouldn’t be harmed by the merger.

But Keith Bishop, the agency’s commissioner, said, “We’ve done a great deal to protect enrollees. We spent a lot of time, held hearings, and I personally reviewed all the written testimony.”

He said his department went further than regulators in other states to respond to concerns expressed by enrollees, including their ability to stick with the same doctor and remain on prescription plans.

Alan Hoops, PacifiCare’s chief executive, said that he was pleased with Friday’s announcement and that he had found the public scrutiny of the merger at hearings last month in Irvine and San Diego “humbling.”

“I feel wonderful. We’ve been working very hard with the department for a long time,” he said.

PacifiCare said Friday that next week 370 employees across California will be either fired or notified that their jobs will be eliminated after the two plans combine operations.

Overall, the combined company expects to eliminate about 900 positions nationwide, mostly in marketing, sales, administration and accounting, including 450 already eliminated through attrition.

“Anybody who deals directly with customers will stay,” said Susan Whyte Simon, a PacifiCare spokeswoman.

PacifiCare still faces another regulatory hurdle before it can merge the two plans. The DOC, which regulates health maintenance organizations, cleared the change in the plan’s ownership Friday.

But the operations can’t be merged unless PacifiCare meets the agency’s novel conditions that patients be permitted to keep their doctors and remain on prescription plans. PacifiCare plans to submit a detailed plan addressing such issues to the agency this summer.

Hoops said he hadn’t expected such conditions would be required.

“Much of the criticism of managed care must be taken very seriously and our industry has a long way to go,” he said.

He said that despite the stipulations, PacifiCare can still reap cost savings that are expected once the two companies are merged. Company officials have testified that the merger will benefit consumers by lowering costs and offering them more choices.

“It will [probably take a year and a half to fully merge and integrate all of FHP with PacifiCare, not just in California but in all the states where operations overlap,” Hoops said.

However, merger opponents said they will push for improved regulation to protect consumers.

“I don’t believe the Department of Corporations is set up--or has the people on board--who can adequately oversee” the HMO industry, said Dr. Juan Carlos Cobo, a Mission Viejo surgeon who heads the Orange County affiliate of the California Medical Assn.

Meanwhile, state Sen. Herschel Rosenthal (D-Los Angeles) said he will continue pressuring the agency to make sure consumer interests are protected as such mergers proceed.

Rosenthal plans to introduce legislation that would shift the state’s regulatory oversight of the HMO industry to the Department of Consumer Affairs. He said he was recently frustrated in an effort to persuade Bishop to ensure those interests are protected.

Rosenthal has invited Bishop and state Atty. Gen. Dan Lungren to a March 5 hearing to explain why their agencies separately approved the merger. Both Lungren’s office and the Federal Trade Commission cleared the merger on antitrust grounds.

PacifiCare on Friday updated terms of the deal for investors. For every share FHP stockholders have in FHP, they will receive $17.50 in cash and 0.232 shares of PacifiCare common stock.

PacifiCare’s Class A shares rose 3/4 to close at $79 in midafternoon trading, while its Class B shares rose 9/16 to 83 3/4. FHP’s shares rose 3/8 to 37 3/8.

* WHAT IT MEANS: Questions and answers about how PacifiCare’s takeover of FHP will affect members. D1