Blue Shield to Acquire CareAmerica

In what one executive jokingly described as a “man-bites-dog” merger, a major nonprofit health-care firm--Blue Shield of California--announced plans Tuesday to acquire a for-profit managed-care firm and turn it into a nonprofit business.

“We are bucking a trend,” said Wayne R. Moon, Blue Shield’s chairman and chief executive, of the company’s purchase of CareAmerica Health Plans of Woodland Hills for $175 million.

Nonprofit health plans have been losing ground to the relentless spread of for-profit competitors, and several recent mega-mergers among California HMOs have involved large for-profit HMOs buying one another to create even larger ones.

The Blue Cross deal would create the state’s fifth-largest managed-care company, with more than 1.8 million members and revenue exceeding $2 billion. The company’s Southern California membership would top 1 million members.

It would also create a larger nonprofit rival to the state’s largest nonprofit HMO, the giant Kaiser Foundation Health Plan, at a time when for-profit medical companies are drawing intense scrutiny and criticism.

As California’s managed-care industry has undergone rapid consolidation in the last few years, industry observers have stressed the need for San Francisco-based Blue Shield to either find a merger partner or risk becoming an acquisition target itself.

Blue Shield has remained on the sidelines as its major rivals have merged to form powerful combinations: PacifiCare Health Network’s recent acquisition of FHP International and Foundation Health’s merger with Health Systems International.

John Edelston, a Woodland Hills managed-care consultant, said the CareAmerica merger would “keep Blue Shield viable” but is too small a deal to “keep them as a completely independent player.”

Moon said the deal offers several key advantages. CareAmerica is attractive because its HMO for Medicare beneficiaries, which has 45,000 members, is well-regarded in the industry. Blue Shield’s Medicare HMO business is quite small, with only 2,000 members.

Also, CareAmerica has expertise in marketing to ethnic populations, a potential area of growth, Moon said.

For CareAmerica, the deal would offer access to Blue Shield’s larger physician network and to doctors participating in Blue Shield’s Access Plus HMO. Through Access Plus, Blue Shield was one of the first insurers in the nation to market a less-restrictive HMO that allowed members, for an extra $20 office co-payment, to see certain specialists without getting prior approval from their primary doctor.

UniHealth, CareAmerica’s Burbank-based corporate parent, has been looking to sell CareAmerica for about a year, observers said.

UniHealth, which also owns seven hospitals and manages about 10 physician groups in California, has been looking for a way to stem losses, observers said.

For Blue Shield, the deal comes after at least two unsuccessful bids to attract a merger partner.

In 1993, Blue Shield’s proposed $6.5-billion merger with UniHealth fell through. Then, in 1995, Blue Shield tried to bust up a proposed marriage of rivals WellPoint Health Networks and Health Systems International by making a hostile bid for WellPoint.

Blue Shield’s proposal failed, but WellPoint and Health Systems eventually called off their deal.

The CareAmerica purchase is subject to approval by state and federal regulators.