CEOs Defend Healthcare Deal

Times Staff Writer

The acquisition of PacifiCare Health Systems Inc. by industry giant UnitedHealth Group Inc. would mean more competition in the health insurance business -- not less, the companies’ chief executives said Friday.

UnitedHealth’s William W. McGuire and PacifiCare’s Howard Phanstiel described the $8.1-billion deal -- which must win regulatory and shareholder approval -- as a step toward a more rational healthcare system.

Answering criticism from doctor and consumer groups, the two men said a combined company would better compete against industry leader WellPoint Inc., which owns Blue Cross of California, benefiting consumers as well as investors.


“I understand all the noise, I understand that everybody has positions,” said McGuire, 56. “Those concerns are legitimate.”

But the purchase, the two executives said, would give PacifiCare, which operates mostly in California, national resources and advanced technology that would allow it to better serve larger companies and thus compete better with WellPoint.

McGuire said he also hoped to expand PacifiCare’s business serving small and medium-sized companies. “We’re going to bring in some new things there,” he said. “This very much fits into our agenda to try to bring better healthcare services to different constituents and do it in a way that is unbounded by geography and other traditional restraints. I’m committed to it as I can be.”

McGuire said the acquisition also would help advance a long-term answer to problems with the nation’s healthcare system by using technology to drive down costs and by expanding efforts to track doctor performance and manage chronic diseases.

Over the long term, however, such an answer will involve finding a way to ensure that everyone receives a minimum level of care, he said. But some treatments will be available only to those who can afford them.

“There is not enough money ... to pay for the healthcare system as it operates today. It is indiscriminate, it is non-scientifically based, it is founded on anecdote as much as it is science,” McGuire said. “We have to change course.”

Under the deal announced Wednesday, Cypress-based PacifiCare, the nation’s biggest administrator of Medicare insurance plans, would be acquired by Minnetonka, Minn.-based UnitedHealth, the nation’s second-largest health insurer. Combined, the two would provide health insurance to more than 25 million Americans.

A small number of corporate positions at PacifiCare, affecting perhaps 200 out of 10,500 workers, are likely to be eliminated given track records of past acquisitions, Phanstiel said. PacifiCare will continue recruiting to fill 800 additional positions, he said.

“I don’t think [the head count] will change much, and certainly we don’t expect it to change a lot in California,” McGuire said. “If anything, I expect we will grow in California. You don’t shrink yourself to success.”

Phanstiel, 56, would become an executive vice president of UnitedHealth Group and remain in Orange County. He said Friday that he would reap about $190 million from the transaction in PacifiCare stock options, restricted shares and other equity instruments.

More than 90% of the value gain in those options came before the deal was announced, Phanstiel said. Most of those options are already exercisable, but some would immediately vest with the deal.

Phanstiel, who makes an annual salary of nearly $1 million, said he had waived his right to get $8.5 million in cash under a clause in his contract triggered by the sale of the company. Instead he elected to get an equivalent amount in deferred payments of UnitedHealth stock that vest over time.

Phanstiel also said he would get an additional $16 million from a retirement plan that immediately vests once there is a change of control of the company, but he wouldn’t receive that money until retirement. The account would have vested next year, even without a sale of the firm, he said. Phanstiel said he would get no “extra deal bonus” from the transaction.

The two CEOs described the arrangement as conservative. “I’m not doing this to get money -- I’m doing this to make PacifiCare a more responsive company, to give it access to the best technology, to be a more viable competitor three or four years down the road,” Phanstiel said.

Phanstiel said he would have a two-year contract with UnitedHealth and that 22 other PacifiCare executives also had agreed to remain.

Federal filings on the deal should be available in the next few weeks, the two CEOs said.

The deal has been in discussion for months, they said. It was McGuire, who said he had watched PacifiCare grow for 10 years, who called Phanstiel about a deal in December.

Since news of the merger leaked out Wednesday, shares of PacifiCare have risen $4.15, closing Friday at $76.83, down 53 cents. UnitedHealth shares fell 44 cents to $53.05. Its shares are down 18 cents since Wednesday.

Consumer advocates such as Anthony Wright of the Sacramento nonprofit organization Health Access have raised concerns about the deal. On Friday Wright worried that acquisition of PacifiCare by an out-of-state firm would not be good for California consumers -- despite promises from the two CEOs.

“I appreciated their assurances,” he said. “But I hope the [state] Department of Managed Health Care gets them in writing.”