United-PacifiCare merger troubles physicians

The big health plans just keep getting bigger. UnitedHealth Group, the second-largest plan in the country, bought itself a beachhead in California by agreeing to pay $8.1 billion for PacifiCare.

But expanding into the most populous state, in which it had little business and in which No. 1 plan WellPoint has a major presence, wasn't the only reason for this deal. Both United and WellPoint have been buying plans as much for their demographics as for their size of membership.

PacifiCare in particular offers United two other beachheads in areas that are expanding -- Medicare managed care and pay-for-performance plans. PacifiCare's Secure Horizons long has been a leader in Medicare managed care, a business that analysts expect to increase significantly as Medicare offers a drug plan starting next year. PacifiCare also has been involved in successful efforts to implement quality bonus programs for physicians, something United has tried, albeit alienating physicians and hospitals with its approach.

Whatever the reasons for the merger, which must get approval from the Justice Dept. and each state in which United and PacifiCare operate, physicians are not thrilled. The AMA and the California Medical Assn., among others, are speaking out against the United-PacifiCare deal, as they have about other recent multibillion-dollar mergers such as Anthem-WellPoint.

"This acquisition highlights the alarming rate of consolidation within the health insurance industry that the AMA has been cautioning about for years," said AMA President-elect William G. Plested III, MD. The AMA has put out reports showing that one or two plans often enroll the majority of private-pay patients in most states and metropolitan areas.

Michael Ile, United's vice president of network advocacy, said he had read past testimony to the FTC and elsewhere by the AMA and others regarding market plan dominance. But he said "that disparity is not going to be materially changed by this transaction," given United's relative lack of presence in California.

"What ought to be important to physicians is not whether a [plan] is large or small, but, 'How does the health plan deal with me? Does the plan treat me fairly?' " Ile said, noting that United "was the first to move away from prior authorization to a care-coordinated approach."

"There's nothing out of this transaction that should signal this should be a threat to [physicians]," Ile said.

But California Medical Assn. President Michael J. Sexton, MD, isn't convinced. He noted that United and PacifiCare are among the few plans that have not settled physicians' class-action lawsuits, consolidated in U.S. District Court in Miami, over what physicians viewed as insurers' unfair reimbursement strategies. "Now they're merging," he said. "We find this disconcerting."

Filling a Medicare niche

News of the deal temporarily raised stock prices of Humana and Cigna, firms that analysts say could be targets for Indianapolis-based WellPoint and Minnetonka, Minn.-based United. But WellPoint spokesman Jim Cappel said his company is concentrating on integrating its Anthem and WellPoint operations from last year's merger. United has not tipped its hand on future buys.

WellPoint's and United's acquisition strategies have centered on more than acquiring other large plans in geographic areas where the firms do not have a substantial market share.

The two companies also have gobbled up specialty companies to expand their reaches in consumer-directed plans, health savings accounts and other relatively small but fast-growing areas in the health insurance field. United, for example, announced June 13 that it had reached 1 million customers in its consumer-directed plans, boosted by its acquisition last year of Definity Health, a Minnesota-based pioneer in that business.

In Cypress, Calif.-based PacifiCare, United got a geographic reach and a reach into a fast-growing niche market. PacifiCare's 3 million managed-care members are mostly in California and make the plan the fifth-largest there, says the AMA "Competition in Health Insurance: A Comprehensive Study of U.S. Markets" guide on health plan market share. United's market share in California was negligible.

But another reason to buy PacifiCare, Ile said, was its experience with Medicare. PacifiCare, with its Secure Horizons subsidiary, is the nation's largest private administrator of Medicare insurance plans.

Analysts expect that getting those Medicare members, who are expected to stay with the firm for the Medicare drug plan scheduled to begin in 2006, was particularly attractive to United. What attracted PacifiCare to United, analysts said, was Medicare as well.

PacifiCare CEO Howard Phanstiel last year called the American Assn. of Retired Persons' proposed Medicare prescription plan his company's biggest competition -- and United on June 6 signed a deal to be that plan's administrator. Humana's stock price bumped up 4% the day of the United-PacifiCare deal because it is the second-largest Medicare administrator, and analysts figure other plans would find that attractive.

But many physicians aren't finding the latest merger activity attractive. "We're all very cautious about how the Medicare drug benefit will play out," said the CMA's Dr. Sexton, an emergency physician at Kaiser Foundation Hospital in San Rafael, Calif. "It will be extremely difficult for doctors to negotiate this system. [The United-PacifiCare] merger is just one more piece of the puzzle."

Dr. Sexton said the CMA is discussing how it may fight the merger.

Dr. Plested, a thoracic and cardiovascular surgeon in Santa Monica, Calif., said the AMA was urging federal and state regulators to "examine closely" United's recently proposed acquisitions -- not only PacifiCare but also Neighborhood Health Partnership, a 135,000-member HMO in southern Florida, where United has only a small market share.