UnitedHealth’s takeover of PacifiCare would be the second-biggest merger ever in the hospital managed care industry

Monterey County Herald (California)

California Insurance Commissioner John Garamendi, whose lone opposition held up a gigantic health-care merger last year, on Monday approved the proposed $9.2 billion union of UnitedHealth Group Inc. and PacifiCare Health Systems Inc.

UnitedHealth‘s takeover of PacifiCare would be the second-biggest merger ever in the hospital managed care industry. The stock-and-cash deal would create one of the nation’s largest private health plan providers, with about 26 million subscribers.

The companies agreed that the costs of the merger will not be borne by California consumers and they agreed to commit $250 million in investments and charitable contributions to medically underserved communities, the commissioner said.

“I expect this merger to go forward,” Garamendi told a news conference.

”They will follow through on this,” he added. ”The agreement is enforceable by court order.”

”We look forward for this opportunity… to apply our skills and ability to work for the advantage of Californians in providing increased affordable access to high quality health care,” said Mark Lindsay, a UnitedHealth spokesman.

PacifiCare appreciates the ”thorough approach” taken by the state ”to ensure that this merger is in the best interest of all Californians,” spokesman Tyler Mason said in a statement.

The merger still must receive approval from the California Department of Managed Care, federal Department of Justice and other states in which UnitedHealth operates.

Lindsay said the merger was already approved by regulators in Arizona, Indiana, Nevada, Oklahoma, Wisconsin and Oregon, leaving Colorado, Texas and Washington state.

Washington state was scheduled to discuss the issue Monday.

None of the other states that approved the merger demanded the contributions and restrictions included in the California agreement, Lindsay said.

The California insurance commissioner’s stamp was considered vital because for months he single-handedly held up the largest health-care industry merger — the $16.4 billion purchase of Thousand Oaks-based WellPoint Health Networks Inc. by Anthem Inc. of Indianapolis.

Garamendi had argued that the deal would have pulled that much money out of California in the form of dividends and that the buyout it offered WellPoint‘s chief executive was excessive.

Garamendi only approved that deal last year after Anthem agreed to contribute some $400 million to the state public health system by, for instance, helping fund new hospitals.

Garamendi said the WellPoint agreement was his template for negotiations with UnitedHealth.

”It was a major hurdle for the company to surpass,” said K. Newton Juhng, an analyst with Piper Jaffray in New York, who covers UnitedHealth. ”California was the big step that needed to be done. It should push things along quite a bit.”

Juhng said the millions of dollars in charitable investments is not a really a major concession because the company already makes similar investments as part of its portfolio.

”The key here from the company’s point of view is the demands that the state made were relatively reasonable,” he said.

UnitedHealth currently covers 53.8 million people through medical insurance or insurance programs it manages for other firms. The deal with Cypress-based PacifiCare was announced in July. It includes $8.1 billion for a stock swap and cash. UnitedHealth also has said it would pay off $1.1 billion in PacifiCare debt immediately after the deal closes late this year or in early 2006.

PacifiCare is one of the nation’s largest health groups with nearly 3.2
million members of health plans and about 11.3 million members of specialty
plans covering such things as dental care and behavioral health.

PacifiCare said the merger would give its members, many of whom are elderly,
nationwide access to health care, cheaper prescription drugs and other services.

Minnetonka, Minn.-based UnitedHealth has a network of more than 4,500 hospitals and 460,000 doctors and other health-care providers nationwide.

Shares of UnitedHealth fell $1.39 to $61.75 Monday during afternoon trading on the New York Stock Exchange. PacifiCare fell 73 cents to $89.16 on the NYSE.

Garamendi said the $250 million in investments and contributions, which could start flowing early next year, would include funding for community clinics and medical training and education, especially in the underserved Central Valley and fast-growing inland region of Southern California, Garamendi said.

Among key parts of the agreement are that PacifiCare cannot send dividends made in California from its insurance products ”upstream” to its new parent, UnitedHealth, for four years, he said.

Garamendi said the investments and charitable contributions were about equal to the ”despicable” level of executive compensation included in the merger, which he estimated at $300 million.

The insurance commissioner said UnitedHealth has ”a very bad reputation across the nation” concerning reimbursement of physicians and other health-care providers, and under the California agreement the company is required to make “prompt and appropriate” payments.

”We have nearly 50,000 doctors that have chosen to work with us and we are proud that they have selected us a a partner,” Lindsay replied.

UnitedHealth has predicted the merger will reduce its operating costs by $100 million in the first year alone.

The California Medical Association and some consumer groups opposed the deal, contending it does nothing for the consumer.

Dr. Jack Lewin, head of the California Medical Association, said Garamendi had negotiated ”positive steps.”

However, Lewin said that despite the four-year ban on upstreaming, the CMA was still waiting to see whether UnitedHealth would pull profits from its new California subsidiary, possibly in the form of higher administrative costs.

”Hundreds of millions of dollars” could be lost, he said.

“This commissioner is selling the public a bag of goods that have yet to prove valuable,” said Jamie Court, president of the consumer group Foundation for Taxpayer and Consumer Rights.
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On the Net:

California Department of Insurance: http://www.insurance.ca.gov/
UnitedHealth Group: http://www.unitedhealthgroup.com
PacifiCare Health Systems: http://www.pacificare.com
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AP Business Writer Alex Veiga contributed to this report.