UnitedHealth Announces Plans To Acquire PacifiCare for $9.2B

Minnesota-based UnitedHealth Group on Wednesday announced plans to purchase California-based PacifiCare Health Systems -- the largest administrator of health plans for Medicare beneficiaries -- for $9.2 billion in cash, stock and assumed debt, the St. Paul Pioneer Press reports. The acquisition, which requires shareholder and regulatory approval, would provide UnitedHealth with access to the 716,000 PacifiCare members enrolled in Medicare plans and the 2.5 million members enrolled in commercial plans in California, Washington state, Oregon and Nevada (Forster, St. Paul Pioneer Press, 7/7). The acquisition would increase the membership of UnitedHealth, the second-largest health insurer in the nation, to 25 million. Indiana-based WellPoint has 27.7 million members (Freudenheim, New York Times, 7/7).

Acquisition Details
Under the acquisition, UnitedHealth would exchange 1.1 shares and $21.50 in cash for each PacifiCare share (Fuhrmans et al., Wall Street Journal, 7/7). The $80.05 per share value represents a 10% premium over the PacifiCare share price as of Tuesday. In total, UnitedHealth would pay $2.2 billion in cash, $5.9 billion in stock and assume $1.1 billion in PacifiCare debt after completion of the acquisition. The combined company would have an estimated $65 billion in annual revenue, with cash flow of more than $6 billion (St. Paul Pioneer Press, 7/7). UnitedHealth officials said that the acquisition would result in $350 million in cost savings over the next three years (Serres, Minneapolis Star Tribune, 7/7). Under the acquisition, PacifiCare would operate as a wholly owned subsidiary of UnitedHealth and maintain headquarters in California, and most of the 10,500 PacifiCare employees would retain their jobs. PacifiCare CEO and Chair Howard Phanstiel would become executive vice president of UnitedHealth. In addition to shareholders, the Antitrust Division of the Department of Justice, the California Department of Managed Health Care and the California Department of Insurance will review the acquisition, which could close late this year (Vrana/Girion, Los Angeles Times, 7/7).

Company Statements
UnitedHealth CEO William McGuire said that the acquisition of PacifiCare was "not a transaction either company really needed to do" but would increase efficiency, reduce costs and provide more options to consumers (Wall Street Journal, 7/7). McGuire added, "The combination will benefit every participant in the health care system, including consumers, employers, physicians and hospitals" (Shell, USA Today, 7/7). The acquisition also would "bring the best of both companies forward in a manner that respects each one's unique history and contributions while advancing a national presence that can help address a highly fragmented health care system," he said (CQ HealthBeat, 7/7). Phansteil said, "We have now reached a point where it makes sense for PacifiCare to join with a strong national partner that can help us reach the next level in leveraging technology and scale" (Los Angeles Times, 7/7).

Medicare Market Share
The acquisition would provide UnitedHealth with access to PacifiCare members enrolled in Medicare plans through the Secure Horizons division, Medigap plans and Medicare prescription drug plans (New York Times, 7/7). "PacifiCare's Secure Horizon plans for seniors have been popular alternatives to traditional Medicare," the Wall Street Journal reports (Wall Street Journal, 7/7). UnitedHealth currently has about 320,000 members enrolled in Medicare plans and provides Medigap plans for 3.8 million other members through a partnership with AARP. In addition, the acquisition would provide UnitedHealth with access to the PacifiCare managed care prescription drug division, which has 5.6 million members. UnitedHealth currently provides prescription drug coverage through pharmacy benefit manager Medco Health Solutions, and company officials said that Medco would continue to serve as the main PBM for members enrolled in commercial plans (New York Times, 7/7). According to the Minneapolis Star Tribune, in preparation for the new Medicare prescription drug benefit, "insurers have been scrambling to position themselves to be big players" in the program (Minneapolis Star Tribune, 7/7). UnitedHealth, which earlier this year reached an agreement with Walgreen to promote plans to Medicare beneficiaries at 4,738 Walgreen pharmacies nationwide, "has been among the most aggressive" of the insurers, according to the Journal (Wall Street Journal, 7/7).

Reaction
Sheryl Skolnick, an analyst with Fulcrum Global Partners, said, "It's safe to say that 99.9% of this deal is driven by the Medicare bill" (Minneapolis Star Tribune, 7/7). According to the New York Times, analysts have said that UnitedHealth faces risks in the expansion of the number of members enrolled in Medicare because of the potential for "abrupt changes in deficit-stressed federal budgets" (New York Times, 7/7). Managed care analyst Carl McDonald of CIBC World Markets said the proposed acquisition of PacifiCare indicates that UnitedHealth has "bet that the government isn't going to do what it did in 1997 and slash Medicare funding" (Wall Street Journal, 7/7). McGuire said, "Admittedly, reimbursement has gone up and down. We expect to be more savvy, more capable with this combination to make sure we operate though any kind of changes. The government is always going to be involved in health care. This issue is how well a company executes in that environment" (New York Times, 7/7). According to the Journal, the acquisition also would help UnitedHealth in "its ambitious effort to dominate" the market for consumer-directed plans. UnitedHealth has more than one million members enrolled in consumer-directed plans, "far more than any other company," the Journal reports (Wall Street Journal, 7/7).

Some Concerns
According to the Los Angeles Times, consumer advocates have raised concerns that the acquisition of PacifiCare "could mean lower payments for doctors and hospitals and more waste in the health care system if conditions are not set by regulators" because employers might have less ability to negotiate premium rates as the number of health insurers decreases. California Medical Association President-elect Anmol Mahal said, "These mergers are driven by the health plans' desire to increase market share and profitability, and they are responding to Wall Street's needs rather than Main Street and the needs of patients" (Los Angeles Times, 7/7). Jerry Flanagan, a spokesperson for the Foundation for Taxpayer and Consumer Rights, said that the group will ask regulators to limit "big payouts" to executives as part of the acquisition (New York Times, 7/7). California Insurance Commissioner John Garamendi (D), who will review the acquisition, said, "My goal, as always, is to provide the maximum protection for California's health care consumers" (Wall Street Journal, 7/7). UnitedHealth spokesperson Mark Lindsay said that the acquisition would provide consumers with more access to and more options for health care through the establishment of a national network of physicians and hospitals. Lindsay also said that executives would receive compensation based on current employment agreements (New York Times, 7/7).