updated 7/6/2005 8:00:02 PM ET 2005-07-07T00:00:02

The nation’s second-largest managed health insurer, UnitedHealth Group Inc., agreed Wednesday to acquire major Medicare provider PacifiCare Health Systems Inc. in an $8.1 billion cash-and-stock deal that gives a niche West Coast player access to a national network while moving UnitedHealth deeper into government-related business.

UnitedHealth also would assume $1.1 billion in PacifiCare’s debt.

In what would be the one of the managed care industry’s largest combinations, PacifiCare would become a subsidiary of Minnetonka, Minn.-based UnitedHealth, which covers 23 million health care plan members and an additional 30.8 million people through medical insurance or insurance programs it manages for other firms.

PacifiCare, based in Cypress, Calif., 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.

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

The deal would give UnitedHealth a larger share of Medicare patients, including many in California, where it is not a significant player. PacifiCare, which operates mainly in Western states, would gain access to the clout of a nationwide company.

In a conference call, the companies said providing Medicare services is a growth market and predicted that government-funded health care — which already covers 86 million Americans — will continue to increase.

One target is a share of the massive new Medicare prescription-drug benefit program that takes effect next year.

“The aging of America is incontrovertible. Health care costs for seniors will continue to rise. I really think the government has nowhere to go but to turn to private (sectors),” said Howard Phanstiel, Pacificare’s chairman and chief executive.

PacifiCare is the second-largest private administrator of Medicare health plans nationally after Kaiser, including 700,000 members in its Secure Horizons plan.

“This is about serving people better. Our health care system needs to work better,” UnitedHealth Chairman and CEO Dr. William W. McGuire said.

PacifiCare holders will receive 1.1 shares of UnitedHealth stock and $21.50 in cash per PacifiCare share. UnitedHealth also would assume $1.1 billion in PacifiCare debt after the deal closes late this year or in early 2006. It is also subject to regulatory and shareholder approvals.

“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 to offer a broad range of competitive products and services,” Phanstiel said in a statement.

Health care deals
Half of the top 10 merger deals in the health care industry have occurred within the past three years, said Richard Peterson, a senior researcher at Thomson Financial. The largest was the $16.4 billion combination last year of Indianapolis-based Anthem Inc. and WellPoint Health Networks Inc. An $8.8 billion deal merged Aetna Life & Casualty and U.S. HealthCare in 1996.

“It seems with health care costs rising and a need to work on the margins, in a way the companies have to be more competitive and this is one option that they pursue in terms of consolidations,” Peterson said.

A combined PacifiCare and UnitedHealth represents an immediate challenge to WellPoint Inc., the nation’s largest health benefits provider.

“The question is now will there be even further consolidation?” Peterson said.

Critics said the proposed deal could hurt consumers.

“HMO goliaths like WellPoint and Aetna and a merged UnitedHealth and PacifiCare are so big they don’t have to compete, and threaten patient care,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights, which has been critical of HMOs.

PacifiCare had been a tempting takeover target. In April, it reported a 28 percent increase in profits for the first quarter, with income rising to $85.7 million, or 89 cents a share, exceeding analysts’ expectations.

The company said the deal could be finalized late this year or in early 2006. It did not mention if layoffs might result.

UnitedHealth has built a reputation as a cost-conscious, efficiency-minded insurer. It has pressed doctors to shift to electronic billing, and has experimented with giving patients financial incentives to use cheaper doctors. Investors have rewarded the company. Over the past five years, its shares have climbed from a split-adjusted $10 a share to more than $50.

UnitedHealth has been on a buying spree, apparently beefing up its Medicare presence and geographic diversity. One of its subsidiaries announced it was joining with Walgreen Co. to become a national provider of the Medicare drug benefit that begins next year.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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