UnitedHealth-PacifiCare deal approved, with conditions

Despite federal and state regulators' insistence on certain changes in the companies' makeup, physicians aren't encouraged by the merger.

By Jonathan G. Bethely — Posted Jan. 16, 2006

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UnitedHealth Group's $9 billion purchase of PacifiCare Health Systems Inc., in a rare case for a health plan merger, is not being approved carte blanche, but that doesn't mean physicians are happy the deal was approved, even with strings attached.

Federal and various state regulators are requiring the company to sell certain operations, contribute money to state-level health initiatives, and meet requirements for addressing physician contracting concerns.

The U.S. Justice Dept. filed legal papers informing United that the merger could take place only if the newly merged company sells operations in Boulder, Colo., and Tucson, Ariz., and within a year pulls out of a deal allowing United access to WellPoint-owned Blue Shield of California's physician network.

It is the first time the Justice Dept. has placed conditions on a health plan merger since it required Aetna to sell certain Texas operations upon its 1999 purchase of Prudential's health operations.

At the state level, regulators in California, where PacifiCare is based, approved the deal with the caveats that United spend $250 million toward health care for the poor, that it didn't pass along merger costs to consumers, and that its customer service remains unaffected by the deal.

Despite these conditions, the California Medical Assn. said it stands by its statements made during a Sept. 16 , 2005, regulatory hearing that the merger "runs the risk of putting patients in jeopardy of increased premiums and reduced access to health care in exchange for increasing profitability of the health plan."

And in Colorado, which physicians called "ground zero" in their attempt to block the deal, regulators required Minnesota-based United to pay at least $7.5 million toward a program to improve access for rural Coloradans and others considered to be in underserved areas.

Meanwhile, United also is required to meet certain performance goals, mostly related to quicker resolution of physician claims. The Colorado Division of Insurance also required the creation of a physician advisory council to "establish better dialogue" between United and physicians, and the appointment of a "mutually acceptable consultant" to act as an ombudsman for the Colorado Medical Society with United to "facilitate a coordinated approach to physicians' concerns."

Despite such conditions being placed on the merger, physicians are not happy with the deal. They see the United-PacifiCare merger as expanding the market power of a company that even before the deal was already the second-largest private health plan in the country, behind Indianapolis-based WellPoint.

While "encouraged that the Dept. of Justice is beginning to recognize the AMA's long-standing concern about the negative effects of aggressive consolidation among health insurers," AMA Trustee Edward Langston, MD, said the organization is "disappointed that the merger ... has been, by and large, allowed to move forward. We continue to be very concerned about the aggressive expansion strategies of UnitedHealth and other large health insurers."

Dr. Langston testified before the Colorado Division of Insurance during Nov. 21, 2005, hearings into the deal that physicians considered key because Colorado is the only state in which United and PacifiCare had fairly equal market shares.

The Colorado Medical Society, which also testified at the hearings, said state regulators didn't go far enough in imposing conditions on the deal.

"We expressed great concern about the merger," CMS executive director Alfred Gilchrist said. "We submitted numerous conditions that we thought should be implemented. The commissioner decided not to impose those conditions but to set up a process that can certainly lead to conditions."

But Colorado Insurance Commissioner David Rivera said he approved the merger because the benefits outweighed the potential risks. Colorado was the last of 10 states necessary to approve the merger.

Gilchrist said CMS is weighing several options to fight the deal. One is to file an appeal in U.S. District Court within 30 days of Rivera's Dec. 20, 2005, approval. The society also is considering taking its concerns to the Colorado General Assembly during its legislative session, which began this month.

One group happy about the United-PacifiCare merger is financial analysts. Some raised their ratings on United stock in the wake of the deal, particularly because the merger strengthens United's position in Medicare-related markets and in Western states, where PacifiCare was strong. "The merger is about significant opportunities for growth," said William W. McGuire, MD, chair and chief executive officer of UnitedHealth Group.

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