New United deal could spur more plan mergers

UnitedHealth Group's newest acquisition not only makes a big company bigger, but it also makes the plan the operator of a large, multispecialty clinic that the company is using as a "petri dish" to test how it might deal with its contracted physicians.

On March 12, United said it would pay $2.6 billion in cash to acquire Sierra Health Services, a Las Vegas-based health plan that analysts identified as one of the few independent, sizable, for-profit regional health plans available. The deal makes United the No. 1 health plan in what has long been one of the fastest-growing metropolitan areas and one of the fastest-growing states in the nation.

The agreement also arouses organized medicine's long-held ire about health plan consolidation. The American Medical Association on March 19 sent a letter to the Justice Dept. asking federal regulators to block the deal.

Sierra also comes with Southwest Medical Associates, the state's largest multispecialty group practice, which includes an outpatient surgery center. Sierra has required Southwest Medical Associates physicians to use electronic medical records and electronic prescribing, as well as use the practice to help manage hospital utilization, among its attempts to -- in the company's eyes -- save costs and improve care. In acquiring Sierra, United wants to figure out how best to transfer the Sierra-Southwest model to its physician networks.

In a prepared statement, United CEO Stephen Hemsley said the company could "leverage [Southwest's] expertise in combination with our leading data assets to gain clinical insights that will be useful in a wide variety of broader care delivery settings in our network-based care model."

"They want to look at it as one would look at a petri dish," said Peter O'Neill, a Sierra spokesman.

After a quiet 2006 for health plan mergers, United's deal signals that insurers again are in a buying mood, even "though there aren't that many more HMOs to be taken over," said Robert Laszewski, president of Alexandria, Va.-based Health Policy and Strategy Associates, which advises health plan and physician clients on health care trends. From 2002 to 2005, WellPoint and United each doubled their number of members as they used mergers to grow into the No. 1 and No. 2 private-pay health insurers in the country.

Laszewski pointed to Humana and Coventry Health Care as possible takeover targets; another analyst, Donald Light of Boston-based Celent, identified Coventry and Health Net. United spokesman Donald Nathan said the company always is looking at potential deals but would not identify future acquisitions. None of the companies the analysts mentioned have said they are for sale. United tried to buy Humana in 1998, but the deal fell through when United's stock price dropped unexpectedly.

With the Justice Dept. having turned down zero health plan mergers -- and putting conditions on only two out of more than 400 deals between 1995 and 2005 -- "how long does it take us before United and WellPoint are in a standoff to see who takes over the other?" Laszewski said.

With their private and Medicare markets essentially flat, the only way health plans will increase profits is through acquisitions, he said. "I think we're almost at a point where now you can call the market an oligopoly."

More market power

In its letter to the Justice Dept., the AMA went further, referring to the local market control health plans exert as "near-monopoly." The AMA noted that United, which in 2005 returned to Nevada through its $9 billion acquisition of PacifiCare, would control 78% of the HMO market in Nevada and 95% of the HMO market in the Las Vegas metropolitan area. Nevada State Medical Assn. Executive Director Larry Matheis said his organization also was objecting to the deal, though as of yet it had not sent a letter to any federal or state regulator who must approve the merger.

"What we observe is [a dominant insurer] tells doctors that they're the large one, they're the only one that will dictate the price you're paid, or you don't become part of the network," said AMA Board of Trustees member J. James Rohack, MD, a Temple, Texas, cardiologist. "It becomes an unlevel playing field for physicians."

Also, by dominant insurers being able to dictate premiums to patients, more are priced out of the private market, creating more uninsured, Dr. Rohack said. "And doctors take care of the uninsured," he added.

In a prepared statement, United called the AMA's letter "misleading," saying it focused only on HMOs and ignored "the numerous other competing insurance products that comprise the Nevada marketplace."

"We believe that this combination is in the best interests of consumers, purchasers, providers and the people of Nevada," the statement said.

Not so, Matheis said. "Whenever there's been any new entry into the market, any consolidation, there has always been adverse consequences" for physicians and patients.

Sierra is one of the few physician-started HMOs that didn't die or hadn't already been acquired by a larger health plan. Sierra has its roots in a Las Vegas cardiology practice that Anthony Marlon, MD, now company CEO, founded in 1972. After growing into a multispecialty practice, Dr. Marlon, as other physicians had done when managed care first began growing, started Health Plan of Nevada in 1982, changing its name to Sierra in 1985.

About 90% of physicians in Sierra's HMO network are independent of its medical group, Southwest, O'Neill said. The group has "250 physicians and extenders" in 14 clinics, plus an outpatient surgery center and urgent care facilities. Southwest opens a new clinic every 18 months to serve its fast-growing area, he said.

Sierra, in 1998, expanded into Texas through the purchase of Kaiser Permanente's operations in that state. But Sierra pulled out of Texas in 2001. O'Neill said Sierra never had the scale of operations in Texas to drive enough patients to the medical group. Plus, the company struggled with troublesome "regulatory and cultural issues" there.

Analysts say the failed Texas experiment likely means United won't try to buy other medical groups, though that is not out of the question. Instead, United probably will be like "the property/casualty company that wants to own auto repair shops," Light said. "It figures if it owns a couple, it'll understand the business better."

Even though United is becoming bigger, and presumably trying to become smarter, it and other health plans are still figuring out how to exercise their market power to cut the costs of providing care to enrollees, Light said.

This is evident in the fact that health costs are still rising at twice the rate of inflation, even as physicians feel reimbursement pressure, he said.

Laszewski, however, said insurer consolidation actually has eliminated plans' imperative for keeping costs down. "If you increase earnings by increasing size through mergers, there's not a lot of incentive to manage the cost of health care."