Experts mixed on effect of health insurers’ merger

Michelle Swafford

Monday, Aug. 22, 2005 | 10:54 a.m.

The merger of two health insurers that operate in Nevada could mean big changes for providers and consumers.

On July 6, UnitedHealth Group announced plans to purchase PacifiCare Health Systems Inc. in an $8.1 billion deal, plus $1.1 billion in debt. The merger is subject to federal approval and state approvals in 10 states including Nevada.

Nevada Insurance Commissioner Alice Molasky-Arman will hold a public hearing Wednesday in Carson City to determine whether the combined companies would hinder Nevadans. (The hearing will not be available by telephone or video conference in Las Vegas.) Insurance commissioners in Arizona, California, Colorado, Indiana, Oklahoma, Oregon, Texas, Washington and Wisconsin are making similar decisions.

"It is more of a legal process where the attorneys represent the organizations," PacifiCare spokesman Tyler Mason said. "We'll present the facts and she'll make her decision. We'll work diligently with her to address any concerns she might have. Even in a complex state like California, at the end, they still approved the previous mergers."

California Insurance Commissioner John Garamendi has been very vocal about health care mergers in the past, especially Anthem Inc.'s purchase of WellPoint Health Networks Inc. in November that formed WellPoint Inc. and generated $265 million in assistance for California health programs.

While the insurers say they do not see a problem with the merger, some Nevada insurance brokers say bigger isn't better and they worry that Nevadans will be stuck with fewer choices and higher premiums.

PacifiCare and UnitedHealth say the companies will "complement each other," especially in Nevada where UnitedHealth has had a limited position since 2003 when the company sold its managed-care business to NevadaCare.

The companies say consumers would benefit from UnitedHealth's $2 billion technology investment to improve health care quality through disease management at the population and demographic levels.

"The big thing for Nevada, for us especially, would be the huge investments in technology and what they've done to modernize health care administration," Mason said.

For example, UnitedHealth has electronic claims payments and consumer identification cards with their eligibility information stored on them. Electronic medical records are one of the UnitedHealth technology upgrades under way.

"Those options for consumers are superior to what we have," Mason said.

Also, consumers would benefit from a broader national network of physicians, hospitals and other treatment centers, which means fewer out-of-network costs, Mason said.

"It should make a wider portfolio available at a better price point -- i.e. more affordable -- with an enhanced technology component," he said.

Seniors insured through PacifiCare or UnitedHealth could benefit from potentially lower prescription drug costs because PacifiCare owns a mail-order pharmacy and the combined companies would have larger buying power, Mason said.

Also, the companies' combined Medicare expertise would provider "broader access to quality services, portability of benefits nationwide when seniors travel and expansion of unique services for elderly and chronically ill individuals currently offered through UnitedHealth Group," Mason said.

Las Vegas insurance broker Bob Bishop said he will attend the hearing Wednesday to speak on behalf of small-business owners, which make up the majority of his clients.

"The loss of carriers is a concern and that's the reason I'm going," he said. "The question that has to be asked is "what assurance do the consumers have that the status quo is going to remain the same. We have heard these words before from other carriers and it's not always happened as they have told us."

Bishop said he would like to see Nevada receive concessions to help Nevada's ailing health care system as a condition for approving the deal.

Larry Harrison, a Las Vegas insurance broker, said he would like to see Nevada receive about $15 million in concession money to establish a high-risk pool for Nevadans who cannot obtain health insurance elsewhere.

Also, although PacifiCare and UnitedHealth may not duplicate their plans in Nevada, consolidating means one fewer company that is available to enter Nevada, he said.

"That is not good for Nevada with the growth we're experiencing," Harrison said. "We're getting tremendous population growth and as far as options are going they're becoming reduced."

He said Anthem and WellPoint said their merger would not affect Nevadans and yet premiums increased 16 percent since January through two rate increases for individuals.

"There are so many ways they can be creative with their bookkeeping that they don't have to say what it is for, but it is what it is," he said.

The American Medical Association has also been critical of the merger because its physician members say they would be excluded from provider networks and receive inadequate insurance reimbursements.

The Nevada chapter has not spoken out against the merger and the state Medical Association's executive director Larry Matheis said the group is taking a "wait-and-see approach" because UnitedHealth has had a limited presence here and the state has regulatory protections that prohibit insurers from requiring doctors to be a provider on all of their health plans, which is a concern in some of the other states.

PacifiCare insured 71,068 Nevadans as of June 30 through its health maintenance organizations, preferred provider organizations, and private Medicare plans, while UnitedHealth insured 119,000 Nevadans with its preferred provider organizations and Medicare supplement plans as of June 30.

PacifiCare's executives -- 39 of them -- are set to receive a combined $229.60 million in compensation if the merger is completed before Feb. 1, according to compensation documents filed with California insurance officials.

About $215 million of the money would come from accelerated vesting of PacifiCare stock options that were granted years ago when the company brought in new leadership to turn the business around.

In addition, 69 other PacifiCare employees would receive $59 million in stock options that would vest after the deal closed.

"A vast majority is equity that is already vested in the company," Mason said. "It's not a result of this merger at all -- 90 percent of the options that are granted to the executives would vest with our without the deal."

PacifiCare said 18 of its senior managers -- excluding company chief executive Howie Phanstiel -- are set to earn $14.5 million in "change of control payments."

UnitedHealth is offering restricted shares of its stock to PacifiCare executives that enter into two to four-year employment and noncompete agreements. The value of those shares is $42 million, according to the filing.

In addition, UnitedHealth is offering $17 million in cash and $25 million in stock for sign-on bonuses to PacifiCare executives who remain with the company following the merger.

Locally based insurers Sierra Health Services Inc. -- operator of Health Plan of Nevada and Sierra Health and Life Insurance Co. -- and NevadaCare and its sister company, Summerlin Life & Health Insurance Co. say they look forward to more competition in the market, which creates better deals for consumers.