Payer Consolidation: United Buys Pacificare

Consolidation may be a result of larger trends soon to pressure health insurance companies

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CEO SUMMARY: For the second time in nine months, a health insurer company has spent around $9 billion to grow by acquisition. This time, it is UnitedHealth Group purchasing PacifiCare Health Systems. These types of deals impact local labs and pathology groups as existing contracts expire. However, the most interesting wild card is consumer-driven healthcare and how payers intend to respond.

BIG CHANGES ARE AHEAD for the nation’s largest health insurers. The trigger is United HealthGroup’s acquisition of PacfiCare Health Systems.

The deal was announced on July 6, 2005. United HealthGroup will pay approximately $8.5 billion in cash and stock to purchase PacifiCare, which is based in Cypress, California. UnitedHealth will add PacifiCare’s three million beneficiaries to its current total of 23 million beneficiaries.

Analysts praised the deal and noted that PacifiCare’s assets complement existing holes in United’s national infrastructure. In particular, the deal beefs up UnitedHealth’s limited presence in California and expands its capabilities in private Medicare plans.

For the laboratory industry, there will be short-term and long-term consequences from this acquisition, once it is completed. In the short-term, as PacifiCare contracts for lab testing services expire, it is likely that UnitedHealth’s contracting preferences will take precedence. This will probably have the greatest impact on regional laboratories and hospital lab outreach programs which want to retain access to PacifiCare’s beneficiaries.

Over the longer term, this deal creates pressure for additional mergers among the nation’s largest heath insurers. Each of these acquisitions will affect lab testing contracts held by smaller laboratories.

More Consolidation?

Consolidation in the health insurance industry is a fact. Just last fall, Anthem Inc. acquired WellPoint Inc. for $14.1 billion dollars. That created a company with 26 million beneficiaries in 13 states. Now, just nine months later, UnitedHealth Group is paying $8.5 billion to purchase PacifiCare, creating a company that also insures about 26 million people.

Some analysts believe each deal described above creates pressure for additional consolidation. Both Aetna, Inc. (14.4 million beneficiaries) and Cigna Corp. (nine million beneficiaries) would be expected to have the motivation to increase their geographical coverage as a response to UnitedHealth’s acquisitions. Health insurance companies likely to be involved in coming rounds of consolidation are considered to be Health Net, Inc., WellChoice, Inc., and Humana, Inc.

Tracking New Trends

Two insights will help lab directors and pathologists track evolution in the health insurance industry. First, UnitedHealth is now considered to be the best bellwether of general industry trends. Its strategic business moves in recent years have generally earned praise. In the mid-1990s, Aetna served as an industry bellwether. But its widely-publicized financial problems several years ago have knocked it off that perch.

Second, some of this consolidation must be viewed as a response to major changes about to take place in the Medicare program. Expect to read and hear more about Medicare Part C (which covers the newly-renamed Medicare Advantage Program—the private insurance plans for Medicare beneficiaries) and Medicare Part D (the new prescription drug program).

More Part C & Part D

The nation’s largest health insurers understand how Part C and Part D activities will infuse more funding into the healthcare areas they cover. Acquisitions are one way to position themselves to gain maximum benefit from these new programs.

THE DARK REPORT predicts that enlargement of the new Medicare Advantage programs is going to put Medicare beneficiaries formerly in the Part B fee-for-service program into a private Medicare health insurance plan. It is likely that laboratory services for these plans will be bid on exclusive or limited-panel contracts.

That means local laboratories and pathology groups should carefully build relationships with local health insurers. As these payers enroll more people in Medicare Advantage Plans, local laboratories should fight hard to retain access to these patients. The natural tendency of payer network managers is to do sole-source or limited panel testing contracts with national labs and the largest regional labs.

If there is a wild card in this market evolution, it is consumer-directed healthcare. On the following pages, you can read how this growing phenomenon is likely to force a restructuring of the health insurance industry as we have known it for the last few decades. In recent years, THE DARK REPORT has regularly observed how the consumer movement in healthcare changes everything.

Consumer as King

With the consumer as king, he/she chooses his/her physician, hospital, and laboratory without restriction by an employer or health plan. For labs and pathology groups excluded by payer contract from providing services, isn’t this the desired outcome? It enables local laboratories and pathology groups to compete on service, quality, and personal relationship.

Price is less of an issue with a consumer than it is with a payer’s network director. Consumers will pay extra for the services they deem to have value. On the following pages, you will learn how the health insurance industry must undergo reform and evolution if it is to effectively serve a “customer-first” healthcare system.

It is easy to dismiss this as being years away. However, in less than twelve months, over 1 million people have chosen HSA (Health Savings Account) plans. That’s a consumer movement now moving at great speed.


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