Humana, Inc. Acquired By United Healthcare

Merger creates behemoth managed care firm as consolidation of national HMOs proceeds

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CEO SUMMARY: Clinical laboratories will see increased concentration of laboratory purchasing as a result of this merger. The combined company will insure 19.2 million people in 48 states. This transaction confirms that consolidation proceeds in all areas of the healthcare industry, despite financial setbacks by large companies in several sectors.

IT MAY BE A CASE OF THE STRONG getting stronger. Minneapolis-based United Healthcare Corp. is buying Humana Inc. The resulting company will have a combined enrollment of 19.2 million people, the third largest number of enrolled lives in the nation.

Both companies earned strong profits in 1997, unlike most managed care companies. Their combined financial clout is one reason why this merger promises to alter the competitive balance in many regional markets. Once the acquisition is digested, clinical lab- oratories can expect to see changes in how United Healthcare contracts for laboratory services.

Strong Presence

What the merger does for United Healthcare is give it a strong presence in all 50 states, as well as Puerto Rico, Hong Kong, Singapore, and South Africa. After combining operations, the company will have added clout in several pivotal states.

They include Florida, Texas, and Ohio, where enrollees will number 2.3 million, 1.5 million, and 1.4 million, respectively. Some analysts believe the size of United Healthcare in these states will allow it to squeeze providers. “Market share is king in this game. It’s critical,” stated Thomas Hodapp, healthcare analyst at Robertson Stevens in San Francisco.

“As in the advertising campaign for ‘Godzilla,’ size does matter,” agreed noted managed care consultant Peter Boland of Berkeley, California. Both commentators were referring to the double-edged sword created by this merger.

First, combining the two insurance companies will yield a projected savings of $400 million per year. Half will come from consolidating corporate overhead and merging overlapping regional operations. The other half will come from improving medical operations. Using this cost-advantage, United Healthcare could make larger profit margins even as it competitively prices its health plans to employers.

Second, the sword’s other edge is United Healthcare’s bargaining clout with hospitals, physicians, and other providers such as laboratories. This is particularly true in regions where it has substantial market share, like Florida, Texas, and Ohio. As a huge buyer of medical services, United Healthcare could extract significant price concessions from healthcare providers worried about losing access to large numbers of patients in their region.

Laboratory executives will see several market trends validated in this mega-merger. It represents a huge consolidation within the insurance industry. “In healthcare, it is our view that this is the equivalent of CitiCorp-Travelers or Daimler-Chrysler. This is an industry-defining event,” said Humana CEO Greg Wolf, as he compared this deal to mega-mergers in the banking and auto industries.

As a management strategy, United Healthcare’s pursuit of size accomplishes several things. First, becoming bigger makes it more attractive for national and international employers to purchase its healthcare products. This is because United Healthcare now has insurance plans throughout the United States.

Economies Of Scale

Second, it believes it can extract economies of scale from its large size. In accomplishing this, United Healthcare can offer tighter premium prices to employers while still making higher profits than competing insurers.

Third, its large size gives it more clout when negotiating managed care contract terms with hospitals, physicians and ancillary providers like clinical laboratories.

But strategy in business is only as good as management’s ability to implement it with success. In this regards, management teams at United Healthcare and Humana have significantly different track records than most of their competitors.

Both companies made money in 1997, a time when many large managed care firms posted record losses. One reason is that both United Healthcare and Humana were aggressive at pushing up premium rates with their employer customers. Thus, revenues were better-aligned to meet the higher-than-expected healthcare costs experienced in 1997.

Another fascinating similarity between the two companies is that both are regarded as industry leaders in efforts to get physicians to improve the quality of care. Each has pro- grams in place to encourage physicians to offer screening services and early disease detection testing which may not be reimbursed by other plans and Medicare.

This is one obvious place where clinical laboratories seeking provider status with the merged United Healthcare/Humana company can demonstrate added value. The corporate culture at this company supports progressive use of diagnostic testing which can be demonstrated to improve the quality of patient care while controlling or lowering costs.

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