United Health’s Big Losses Derail Merger With Humana

United Healthcare Corp’s $900 million charge comes as unpleasant surprise to Wall Street

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CEO SUMMARY: Considered the darling of the managed care industry by investors, United Healthcare’s huge write-down makes it the latest healthcare behemoth to post an immense loss. Laboratory executives should see this as a sign that even big healthcare companies are struggling to develop fiscal stability.Medicare HMOs are believed to be one major source of United Healthcare’s big loss. That is another warning flag for the clinical laboratory industry.

WALL STREET WAS STUNNED WHEN United Healthcare Corp. disclosed a $900 million charge on second quarter earnings. Within days of the announcement, made on August 6, the merger between United Healthcare and Humana Inc. was cancelled by mutual agreement.

“Your jaw drops when you see the charge. It’s enormous,” commented Todd Richter, financial analyst at Morgan Stanley. “I don’t think anyone expected it.”

The charge caused a second quarter loss of $565 million at United Healthcare and a decline in market capitalization of $2.9 billion. Only two years earlier, a similar surprise announcement of an earnings shortfall caused the market capitalization of United to fall by $2.3 billion in one day.

This most recent decline in United’s stock price meant that the Humana deal dropped from a value of $6.3 billion to only $4.1 billion. United Healthcare withdrew its tender offer after discussions with Humana.

If the merger had gone through, it would have created the largest managed care entity in the United States. The merged entity would have insured 19.2 million people in all 50 states, and boasted revenues of $27 billion.

It was predicted by THE DARK REPORT that the United-Humana merger would affect the way clinical laboratory contracts were negotiated in a number of states. Given the size and clout of the merged company in states like Florida, Texas, and Ohio, new laboratory arrangements, at tighter reimbursement terms, were expected.

For laboratory executives, the developments at United Healthcare provide a valuable peek at the financial challenges industry. Because managed care plans contract and pay for laboratory services, any financial problems they experience directly affects reimbursement for clinical laboratory services.

Plainly put, if a managed care company finds itself in a cash flow squeeze, it would be unable to pay its providers and vendors, including clinical laboratories. Oxford Healthcare and FPA are two recent examples of exactly this problem. Both companies found themselves unable to pay contracted reimbursements to physicians and other providers on a timely basis.

Because managed care plans contract and pay for laboratory services, any financial problems they experience directly affects reimbursement for clinical laboratory services.

United Healthcare’s business problems provide early warning to laboratory executives on a number of market issues which are common to most managed care companies. This is especially true of United Healthcare, because the company was considered to have one of the best information systems in the industry. In theory, they had better knowledge of cost trends and utilization patterns than other managed care companies.

THE DARK REPORT also believes one unique issue in United Healthcare’s $900 million charge should be carefully watched by lab industry executives. It is the problems experienced by United Healthcare in servicing both the Medicare HMOs and its American Association of Retired People’s (AARP) health insurance program, which is a supplemental fee-for-service plan offered to AARP’s 32 million members.

“They’re clearly writing off a significant chunk of Medicare,” observed Peter Costa, analyst at ABN AMRO. “They’re reducing exposure in more than 35 counties and curtailing start-up efforts in four others. Medicare was a big startup area for United and clearly it is not working out as desired.”

Key Laboratory Trend

Costa’s comments focus attention on a key trend affecting clinical laboratories. The demographic growth of the Medicare population guarantees that any Medicare-related healthcare product will be significant in coming years.

The federal government wants private managed care plans to play a greater role in the Medicare program. But here is evidence that the existing combination of federal reimbursement and United Healthcare’s management of the Medicare HMOs has been unable to generate sufficient profit margins to sustain these regional HMO operations.

United Healthcare is not the only major managed care company overhauling its Medicare HMO programs. Anthem Blue Cross/Blue Shield pulled its Medicare HMOs out of 19 Ohio counties. Pacificare Health Systems ceased Medicare HMO operations in southern Oregon and intends to quit Utah and portions of Washington.

Abandon Medicare Business

These are just a few examples of managed care companies which decided to abandon the Medicare HMO business. THE DARK REPORT predicts that reimbursement for services provided under the Medicare program will fail to keep pace with inflation.

The result is that even Medicare fee-for-service reimbursement will fail to cover provider costs. This will continue one source of the financial squeeze on clinical laboratories.

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