State Agency Blesses Second-Largest Health-Insurance Acquisition

By Jesus Sanchez, Times Staff Writer



California Insurance Commissioner John Garamendi today approved the acquisition of Orange County-based PacifiCare Health Systems by insurance giant UnitedHealth Group in an $8.1 billion deal.



In return for the agency's blessing, the companies agreed to, among other things, pay no dividends from PacifiCare's operations for four years after the acquisition and pledged to make more than $200 million charitable contributions and investment in underserved communities.



I continue to be concerned by many trends in this industry," said Garamendi said in a statement. "But today's agreement, particularly its restriction on the distribution of dividends, provides meaningful and substantial benefits for California consumers."



The acquisition would help UnitedHealth, the nation's second-largest health insurer with 22 million members, gain ground on industry leader WellPoint Inc. and tap into PacifiCare's strong Medicare business, positioning the company to capitalize on a prescription-drug benefit scheduled to start Jan. 1.



The deal, which was announced in July, would be the second-largest health-insurance acquisition, after last year's $21-billion purchase of Thousand Oaks-based WellPoint Health Networks Inc. by Anthem Inc., which took the name WellPoint Inc.



While company executives and Wall Street investors have hailed the acquisition, some managed-care experts and consumer groups worried the deal could mean higher costs and fewer choices for consumers. Employers may find they have less leverage in negotiating coverage because there are fewer providers to bargain with, according to some industry observers.



The deal has also caught flak over $345 million in payments that top executives of PacifiCare Health Systems Inc. would receive as a result of the sale. The California Public Employees' Retirement System, a PacifiCare shareholder, has opposed the payments and asked the state Department of Managed Health Care, which is also reviewing the combination, to reject the deal if the payments are included.



Through its Secure Horizons brand name, PacifiCare provides coverage to more than 700,000 seniors on Medicare, making it the nation's largest for-profit provider of such plans. It also offers supplemental plans and heart-disease management to other Medicare recipients.



UnitedHealth executives, who have acquired nearly 10 smaller insurers in recent years, said they were also attracted to PacificCare's specialty programs, such as those for prescription drugs, behavioral health, dental and vision insurance.



PacifiCare began as a nonprofit HMO in 1975 and became for-profit in 1984, rising to No. 172 on the Fortune 500 list. It serves nearly 3.2 million health-plan members and more than 11 million people in its specialty plans.



Cypress-based PacifiCare will remain in Orange County, operating as a subsidiary of UnitedHealth, company officials said. Insurance products would retain the PacifiCare and Secure Horizons brand names.



Most of the company's 10,500 employees ? of whom more than 5,600 are in California ? would keep their jobs, company officials said.



The deal is also being reviewed by the California Department of Managed Health Care, regulators in several other states and the U.S. Justice Department.