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PacifiCare: Vote Near on Sale as Hurdles Fall

Shareholders of PacifiCare Health Systems Inc. are expected to approve UnitedHealth Group Inc.’s $8.1 billion buy of the Cypress-based health plan operator this week.

Approval coming out of the company’s shareholder vote set in Los Alamitos would leave just a few hurdles to clear before the buyout is finalized.

The big one: getting California Insurance Commissioner John Garamendi’s blessing.

Earlier this month, Garamendi said he would deny UnitedHealth’s bid for PacifiCare unless he was assured the deal wouldn’t result in higher premiums for policyholders.

Garamendi has the power to block acquisitions in the insurance industry if he feels they might harm policyholders.

“In short, I am encouraged but not yet convinced that this deal would be good for California consumers,” Garamendi said after a recent hearing on the deal.

PacifiCare said the deal is progressing as expected, even if the process is “challenging,” said Cheryl Randolph, a PacifiCare spokeswoman. In addition to Garamendi’s blessing, the deal still needs to be OK’d in other states where the companies do business.

“We continue to expect the transaction to close by the end of 2005 or early 2006,” Randolph said. “We continue to meet with state regulators in California as well as in other states to address any concerns regarding the proposed merger.”

The acquisition has approval from state insurance departments in Indiana, Nevada and Oklahoma, Randolph said.

PacifiCare also is working with the Department of Justice to complete its look at the proposed deal under antitrust laws, Randolph said.

Meanwhile, UnitedHealth Chief Executive William McGuire said at an investor conference last week that he expects three more states to approve the PacifiCare buy during the next week. PacifiCare and UnitedHealth have filed regulatory petitions in 23 states for approval.

“The biggest challenge (to the PacifiCare deal) will be California, given the recent history,” said Carl McDonald, a managed healthcare analyst with CIBC World Markets, earlier this year.

“That said, I think the WellPoint merger sets out a template of what the (companies) need to do to gain the approval of the insurance commissioner,” McDonald said.

Last year, Garamendi delayed Indianapolis-based Anthem Inc.’s $17.5 billion acquisition of WellPoint Health Networks Inc. in Woodland Hills.

Garamendi initially said the Anthem-WellPoint deal would lead to higher premiums for policyholders. Anthem, which later took the WellPoint name, sued Garamendi for blocking the deal.

Garamendi eventually extracted about $265 million in concessions from WellPoint as a condition to approve the deal, which he did a year ago. That money was earmarked for California health programs.

“Anthem, at my demand, agreed that none of the cost of its merger would be borne by California policyholders,” Garamendi said. “It also pledged, and is delivering, more than $250 million to improve healthcare in underserved communities,an amount that equaled its executive compensation package.”

One element of the UnitedHealth-PacifiCare deal has irked the insurance commissioner and other critics: hefty payouts for some 40 PacifiCare executives.

“Their proposed executive compensation package of more than $300 million is, in my opinion, unconscionable,” Garamendi said.

The California Public Employees Retirement System’s board voted last month to oppose the bonuses. Calpers, one of the country’s largest purchasers of healthcare, holds shares in both companies.

PacifiCare has defended the payouts, saying they are performance based and were granted during a time when the company didn’t have the strength to attract top-level executive talent.

UnitedHealth’s McGuire didn’t specifically address the bonus issue at the recent investor conference, according to reports.

McGuire said there was “really nothing going on” that would suggest the deal wouldn’t be completed along the lines UnitedHealth planned.

UnitedHealth said last week that its profit would be higher in 2006 if the PacifiCare acquisition closed by the end of the year.

The acquisition is expected to give UnitedHealth, which now has about 22 million members nationwide, a stronger foothold in the Medicare market. That’s been a solid business for PacifiCare for years.

Medicare has become more attractive to health plan operators because of the 2003 Medicare Prescription Drug Improvement and Modernization Act, a federal law that stands to funnel billions of dollars to Medicare plan operators in the next few years.

Besides getting money to augment health plan offerings, PacifiCare, UnitedHealth and its rivals also are rushing to market new Medicare prescription drug benefit plans, known as Plan D.

PacifiCare’s sale highlights a comeback that began five years ago, when the managed care company was wrestling with challenges such as some nasty contracting spats with hospital operators and doctors.

Chief Executive Howard Phanstiel took over PacifiCare in late 2000 and guided its comeback. Phanstiel pared unprofitable business, signed more contracts with commercial employers and oversaw a revival in Medicare, thanks to the federal government.

PacifiCare now counts 12 million members.

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