Just a few years ago, few would have wanted to buy PacifiCare Health Systems Inc.
The health plan operator’s shares were in free fall as it struggled with doctor revolts, management shifts, falling Medicare payments and a public souring on HMOs.
Last week’s $8.1 billion buyout offer by Minnesota’s UnitedHealth Group Inc. is for another PacifiCare entirely.
The Cypress-based company has seen a revival in the past four years after a hard restructuring. Chief Executive Howard Phanstiel, who took over in late 2000, has pared unprofitable members, won more business from employers and even seen a Medicare turnaround.
The result: a multibillion-dollar payday for PacifiCare shareholders.
UnitedHealth’s offer is 10% higher than PacifiCare’s market value before the deal was detailed last week. United is paying $2.2 billion in cash and 112 million shares for PacifiCare.
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PacifiCare’s Cypress HQ: about 4,800 OC workers |
Directors at PacifiCare were “actively engaged with management over a two-year period of assessing, evaluating and exploring all the strategic options in an industry that’s obviously consolidating,” Phanstiel said in a conference call last week.
“I would say at this point that while we did not do an auction process for PacifiCare, when you read the details, you’ll see it all transpired within a very competitive context,” Phanstiel said.
The pending sale crests a stumble and comeback that began nearly five years ago, during a time when PacifiCare was wrestling with big changes in its world.
PacifiCare hit a low in fall 2000, when its shares lost 85% of their value in two months after the company warned that higher costs would eat into its profits.
The warning was part of a string of upsetting news, including a contracting battle with St. Joseph Health System, the Orange-based hospital operator, and the resignation of then-chief executive Robert O’Leary.
O’Leary, now chairman of Costa Mesa-based drug maker Valeant Pharmaceuticals International, stepped aside saying his skills weren’t a good fit for PacifiCare.
In 2000, Phanstiel joined as PacifiCare’s chief financial officer, moving over from ARV Assisted Living Inc. of Costa Mesa, where he was chief executive.
Phanstiel, whose background included stints at what was WellPoint Health Networks Inc., the Thousand Oaks-based owner of Blue Cross of California, served as interim boss after O’Leary’s exit and was named permanent chief executive in late 2000.
Reinvented Company
He went on to launch a reinvention of PacifiCare designed to make the company a “diversified healthcare organization,” rather than just a frugal health maintenance organization.
Phanstiel’s efforts included new health plans, such as a preferred provider organization and Medicare supplemental insurance, as well as marketing geared to everyday consumers and various ethnic groups.
PacifiCare also became part of the nascent “consumer-driven” healthcare movement through its “self-directed health plan,” which aims to place more healthcare responsibility on workers.
Phanstiel also has built up PacifiCare’s Costa Mesa-based Prescription Solutions unit, which fills prescriptions by mail for enrollees and others.
Prescription Solutions is expected to be a big player when Medicare launches a drug benefit program in 2006. The pharmacy just signed a deal to build a distribution center in Overland Park, Kan., a Kansas City suburb.
Medicare, once an albatross for PacifiCare, now is seen as a growth driver as the federal government seeks to push more of the program for the elderly to the private sector.
“Over the next several years, some of the products will ebb and flow,” Phanstiel said. “But the aging of America is incontrovertible. Healthcare costs for seniors will continue to rise, and I really think the government has no place to go but to turn to private sector.”
Did Own Buying
PacifiCare also has grown through deals, including spending $500 million last year for American Security Medical Inc., a Wisconsin-based preferred provider organization.
Earlier this year, PacifiCare wrapped up its buy of the group health insurance business of Newport Beach-based Pacific Life Insurance Co. for undisclosed terms.
While Phanstiel has done a lot of heavy lifting at PacifiCare, he did get some help with the company’s Medicare business.
In late 2003, President Bush, going into an election year, signed the Medicare Prescription Drug, Improvement and Modernization Act.
The law gave PacifiCare and others $14 billion in federal largess to boost plans and services,and to lure seniors away from Medicare and into private plans.
More than 750,000 of PacifiCare’s total membership of 3.2 million are connected to Medicare. The company’s business serving seniors appealed to United, according to analysts.
“Considering the aging demographic trends in the U.S. and President Bush’s leanings toward more privatization, the (PacifiCare) merger would strategically position (United) to further benefit from those trends,” K. Newton Juhng, an analyst with US Bancorp Piper Jaffray in Minneapolis, wrote in a research note.
UnitedHealth only has about 345,000 Medicare-related members.
The acquisition stands to create a company with operations in big markets such as California, where PacifiCare has 1.5 million members.
“Because PacifiCare and United operate in largely different geographic markets yet focus on the same efforts, such as serving seniors, this is a combination that we believe will build on growth and business expansion,” Phanstiel said.
William McGuire, United’s chief executive, called the combination, “compelling, straightforward and powerful.”
The deal, which could close late this year or in early 2006, stands to be this year’s biggest for Orange County,and possibly the largest acquisition yet of any local company.
PacifiCare is projected to have some $14.5 billion in revenue this year.
With the PacifiCare buy, the county is set to lose its second largest company by annual revenue (after Santa Ana’s Ingram Micro Inc.). PacifiCare also is a Fortune 500 company,the second OC stands to see disappear with Aliso Viejo-based Fluor Corp.’s pending move to Texas.
PacifiCare is expected to stay in its Cypress headquarters and keep its brands. Most of PacifiCare’s 10,500 workers, including some 4,800 in OC, could keep their jobs.
Phanstiel is set to become a United vice president, reporting to McGuire.
Regulatory Issues
The deal, while hailed by Wall Street, could draw criticism.
California Insurance Commissioner John Garamendi, who attempted to block last year’s $21 billion combination of WellPoint Health Networks and Anthem Inc., said he would “apply the same close scrutiny and principles used in our examinations of previous applications” to the PacifiCare-United deal.
The Department of Insurance, Garamendi said, “has established a very clear position on healthcare industry consolidations and the effect that they may have on consumers.”
And the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based advocacy group that takes a dim view of commercial health insurers, also called for state regulators to take a hard look at the buy.
The Santa Monica-based foundation argues that large health insurance deals reduce incentives for companies to keep premiums down and efficiencies up.
