PacifiCare Health Systems is being melded into Minnesota’s UnitedHealth Group Inc. with an eye on cutting costs and boosting business from Medicare.
The two health insurance companies are three months into a combination that saw Minnetonka, Minn.-based UnitedHealth pay $9.2 billion for PacifiCare in December.
So far, UnitedHealth has aligned some of PacifiCare’s operations with its own. Beyond that, UnitedHealth is looking to move PacifiCare to its computer system and bolster the combined company’s Medicare business.
The goal: “basically taking the best of what United has and the best of PacifiCare remaining,” said Tyler Mason, a spokesman for Cypress-based PacifiCare.
Cutting costs is a big part of the deal.
This year, UnitedHealth is looking to save $100 million and up to $250 million in the next couple of years after integrating PacifiCare.
UnitedHealth is the nation’s second-largest health insurer after WellPoint Inc. of Indianapolis. PacifiCare is big in California and in Medicare plans for seniors covered by the federal program.
In recent years, UnitedHealth has spent $2.5 billion on technology upgrades, according to Joseph France, a managed care analyst for Banc of America Securities LLC.
Converting PacifiCare customers and claims processing to UnitedHealth’s “superior platform” should drive savings, he said.
UnitedHealth’s system should allow PacifiCare to pay doctors and other healthcare providers faster and cut out paperwork for brokers who steer companies to PacifiCare’s plans, Mason said.
About 96% of UnitedHealth’s claims are paid within 10 days, he said.
PacifiCare has spent much of the past five years working on a turnaround and didn’t have time to upgrade its technology, Mason said.
UnitedHealth also is going after administrative costs.
Both companies already run pretty lean for their industry. In the third quarter, PacifiCare’s last as a stand-alone company, selling, general and administrative expenses were 14% of its $3.8 billion in revenue. UnitedHealth’s ratio was 14.9%.
“They focus on administrative overhead because the market is not going to bear unnecessary costs,” Mason said.
As expected, some corporate jobs have been cut at PacifiCare, according to Mason, who didn’t give details.
On the executive side, most of PacifiCare’s core managers, including former Chief Executive Howard Phanstiel, now a UnitedHealth executive vice president, and its sales staff remained in Cypress, Mason said.
“It’s still local leadership and a local sales force,” Mason said.
PacifiCare has focused on bringing UnitedHealth’s healthcare maintenance organization and other plans to California, Mason said.
For its part, PacifiCare has kept its own plans and expanded them to UnitedHealth’s nationwide network of 500,000 healthcare providers, he said.
“Two months ago, before the integration started, we couldn’t do that,” Mason said.
PacifiCare should see better rates in its contracts with doctor groups and hospitals because “they will have all of the United membership that was in the area that they could use for leverage and bargaining power,” said Carl McDonald, an analyst with CIBC World Markets in New York.
One early shift: PacifiCare’s Secure Horizons Medicare plans and its Prescription Solutions, a pharmacy for plan members and others, are being folded into Ovations, UnitedHealth’s unit geared to members age 50 and up.
Secure Horizons was a key attraction for UnitedHealth in its buy of PacifiCare.
Medicare has been growing for health plan operators, spurred by President Bush’s signing of the Medicare Prescription Drug, Improvement and Modernization Act in late 2003.
UnitedHealth’s buy of PacifiCare has drawn comparisons to the industry’s last big deal, Indianapolis-based Anthem Inc.’s 2004 buy of WellPoint Health Networks in Thousand Oaks, for some $16 billion.
(Anthem kept the WellPoint name after the buy.)
“It appears United is following to a great degree, the WellPoint integration model,” said Robert Layton, a partner in Sheppard, Mullin, Richter & Hampton’s healthcare practice group in Los Angeles. “They had the advantage of reading from what I call the ‘WellPoint playbook.'”
There’s little doubt who bought who, according to Layton.
“It appears they are going to try and integrate PacifiCare according to United’s business lines,” he said. PacifiCare Health Systems is being melded into Minnesota’s UnitedHealth Group Inc. with an eye on cutting costs and boosting business from Medicare.
“It appears they are going to try and integrate PacifiCare according to United’s business lines,” he said.
