Whether they like it or not, executives with UnitedHealth Group Inc. and PacifiCare Health Systems Inc. will spend a lot of time with regulators in the next six months.
Minnetonka, Minn.-based UnitedHealth’s $8.1 billion buy of Cypress-based PacifiCare depends on it.
If all goes as planned, the companies hope to close the deal by the end of March at the latest.
In the meantime, there are plenty of loose ends to tie up, including:
n Passing an antitrust review by the Federal Trade Commission and the Department of Justice.
n Convincing PacifiCare and UnitedHealth shareholders to sign off on the proposed deal.
n Withstanding expected scrutiny by state regulators, particularly California Insurance Commissioner John Garamendi.
“The main thing right now is that both companies are working together with federal and state regulators to obtain approval of this merger,” said Tyler Mason, a PacifiCare spokesman.
Garamendi could be the wild card.
Last July, he held up Woodland Hills-based WellPoint Health Networks Inc.’s $16 billion acquisition by Indianapolis-based Anthem Inc.
He said the deal would cause policyholders to pay higher premiums. Anthem, which took the WellPoint name, later sued Garamendi for blocking the deal.
But Garamendi was able to extract some $265 million from WellPoint as a condition to approve the deal, which he did in November. The money is marked for California health programs.
“The biggest challenge (to the PacifiCare acquisition) will be California, given the recent history,” said Carl McDonald, a managed healthcare analyst for CIBC World Markets. “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.”
The state Department of Managed Health Care has 20 business days from when the filing is deemed complete to weigh in. Garamendi is required to rule on mergers 60 days after the filings are finished. He also has the option of holding public hearings.
PacifiCare’s Mason declined to give a timetable on when those regulatory filings would be done.
As information on the deal comes in to the Department of Insurance, regulators will “make sure it meets standards, and the commissioner will conduct any other type of due diligence as he sees necessary,” said Norman Williams, a department spokesman.
A payment request from the state similar to WellPoint’s isn’t out of the question, according to Kathrin Kudner, a healthcare attorney with Dykema Gossett PLLC, a Detroit-based law firm.
“Requiring the survivor to put money in the healthcare system is very typical these days,” Kudner said. “Not just in California, but in other states. Every state is struggling to find money for their healthcare budget.”
UnitedHealth announced plans to buy PacifiCare earlier this month for $2.2 billion in cash and stock.
The deal is expected to give UnitedHealth a stronger foothold in the Medicare HMO market. That market’s become more attractive in the wake of the 2003 Medicare Prescription Drug Improvement and Modernization Act, which is funneling billions of dollars to Medicare health plan operators in the next few years.
UnitedHealth also would gain a presence in California and other Western states via PacifiCare’s network. PacifiCare is No. 5 in the state with 1.7 million HMO members. Kaiser Permanente is No. 1 with 4.7 million members, with WellPoint in second.
The deal isn’t likely to be scuttled unless there’s a “material change” in the California health insurance business environment, said Sheryl Skolnick, a healthcare analyst with Fulcrum Global Partners LLC in New York.
The change would have to “so adversely affect PacifiCare so as to make the valuation not work from a financial perspective for UnitedHealth,” she said.
Skolnick expects shareholders to approve the acquisition.
“Certainly I would expect the PacifiCare shareholders to vote in favor of this transaction,they will be getting stock in a very significant and well-balanced company,” she said.
Neither company has set a shareholders meeting to vote on the deal, Mason said.
Federal regulators, meanwhile, will look at whether a combination would give UnitedHealth too much pricing power in certain sectors, including small employer groups, said Howard Iwrey, also of Dykema Gossett. Iwrey specializes in antitrust cases.
Federal regulators also are expected to examine the company’s potential negotiating stance with hospitals and physicians.
“They’re going to look at whether the combined entity would have an undue amount of influence with healthcare providers and force them to provide unreasonably low prices because they have so many members,” Iwrey said.
Could another suitor for PacifiCare emerge during the regulatory approval process?
Not likely, according to CIBC’s McDonald.
He said neither WellPoint nor Hartford, Conn.-based Aetna Inc.,the two companies with enough size to buy PacifiCare,would want to boost their exposure to the Medicare HMO market, which is one of PacifiCare’s strengths. WellPoint and Aetna focus on selling commercial health plans.
PacifiCare’s pending sale is a crest of a comeback that began nearly five years ago when the managed care company was wrestling with big changes in its world.
The company’s comeback was guided by Chief Executive Howard Phanstiel, who took over in late 2000. Phanstiel pared unprofitable members, won more business from commercial employers and saw a revival in Medicare thanks to the federal government.
He’s set to get up to $200 million in cash and stock if the deal closes.
