MINNEAPOLIS-United HealthCare Inc.'s possible acquisition of MetraHealth Cos. is certain to produce a competitive managed care juggernaut, but the merger won't be without challenges.
Unlike previous HMO mergers, in this deal United HealthCare, currently the nation's fourth-largest health maintenance organization, would be acquiring a health care company with three times as many health plan members.
Analysts and benefit experts point out that MetraHealth is a considerably weaker managed care organization than its merger partner. The majority of its members are enrolled in costly traditional indemnity plans.
Some analysts say that acquiring so much indemnity plan business, which is more costly to manage than HMOs, poses a significant financial risk to United HealthCare.
Meanwhile, corporate health care purchasers worry that such a merger may strain United HealthCare's otherwise efficient operations.
Minneapolis-based United HealthCare last week confirmed it was having discussions with MetraHealth, a 1-year-old group health joint venture of Metropolitan Life Insurance Co. and Travelers Corp. If the merger takes place, the combined new entity would be the second-largest HMO in the country, with more than 5.4 million employees and dependents in HMO and point-of-service plans.
On Friday, a United HealthCare spokeswoman said no agreement had been reached and there was no certainty that one would be reached. Neither company would comment further.
However, a person close to MetLife and McLean, Va.-based MetraHealth said last week that the deal was a virtual certainty.
The source said United HealthCare is offering MetLife and Travelers a package of $1.65 billion in stock and cash and an additional $350 million if MetraHealth meets its earnings projections for 1995.
MetLife is reportedly supportive of the deal and will seek to take its portion of the $1.65 billion primarily in stock because the New York-based insurer is optimistic about the potential of the group managed care field, in which United HealthCare is a leading player.
Conversely, the source said that Hartford, Conn.-based Travelers is much less keen on the group health business.
Travelers' Chairman and CEO Sanford Weill has publicly acknowledged he would like Travelers to divest all of its group health care holdings as quickly as possible and concentrate on non-health-related lines of business.
When formed last summer, MetraHealth had nearly 13 million customers. It now has about 11 million subscribers, nearly 80% of whom are in unmanaged or loosely managed health plans. The company posted about $40 million in net income in first-quarter 1995, its first full quarter of operations. Those earnings were on target, a company spokesman said.
The company declined to provide information on its medical loss ratio, which represents medical costs as a percentage of premium revenues.
United HealthCare, on the other hand, has about 3.7 million customers, all of whom are enrolled in managed care plans. Its first-quarter net income totaled $89.4 million and it reported an enviable medical loss ratio of 78%.
While United HealthCare has made numerous acquisitions of smaller HMOs over the past several years, its purchase of MetraHealth makes it one of an elite group of cash-rich managed care companies that have enough money to gobble up even larger players.
WellPoint Health Networks Inc. earlier this year acquired Health Systems International Inc., forming an HMO with some 4.4 million managed health plan members (BI , April 3). In addition, FHP International Corp. acquired TakeCare Inc., forming an organization with more than 1.7 million managed health plan members (BI, March 7; Jan. 17, 1994).
But, United HealthCare's purchase of MetraHealth may be more akin to an ant acquiring an elephant and could pose problems not present in previous HMO mergers.
"I'm really very surprised by this because United HealthCare has always been a selective company that has picked small, high-quality plans that are either well managed or that could quickly and easily benefit from the management and group purchasing strengths of United," said Helen Darling, manager-health care strategy and programs for Xerox Corp. in Stamford, Conn.
"In many ways, this is the opposite. Neither Travelers nor Met is among the leaders in any market and they don't hold any strong niches. United is buying access to markets, but they are buying relatively weak organizations. United will have a lot of management challenges ahead if they want to make a silk purse out of this."
Robert Mains, an analyst with First Albany Corp. in Albany, N.Y., said the price at which United HealthCare would acquire MetraHealth is "attractive." However, he said, United HealthCare would be assuming some significant risks by taking on nearly 6 million customers in unmanaged indemnity plans.
"There have been ample examples lately of indemnity insurers running into trouble, so United can't let that large indemnity chunk pollute its existing book of business," Mr. Mains said.
He pointed out that when Healthsource Inc. in December acquired the group health business of Provident Life & Accident Co. of America Inc. for $231 million, Provident was mostly providing administrative services to self-insured employers. MetraHealth, in contrast, fully insures the majority of its indemnity plan business.
Based on how many unmanaged lives United HealthCare is acquiring, Mr. Mains said it would need to convert about 500,000 people per year, starting in 1996-1997, to make the deal profitable, or underwriting losses could set in.
"Xerox offers United HealthCare plans in a number of markets and we don't want to see their strengths drained by this acquisition," said Ms. Darling.
The likelihood that MetraHealth will be sold only one year after its formation-for a price that one analyst called "cheap"-and just a few months after it truly got up and running, prompted observers to question whether MetraHealth's future is cloudier than its present. Some went so far as to question whether the joint venture was formed at Traveler's behest primarily to create a group health care entity that would be more attractive to potential buyers.
"The merger of Travelers and MetLife was never a smooth one. To see them going to UHC so soon makes one wonder if MetraHealth was simply a creation for sale," said Michael Sass, a principal with A. Foster Higgins & Co. in New York.
Mr. Sass pointed to Travelers' Mr. Weill's open desire to withdraw from the health care market as impetus for the sale.
"I suspect Sandy Weill has better places to put his share of $2 billion," Mr. Sass said.
"If I were an insurer, I'd want to get out of the health business, too," agreed Fred Hamacher, vp of compensation and benefits for Minneapolis-based Dayton Hudson Corp., which offers both United HealthCare and MetraHealth plans to employees.
"There are a lot more profitable businesses for an insurer to be in, like life insurance, pensions and 401(k)s," he said.
"I think it's hard to make money in health insurance and it'll be very difficult in the future as buyers get smarter and smarter and smarter," Mr. Hamacher said.
Other analysts and consultants could not find much fault with MetraHealth's apparent willingness to sell, either.
The company currently has 8.8 million customers in traditional fee-for-service indemnity plans or loosely managed preferred provider organizations. It has been described widely as a struggling company that stood little chance of thriving in a group health care market that has clearly turned the corner toward heavily managed care, primarily in the form of health maintenance organizations.
Observers said MetraHealth, which has only 400,000 members in pure HMOs and another 1.7 million people in POS plans, is the product of two companies' weakly managed group health portfolios-ones that were weighted far too heavily toward fee-for-service indemnity business. They said the joint venture of MetLife and Travelers was likely formed with hopes of converting the 8.8 million non-managed care customers to managed care plans, but MetraHealth's management realized that such a task would be too difficult.
"These were two widely divergent companies getting together in a merger that seemed remarkable. When it was announced, I thought it would take an incredible feat for them to pull it off," said Jerry Lanoux, a principal with Buck Consultants Inc. in Boston. "Maybe over three to five years it could happen. But this deal seems to say that MetraHealth was too little too late."
The source familiar with the negotiations agreed that originally the two companies thought they could convince members to convert to managed care. He also said that an initial public offering by MetraHealth about two to three years after its formation was planned in order to raise capital to help that transition to managed care.
But, that may have been wishful thinking, said Foster Higgins' Mr. Sass. "MetraHealth came out of two heavy fee-for-service companies that were maybe moving toward capitation at most. They were firmly from the indemnity world. Their experience was in managing costs, not care. It was all about utilization review, not telling doctors and hospitals how to operate."
United HealthCare is much better at heavy managed care and will likely do all that it can to convert MetraHealth indemnity members into HMOs. If it's successful, the deal represents colossal growth potential for the company.
One HMO industry analyst said that even if United HealthCare succeeds in converting half or one-third of those not already in managed care, it will get its money's worth from the deal.
"$1.65 billion is a very cheap price for 11 million people. That's basically $180 per life, so even if they hold on to half of those unmanaged people, it will be OK for UHC," said Mary O'Connell of Louis Nicoud & Associates in San Francisco. Ms. O'Connell said MetraHealth was a deal born out of critical mass and it failed. "They thought they could graduate all those indemnity plan customers to managed care and it wasn't happening. And $40 million in first-quarter earnings on projected revenues of $15 billion to $17 billion isn't very good. This will be a big but potentially profitable job for United."
"It's a bonanza," asserted Buck's Mr. Lanoux. "The profits that HMOs are throwing up are enormous. If UHC can make the necessary conversions, they're going to be very happy." However, he cautioned that it will likely take United HealthCare three to five years to "get it all together."
Working in the company's favor, Mr. Lanoux said, is that MetraHealth is truly national, though its greatest saturation is east of the Mississippi River. MetraHealth's geographical scope, therefore, gives United HealthCare the opportunity to become the first national HMO network. "No HMO has a national presence," he said. "UHC is great locally, but just like all the big players like Kaiser and Oxford, it's not national. Their strategy has to be to blanket big areas. If they play their cards right and they transition most of those 8.8 million people over, they'll make a bundle."
Joe Glimbizzi, a principal with Kwasha Lipton in Fort Lee, N.J., said he was surprised United HealthCare has chosen this time to make a huge health care acquisition.
Prior to press reports of the deal last week, the company's stock was down more than 11% for the year.
"HMOs are taking a beating this year, so it seems odd that UHC would want to acquire MetraHealth after its slow start. We have been disappointed with MetraHealth and have found them to be very disorganized. Some of our clients are still waiting for quotes," Mr. Glimbizzi said.
But, United HealthCare could still make it work, he said. "They're probably big enough to make it work, which would be great. But can they keep all those people in PPOs and fee-for-service plans? If they all go elsewhere, then what?"
