ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, April 2, 1996 TAG: 9604020064
SECTION: BUSINESS PAGE: B8 EDITION: METRO
DATELINE: NEW YORK
SOURCE: ASSOCIATED PRESS
AETNA HAS BEEN SEARCHING for a health-care merger partner for six months. Monday, the company announced it had found one: U.S. Healthcare.
Aetna Life and Casualty Co. is buying U.S. Healthcare Inc. in an $8.9 billion deal that will create the nation's biggest provider of health benefits, reaching one in every 12 Americans.
Combined, the companies' medical plans cover 23 million people nationwide with life, health and disability insurance, prescriptions, mental health, vision, and dental care. Of that number, 14 million get full-scale medical coverage.
The deal announced Monday represents a clear illustration that traditional health insurance is in irreversible decline, to be replaced by HMOs and other forms of managed health care, where U.S. Healthcare is a leader.
Although the combined company will retain the Aetna name, it will be managed more like U.S. Healthcare, which is far more profitable.
Hartford-based Aetna has been publicly searching for a health-care merger partner for six months, planning to shed less profitable insurance lines such as auto and homeowner coverage.
Within days it is expected to complete the $4 billion sale of its property-casualty insurance unit to Travelers Group.
U.S. Healthcare, based in Blue Bell, Pa., serves 13 Eastern states and Washington, D.C.
``This merger is a major step in our strategic plan to create an outstanding national health-care company,'' said Aetna Chairman Ronald Compton, who will be chairman of the merged company. ``It is an excellent strategic fit and establishes a strong platform for growth.''
Aetna said it expects the deal to add $300 million in profits within 18 months by reducing operating expenses and creating new revenues.
While Aetna already operates HMOs, they're much more loosely managed than U.S. Healthcare. The conversion to U.S. Healthcare's model likely will be gradual, so as to avoid angering customers and doctors, who could abandon the company for other health plans.
``I think they will make it voluntary and through financial incentives rather than through any sort of coercive effort,'' said Gary Frazier, health-care analyst at Bear Stearns in New York.
Aetna provides full-scale medical coverage to far more people than U.S. Healthcare, 11.3 million compared with 2.8 million.
But Aetna earned only $252 million last year on $13 billion in revenues. U.S. Healthcare earned $380 million on $3.6 billion in revenue.
U.S. Healthcare was founded 20 years ago by its chairman, Leonard Abramson. It employs aggressive cost controls, watching closely the services provided by its doctors and hospitals and penalizing those perceived to be wasteful. Unlike most competitors, however, it rewards doctors financially for getting higher patient satisfaction ratings, not just for spending less.
It is also one of the few HMOs that attempt to measure patient health and medical care quality.
U.S. Healthcare's tight management has made it among the least expensive HMOs, which has contributed to rapid growth in the number of members, up 24 percent last year.
Cost controls, however, have prompted many doctors and patients to complain that HMOs deny necessary drugs, medical specialists and hospitalization, in the name of profits.
Like other managed-care providers, U.S. Healthcare has attempted to blunt these criticisms by offering patients a hybrid HMO sometimes called a ``point of service'' plan.
These plans allow members to get health care from any doctor they want outside the HMO network - as long as they pay part of the cost. They are among the most popular.
Despite all these efforts, stiff competition has prohibited many HMOs from raising their rates, putting future profits in jeopardy.
Abramson, who will relinquish his control of the company but become an Aetna board member, said Monday that the key to the future is growing larger.
The purchase will give the combined company the clout to demand lower prices from medical care providers, he said. ``This gives us excellent marketing power to negotiate with physicians, hospitals, laboratories and drug companies.''
The purchase is expected to cause job cuts in overlapping operations, but executives noted that the combined company expects to grow, opening up new jobs for some who are displaced.
Under the terms of the deal, Aetna has agreed to pay $34.20 in cash and 0.2246 of a share of its stock for each share of U.S. Healthcare. Based on the recent value of Aetna's shares, the deal values U.S. Healthcare at $57 a share, a healthy premium of 24 percent over Friday's closing price.
U.S. Healthcare's shares soared $6 to $51.87 1/2 on the New York Stock Exchange. Aetna's shares plunged $3.37 1/2 to $72.12 1/2.
Some investors were dismayed at the high price Aetna is paying, while others were disappointed that Abramson won't be taking an active, long-term role in the combined company, Frazier said.
THE BIG MARRIAGES AT A GLANCE
WHAT HAPPENED:
Two big mergers in telecommunications and health care will create gargantuan players in those industries. SBC Communications Inc. is buying Pacific Telesis Group for $16.7 billion in stock. Aetna Life & Casualty Co. is buying U.S. Healthcare Inc. for $8.9 billion.
IMMEDIATE IMPACT:
The SBC-Pacific Telesis merger will create the nation's second-biggest phone company after AT&T Corp., serving millions of customers in seven states. The merged company, to be called SBC, will have more money and power for its planned entry into long-distance phoning.
The Aetna-U.S. Healthcare merger will create the nation's largest medical-benefits company, providing a range of benefits and services reaching 23 million Americans.
LONG-TERM IMPACT:
The new SBC eventually could become as common a name in telecommunications as AT&T and MCI, offering a broad range of newfangled video and data transmission services. The effect on prices consumers pay isn't clear yet.
The new Aetna will push aggressively into low-cost managed health care, where U.S. Healthcare is a leader. The company likely will convert Aetna customers with traditional insurance to the managed-care system. Its sheer size should enable the company to negotiate cheaper prices for hospital and pharmaceutical services. -Associated Press
LENGTH: Long : 125 lines ILLUSTRATION: PHOTO: 1. AP Aetna Life & Casualty Co., in Hartford, Conn., isby CNBlooking to shed some of its less profitable enterprises - such as
homeowner and auto insurance. color
2. headshot of Ronald Compton Aetna chairman color
3. headshot of Abramson