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EFFICIENCY VS. FEWER OPTIONS

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PHILADELPHIA-The combination of CIGNA HealthCare and Healthsource Inc. will offer employers service in more geographic areas, cost efficiencies and stronger negotiating power with providers, many consultants say.

But at the same time, some benefit consultants warn the consolidation represents yet another reduction in the number of health plan options available to employers.

Under terms of a definitive agreement reached last month, CIGNA Corp. agreed to pay $21.75 per share in cash for all outstanding Healthsource shares. The deal will be financed from cash on hand and short- and long-term debt, said a CIGNA spokes-man.

CIGNA HealthCare, a division of CIGNA Corp., offers a wide range of group medical, dental, disability and life insurance products in all 50 states. It operates managed care networks in 43 states, including health maintenance organizations in 24 states and Washington, D.C.

About 15 million people receive health benefits from CIGNA

HealthCare, including 4.5 million enrolled in HMOs and 1.2 million enrolled in preferred provider organizations.

Healthsource, which has about 870,600 HMO members, operates in 15 states, primarily in the Northeast, the Midwest and the South. Its operations include the group health care, HMO and third-party administration business of Chattanooga, Tenn.-based Provident Life & Accident Insurance Co. of America Inc., which it acquired in 1995 (BI, June 5, 1995; Dec. 26, 1994).

Combined, CIGNA HealthCare would operate HMOs with 5.3 million members, maintaining its No. 2 ranking behind Kaiser Permanente (BI, Dec. 27, 1996).

CIGNA's medical indemnity business after the acquisition would cover 7 million lives, including CIGNA's 4.5 million lives and Healthsource's 2.5 million. CIGNA is expected to make every effort to encourage these members to switch into its managed care operations.

The combined operation will have strong dental plan operations. CIGNA now has 2.5 million managed dental care members and 8 million indemnity dental lives. Healthsource services 2.6 million lives, including 313,000 who are part of its managed care operation and 2.3 million who use its self-insured product.

Healthsource will give CIGNA HMO members in six states where it currently has none: Arkansas, Indiana, Kentucky, South Carolina, New Hampshire and Maine. CIGNA's membership is now concentrated most heavily in California, Arizona and Florida.

The acquisition is "especially appealing and important to multistate employers who look to a national company like CIGNA to be able to serve their employees throughout the country," the CIGNA spokesman said. The deal will "enhance our efforts to negotiate appropriate contracts with providers that help to keep costs down for employers," he added.

Consultants agree that wider geographic spread and improved cost efficiencies are the two primary benefits of the acquisition.

The deal means a wider variety of managed care products available in more geographic areas, said Bob Eicher, a principal with A. Foster Higgins & Co. Inc. in New York.

The principal advantage is "they're better able to negotiate better deals with the health care providers," as well as reduce expenses, because there will be certain redundancies within the two operations, said Jack Doerr, group benefits practice leader for Sedgwick Noble Lowndes in Chicago.

But some observers worry the acquisition means fewer options for employers. "It's going to make it a bit more of a challenge for employers, because they may have fewer plans from which to choose," which could reduce their bargaining power, said Tom Billet, the Stamford, Conn.-based national practice leader for the MEDSTAT Group, a Minneapolis health care information and consulting firm.

"I think what it does is remove one significant regional player in the Northeast and parts of the Southeast and just gives (employers) one less option," said Rich Sinni, principal and director of health care management for Buck Consultants Inc. in Secaucus, N.J.

Sedgwick's Mr. Doerr said that while eventually the reduced number of choices will become a negative, "I don't think we're terribly close to that point." While there now may be fewer choices available in the market, they are stronger than before, he said.