HMO'S LOSS THROWS WRENCH IN MERGER TALKSPosted On: Aug. 9, 1998 12:00 AM CST
MINNETONKA, Minn. -- United HealthCare Corp.'s surprise announcement last week of a $900 million charge against second-quarter earnings threw the future of its Humana Inc. deal into doubt and is likely to lead to higher rates for its employer clients.
"I think both companies have a lot of analysis and a lot of soul-searching to do," said Todd B. Richter, a health care analyst at Morgan Stanley Dean Witter in New York. He added, however, "I think it's way too soon to speculate on what's going to happen."
"I think United is going to look over very carefully the ways they price all of their products" as a result of the announcement, said Bill Gibson, client services manager for Sedgwick Noble Lowndes in Philadelphia.
"From a corporate standpoint, they must get maximum dollars from the profitable business they do have," said Mr. Gibson.
United HealthCare last week said the $900 million charge -- which led to a $565 million quarterly loss and a $433 million loss for the half -- is in part because of its unprofitable Medicare plans.
The company also said that as part of its "realignment initiatives," it plans to either exit or "significantly change the nature of its operating presence" in several unspecified commercial health plan markets where its penetration is inadequate or where its profit or growth potential appears uncertain. The company would not comment further.
The $900 million charge reflects $620 million for withdrawal from selected markets and products and contractual disposition of "non-strategic operations"; $190 million for consolidation of operational activities and systems platforms and $90 million in operating cost reductions, including severance.
The stock market reacted strongly to the announcement. United HealthCare's stock dropped $15, or 28.4%, to $37.88 on Thursday, the day its earnings were announced. It closed at $36.31 Friday. The announcement also had an impact on other health maintenance organization stocks, which dropped 13.4% last week, according to the Business Insurance Industry Stock Report.
The news means United's deal with Louisville, Ky.-based Humana, a deal that would create the nation's largest single managed care organization and was originally valued at about $5.5 billion, may be either restructured or killed altogether (BI, June 1).
Humana said in a statement that it will comment on United's announcement only after it has had the opportunity to work with United's management "to understand the problem underlying the action taken today" and its impact on the deal. "We really won't have anything more to say until such time as we have a better understanding of the issue," a spokesman said Friday.
Humana reported $52 million in net income for the quarter, up 23.8% from $42 million for the comparable quarter a year ago.
A hearing on the deal scheduled by the Kentucky Insurance Department for Friday was canceled. Both Humana and United HealthCare officials met informally with Kentucky Insurance Department officials Friday.
"Humana is going to step back and very, very carefully look at the financial commitment that's involved," said Sedgwick's Mr. Gibson. "I wouldn't be at all surprised if they re-evaluate the deal and restructure the deal. A lot of that is going to depend on what they find," he added. If it turns out this announcement is only the tip of the iceberg, the deal may be killed altogether, he said.
"I think everyone is equally divided as to whether this is something that will go through or not," said Mark Jamilkowski, an HMO analyst with Conning & Co. in Hartford, Conn. "It's a tough decision for Humana's board of directors," he said.
"The larger question is, if the merger with Humana is consummated, whether there will be additional writeoffs associated with the integration, staff reductions and so on," said Arun N. Kumar, managing director at Standard & Poor's Corp. in New York. He also said it is still early to determine if the deal will go through.
Whatever the outcome of the deal, it is expected to mean higher prices for employers doing business with United. "I would predict that employers that are dealing with United, at least, will see higher rates, and if Humana gets swept into the deal, it would be predictable that those clients would see higher rates, too," said Ken Jacobsen, national director-health care practice for The Segal Co. in Atlanta.
Conversely, if Humana backs out of the deal, to stay competitive it will "find ways to keep their premiums in line," said Mr. Jacobsen. "Hopefully, they wouldn't be faced with the same internal pressures to increase prices as high as United might."
The announcement will lead to higher rates for employers doing business with United "for sure," said Barry Barnett, a principal at Kwasha HR Solutions, a unit of Price Waterhouse Coopers in Fort Lee, N.J.
Mr. Barnett also predicted that if the deal does not go through, Humana will find another buyer.