UnitedHealth gets back on acquisition track

MINNETONKA, Minn.—UnitedHealth Group Inc.'s proposed acquisition of Sierra Health Services Inc. is unlikely to have a significant impact on employers, although the American Medical Assn. is expressing concern about the deal's potential impact on the Las Vegas health insurance market.

The transaction, analysts say, sends a clear signal to the market that UnitedHealth is moving on from the stock options scandal that has hit the company over the past year. The acquisition, though, does not foreshadow an uptick in the consolidation trend that has dominated the health insurance market over the past four years, analysts say.

Minnetonka, Minn.-based UnitedHealth announced last week that it would acquire Las Vegas-based Sierra for about $2.6 billion in an all-cash transaction that is "a testament to their strength," said Bradley Ellis, director at Fitch Ratings in Chicago.

Sierra is the latest in a series of acquisitions for UnitedHealth as the company strengthens its presence in key regions (see box, page 1). The acquisition represents an opportunity for UnitedHealth to improve its position in the second fastest-growing state in the country, analysts say.

The Las Vegas health insurance market is "one of the few markets that has been growing commercially," said Sally Rosen, a senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc.

Sierra provides employer-sponsored benefits to about 310,000 members in Nevada, while UnitedHealth has about 47,600 commercial health plan members in the state. "I think it makes strategic sense," Mr. Ellis said. "United didn't have much of a hold at all in the Nevada market. This is a whole new ballgame for them. Sierra has a superior market share."

Sierra is the second largest insurer in Nevada, with a total market share of 29%, while UnitedHealth has a 14% market share, according to the Chicago-based American Medical Assn.

Sierra has a dominant position in the Las Vegas-Paradise metropolitan area health maintenance organization market, with an 81% market share, while UnitedHealth has a 13% share, which is a cause of concern for providers and patients in the region, said Dr. James Rohack, a Temple, Texas-based trustee of the AMA. "They would be able to literally dictate whatever premiums they want."

Despite the AMA's comments, a UnitedHealth spokesman said company officials have not heard any concerns from Nevada providers. "I think the AMA is not understanding that the physicians that are doing a great job for Sierra are actual employees and are excited about this proposition," the spokesman said.

The transaction, which is expected to close by the end of 2007, is subject to state and federal regulatory approvals. The AMA hopes that the U.S. Department of Justice and state regulatory officials take a careful look at the proposed deal--considering the transaction's impact on pricing, the uninsured population and access to care--and take steps to either prevent the acquisition or force divestiture of certain assets, Dr. Rohack said.

When UnitedHealth acquired PacifiCare Health Systems Inc. in 2005, it was required to divest portions of the Cypress, Calif.-based insurer's commercial health insurance businesses in Tucson, Ariz. and Boulder, Colo., due to concerns that the proposed deal would result in higher prices and lower-quality commercial health plans. The Sierra deal, however, is unlikely to encounter similar resistance from regulators, analysts say.

"With the size of United, they have to be careful where they do transactions because of antitrust concerns, but this is a situation where they didn't have a very strong market share," Mr. Ellis said.

Despite the merger, it is unlikely that employers will be negatively impacted from a pricing standpoint because of UnitedHealth's lack of a sizable market position in Nevada, analysts say. "I don't see why there should be any change in pricing," said Stephen Zaharuk, vp and senior analyst for Moody's Investors Service Inc. in New York.

Sierra historically had some of the best premiums rates in the health insurance business despite its large market share, said Joseph Marinucci, credit analyst with New York-based Standard & Poor's Corp.

Employers are likely to benefit from the deal because it gives multi-state employers with operations in Nevada another national health plan option and will allow Nevada employers to access UnitedHealth's large provider network and suite of products, analysts say.

In the deal, UnitedHealth also will acquire Sierra's provider network, Southwest Medical Associates. The provider network is a key component to Sierra's profitable business model because the doctors work directly for the insurer, Ms. Rosen said.

The timing of the acquisition is interesting, analysts say, because it closely followed UnitedHealth's completion of a $1.5 billion earnings restatement as the company tries to move past its stock-option backdating problems. "I think it's a statement to the marketplace," Mr. Zaharuk said.

It does not, though, signal a trend of major merger and acquisition activity in the health insurance market, analysts say. "I don't think (the Sierra deal is) an indication of an upturn," Mr. Ellis said.

While insurers are always exploring potential acquisitions, the largest insurers--UnitedHealth and Indianapolis-based WellPoint Inc.--now have limited properties they can acquire due to their dominant positions, he said.

Other insurers such as Hartford, Conn.-based Aetna Inc. and Philadelphia-based CIGNA Corp. have the resources to acquire sizeable properties, but they do not appear eager to engage in such transactions, focusing instead on small companies that enhance their product and technological capabilities, Mr. Zaharuk said.

Sierra's stock closed last Friday at $41.32 a share, up 15.1% for the week.