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California HMOs merge
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August 5, 1996: 10:48 p.m. ET
PacifiCare buys FHP for $2 billion; deal creates fifth-largest HMO
From Correspondent Casey Wian
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CYPRESS, Calif. (CNNfn) - Two California health maintenance organizations agreed to a $2 billion merger Monday that is expected to trigger a wave of consolidation among HMOs.
PacifiCare Health Systems Inc. will buy FHP International Corp. for stock and cash, creating the nation's fifth largest HMO in the United States with annual revenue of more than $8.5 billion.
"These are two companies that have literally grown up in the same markets, provide the same products, and even have corporate headquarters that are not more than 20 minutes apart. The ability to bring these two companies together will provide opportunities for quality improvement as well as cost improvement," said Alan Hoops, president and CEO of PacifiCare.
Before Monday's deal, both companies saw their stocks lose about a third of their value since March as disappointing earnings among several HMOs hammered the entire industry.
But the biggest problem facing the industry has been slow growth in premiums. That has led many companies to cut costs to stay competitive, particularly in California, where more than 40 HMOs compete for customers.
"Size in a market like California is very important to providing a service that is of high quality and affordable and provide it in the most efficient way," said Bill Price, president and CEO of FHP International.
The merger will create a new publicly traded company called Talbert Medical. It will be staffed by FHP doctors and medical facilities.
Robert Hoehn, healthcare analysts for Salomon Brothers, said the merger is good for both companies. (283K WAV) or (283K AIFF)
PacifiCare said the purchase will help it get more involved in Medicare, which it sees as a growth business. Currently, only 10 percent of Medicare patients are enrolled in an HMO.
One way the combined companies plan to save money is through job cuts. The two employ about 18,000 workers, many performing the same tasks. Both companies, though, said it was too early to speculate about the numbers jobs that will be eliminated. 
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