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Financial Woes Doom a Merger, Dog an HMO, Dampen Investor Spirit

MANAGED CARE September 1998. © MediMedia USA
News and Commentary

Financial Woes Doom a Merger, Dog an HMO, Dampen Investor Spirit

Michael D. Dalzell
MANAGED CARE September 1998. ©1998 Stezzi Communications

Humana and United HealthCare will never make it to the altar. The two companies terminated their merger agreement after a stock swoon dropped the value of the union from $5.3 billion to $3.1 billion.Wall Street got nervous when United announced a $565 million second-quarter loss stemming from a one-time $900 million charge associated with "strategic realignment activities." Those moves include withdrawing from several commercial markets, as well as rural Medicare markets with high medical loss ratios. United will make other cost-cutting moves, including layoffs.

Though Humana posted a $52 million second-quarter profit, the news about United nonetheless triggered a huge selloff of both HMOs' stocks. United shares lost 30 percent of their value the day of its announcement, while Humana's stock plunged 29 percent.

Meanwhile, Oxford Health Plans posted second-quarter red ink, to the tune of $508 million. The HMO chalked up more than half of the loss to one-time internal restructuring expenses. Word came days after Oxford's ominous announcement that it would soon cut physician and hospital fees and raise premiums.

The day it released second-quarter financials, Oxford stock closed at $7.25 a share, less than a third of its $25.88 close on Oct. 27 — the day Oxford stock lost 62 percent of its value.

Texas Health Resources, the parent company of Harris Methodist Health Plan, has agreed to unload its money-losing HMO to Blue Cross and Blue Shield of Texas. The Blues will buy a majority stake in Harris Methodist, though the purchase price has yet to be determined.

Disposing of Harris Methodist, the largest HMO in northern Texas with about 325,000 members, is a big step in Texas Health's own makeover. The company, which owns 13 hospitals and the HMO, plans to enter into a "joint operating agreement" with Baylor Health Care system. The affiliation — not quite a merger — was contingent upon Texas Health's ability to sell Harris Methodist.

The amount of money spent on direct-to-consumer advertising in April (the latest month for which statistics are available) was up 38 percent from the same period last year.

Perhaps more significant, the ads are persuading people who otherwise might not do so to see their doctors. According to an audit by Scott-Levin, the consulting company, six of the top ten medical conditions that accounted for increased office visits last year were mentioned in direct-to-consumer advertisements.

Physicians may or may not like the increased foot traffic that direct-to-consumer ads generate, but the public apparently appreciates the information. Consumers told Scott-Levin that their doctors often do not take the time to educate them about medications and prescription options.

Financial analysts warn against judging FPA Medical Management's slide into bankruptcy as the general direction of the physician practice management industry. Said one, wide variations in business strategy make generalizations unrealistic. The consensus about FPA is that it grew too fast. FPA has fallen hard; its stock price, which was around $40 a share last fall, hovered below 20 cents in August.... Jay Gellert has succeeded the retiring Malik Hasan, M.D., as CEO of Foundation Health Systems. Hasan will remain chairman of the board until early next year.

Michael D. Dalzell