Aetna Life & Casualty to buy U.S. Healthcare $8.9 billion deal to form nation's biggest managed-care company

April 02, 1996|By M. William Salganik | M. William Salganik,SUN STAFF

Aetna Life & Casualty Co. announced yesterday that it would buy U.S. Healthcare in an $8.9 billion deal that would forge the largest managed-care company in the United States, reaching one in 12 Americans.

The purchase demonstrates how managed care is overtaking traditional health insurance. It also accelerates a trend toward consolidation and the blending of roles between traditional insurers, managed-care companies and providers.

In becoming the largest, Aetna vaults over United HealthCare, which itself jumped into the No. 1 spot with a huge takeover -- the $1.6 billion purchase last June of MetraHealth, an insurer that represented the merged health businesses of Travelers Group Inc. and Metropolitan Life Insurance Co.

Another example of the consolidation trend was provided last week, when Columbia/HCA, a for-profit hospital chain, bought most of the operating units of Blue Cross and Blue Shield of Ohio for $300 million.

"I think the consolidations will continue," predicted Eleanor H. Kerns, a health industry analyst in the Boston office of Alex. Brown Inc. "It will become more and more difficult to compete with the larger players, leaving the smaller regional players with a decision whether to sell out."

"What this really points to is that this marketplace is so dynamic, locally and nationally," said Gregory Devou, executive vice president of Blue Cross and Blue Shield of Maryland. "The larger organizations, national in scope, are looking to do regional as well as national acquisitions."

Hartford, Conn.-based Aetna, more than 140 years old, provides health insurance to 11.3 million subscribers. It also offers life insurance and other products. In November, it announced that it would concentrate on health by selling its property-casualty business to Travelers Group for $4 billion -- a cash infusion that led analysts to expect a major acquisition.

Aetna long sold traditional indemnity insurance, policies in which it collects premiums and pays claims. And, like most old-line insurers, it has been moving into managed-care plans, which gain more control over rates by negotiating contracts with doctors, hospitals and other providers. Managed-care plans exercise more control over use of health services by setting guidelines and having "gatekeeper" physicians control referrals.

In the last four years, as cost-conscious businesses shifted quickly to managed-care plans for their employees, Aetna has seen its health business turned on its head -- from roughly two-thirds indemnity insurance to roughly two-thirds managed care.

Yet, Aetna's growing managed-care business, which now has roughly 7.5 million members, has not been nearly as profitable as that of U.S. Healthcare, an aggressive company started in 1972 in Blue Bell, Pa. U.S. Healthcare has grown in a market stretching from Rhode Island to South Carolina by concentrating on managed care.

Much of U.S. Healthcare's management team -- including its hard-driving founder, Leonard Abramson -- is to move into Aetna management. James W. McLane, CEO of Aetna Health Plans, announced that he will be leaving the company. The company, to be called Aetna Inc., will maintain offices in Hartford and Blue Bell.

The deal could make Aetna "a powerhouse in the mid-Atlantic market," said Joel M. Ray, an analyst for Wheat First Butcher Singer in Richmond, Va.

U.S. Healthcare is strong in New Jersey and the Philadelphia area. Much of Aetna's strength is with national clients. In the Maryland market, Aetna has about a 5 percent market share, U.S. Healthcare about 1 percent.

Aetna and U.S. Healthcare members will see no immediate difference -- the deal is not expected to close until the third quarter -- and may see very little change even after the plans are merged, spokesmen for both companies said. Both operate primary by contracting with doctors and hospitals, rather than operating their own centers, so the merger should not result in closing of health facilities.

Eventually, subscribers may see changes in plan benefits and costs.

Under the terms, for each share of U.S. Healthcare stock, shareholders would receive $34.20 in cash and Aetna stock -- a total of about $57 a share. The deal is subject to approval by stockholders of both companies.

Pub Date: 4/02/96

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