Blue Cross negotiating to acquire PHN Local HMO is owned by 14 area hospitals

June 01, 1996|By Norris P. West | Norris P. West,SUN STAFF

Blue Cross and Blue Shield of Maryland has been in negotiations to acquire Preferred Health Network, a Catonsville-based health maintenance organization owned by 14 local hospitals.

Bruce H. Sturm, chief executive officer of PHN, confirmed yesterday that the HMO was holding discussions with several larger companies, including Blue Cross, about a potential merger.

"There has been some interest expressed by the Blue Cross organization as well as others, and I think it's because of the fine reputation we have in the marketplace," Sturm said.

He said he could not comment on the status of the negotiations.

Blue Cross spokesman Jeffery W. Valentine said the company is seeking to make moves but declined to comment on any specific activity.

"We're looking at a variety of options for the company," Valentine said. "We have to expand our markets in order to compete."

PHN was formed in 1986 and has about 100 employees who design and develop health plan benefits, contract with doctors nTC and market the company's programs. The HMO has 3,600 physicians and covers 50,000 members.

The company is owned by community-based hospitals, including North Arundel Hospital and Greater Baltimore Medical Center. It serves the Baltimore-Washington region and plans to move later this month to Airport Square in Linthicum.

Blue Cross and Blue Shield, the state's only not-for-profit insurer, has 1.34 million subscribers, slightly more than a million of them in indemnity plans.

It earned $44.3 million in 1995 -- down 26 percent from the year before -- as enrollment and revenue remained flat. More-over, earnings and revenues in the first quarter of 1996 fell 38 percent from the same period in 1995.

Health care analysts said an acquisition of PHN would be a good move for Blue Cross, because it would enable the insurance company to expand its share of the health care market.

"To be bigger is to be better," said Gerard F. Anderson, director of the Center for Finance and Management at Johns Hopkins School of Public Health. "You want to try to control a large portion of the marketplace by having more people under your control."

Anderson said Blue Cross also would benefit by gaining access to PHN's primary care physicians.

"They want groups with a lot of primary care physicians, which gives them access to a lot of individuals," he said. "What they don't want are a lot of specialists."

Analysts also said an acquisition by Blue Cross would be another example of a consolidation movement in the industry, best exemplified by the April 1 announcement that Aetna Life & Casualty Co. was planning to buy U.S. Healthcare for $8.9 billion.

At the time of the Aetna announcement, an Alex. Brown Inc. analyst said the move to consolidate would make it difficult for small regional health companies to compete and that they would have to consider mergers.

Michael Steinberg, president of Michael Steinberg & Associates, industry consulting firm, said PHN is too small to survive in the Baltimore area.

"An HMO with 50,000 lives will not succeed in this market," Steinberg said. "They have to do something."

He said Blue Cross would gain power from such a move.

Pub Date: 6/01/96

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