Minnetonka, Minn.-based UnitedHealth Group Inc., the second largest health insurer in the U.S., announced yesterday that it had agreed to acquire Cypress, Calif.-based PacifiCare Health Systems Inc. for $8.1 billion in cash and stock. The huge deal is the latest in a series of consolidations that is reshaping the U.S. employer health insurance industry, a trend that affects thousands of workers in the large medical services sector of Houston’s economy.
The consolidation trend in the employer health insurance is noteworthy also because traditional employer health insurance has been losing market share over the past 15 years because of rising costs. Although almost 80% of U.S. workers in the private sector were covered by traditional employer health insurance in 1990, only 56% of of those workers were covered by such insurance in 2003, and the decline has accelerated over the past five years. The deal also narrows the gap in subscriber bases between UnitedHealth and the largest U.S. health insurer — WellPoint Inc (formerly Anthem) — which has 28.5 members.

UnitedHealth’s strongest subscriber bases are in the East, Midwest and South, and it has been raising premiums and doing well financially over the past several years. The company’s earnings per share have grown at least 30% annually over each of the past four years while the value of the company’s shares have tripled over that period. Over that same period, UnitedHealth has has gained nearly five million members from acquisition of other health insurers alone. Under the proposed merger, UnitedHealth would exchange 1.1 of its shares plus $21.50 in cash for each PacifiCare share, which means that the total consideration for the merger would be approximately 111.6 million shares and $2.2 billion in cash. If the deal closes, PacifiCare’s 3 million health-plan members would join UnitedHealth’s 23 million member base and increase UnitedHealth’s presence in three key markets — California, senior citizens under Medicare, and specialty benefits, such as vision and dental benefits.
Interestingly, the acquisition reflects a big bet that UnitedHealth is making on the Medicare market. PacifiCare has been an industry leader in positioning itself to take advantage of new Medicare opportunities set to begin in 2006 — including a new government-funded prescription-drug benefit for seniors — while emphasizing commercial health plans for individual and small group markets in California and other western states.