Analysts expect Sierra Health buyout to close

Doctors' groups don't like the deal, and the Department of Justice is questioning it.

But managed-care analysts say those hurdles are unlikely to block UnitedHealth Group's buyout of locally based Sierra Health Services, and, despite the hurdles, the $2.6 billion sale will likely close by the end of the year.

"UnitedHealth is good at this (mergers and acquisitions)," said David Trout, owner and publisher of The M&A Researcher. "They have the resources, the legal staff and the experience. They know how to get through these kinds of situations, and they will get through it if they want to."

The Minnesota insurance company must first maneuver discontent over the purchase among physicians' groups and make it through the monopoly-vetting process at the Department of Justice.

The Clark County Medical Society adopted a resolution on May 15 opposing the deal, and the Justice Department submitted a second request on May 16 for additional information related to the antitrust implications of the acquisition.

Members of the medical society say they don't like the buyout because they believe it would create a monopoly in local managed-care insurance, said Dr. Ed Kingsley, a trustee of the Clark County Medical Society and president of the Nevada State Medical Association.

The state medical association came out against the deal in early May.

"We think we're able to negotiate better with insurance companies when there is competition, and not a monopoly," Kingsley said.

National doctors' organizations have also taken issue with the buyout.

The American Medical Association asked the Department of Justice in March to block the sale, which the group called a "blatant grab for dominant market power."

The trade group estimated that UnitedHealth would control 78 percent of the Nevada HMO market and 95 percent of the Las Vegas HMO market after the buyout. In a letter to U.S. Attorney General Alberto Gonzales, the association said a lack of competition would allow UnitedHealth to raise premiums above market rates and "exercise exclusive power over the purchase of medical services."

Sierra Health has about 670,000 members in Nevada, and UnitedHealth has about 110,000 members in the state through its PacifiCare Health Systems operation. The two companies are No. 1 and No. 3 in market share. WellPoint Health Networks is No. 2, with 270,000 members.

Observers said physicians' opposition will do little to halt the deal.

That's partly because their protestations are a familiar refrain in the health-care realm, CIBC World Markets Executive Director Carl McDonald said.

"Every time a managed-care merger is announced, you get that kind of opposition," McDonald said. "In some ways, the impact is sort of muted because it's expected. It's just part of the process."

Also, McDonald said, the American Medical Association's emphasis on the companies' HMO penetration misses several other lines of business. In commercial sales to businesses buying insurance for their employees, for example, UnitedHealth and Sierra Health would hold just one-third of the market, thanks to the high number of self-insured companies here, McDonald said. And HMOs are a small component of the overall health-insurance sector, he added.

Trout said physicians could affect the deal if they could point to specific problems the sale might cause in individual markets. If they're complaining about the potential for a monopoly in general terms, the Department of Justice isn't likely to give their comments too much weight, he said.

Officials of both Sierra Health and UnitedHealth said they are meeting with doctors' groups to assuage their worries. Their pitch: Sierra Health will keep its own line of businesses, so the number of services available in the market won't decline. And physicians in the Sierra Health network will have access to the $2.5 billion in technology UnitedHealth has spent in recent years to improve the claims process and to provide systemwide health-care data.

Tyler Mason, a spokesman for UnitedHealth, said many local physicians -- including the 250 or so doctors who work for Sierra's Southwest Medical Associates -- approve of the deal. What's more, not all of the state's doctors belong to local trade groups, Mason said, so the associations' positions hardly mean doctors are monolithic regarding the merger. UnitedHealth alone has 2,200 network physicians, for example, while the Clark County Medical Society has 894 members.

"We need to do a better job of explaining to (doctors' trade groups) why other physicians in the community are supportive (of the sale), and we're willing to roll up our sleeves and do that," Mason said. "I'm not sure the initial opposition is not productive in the long term. It gives us the opportunity to go back and persuade them of the merits of the deal."

Both companies are also trying to help the Department of Justice understand the buyout's upside.

Trout and McDonald said second requests for information from the federal agency are common in the health-insurance sector.

Spokesmen from UnitedHealth and Sierra said they didn't yet know what additional details the department would seek, but Trout said federal antitrust attorneys would probably want specifics on whether the combined companies could control pricing or health-care access in some of Nevada's smaller markets. The department will likely ask for the businesses' financials for all the state's markets, as well as an accounting of their history in those regions. Justice officials might also query doctors in individual markets for their thoughts on the sale's effects.

The department's second request does not mean antitrust attorneys have serious reservations about the sale, Trout said.

Nor does it imperil the buyout's prospects, McDonald added.

He said he can't recall a health-insurance acquisition in the last decade that fell apart following an antitrust investigation at the Department of Justice. Rather than scuttling a transaction, McDonald said, the department's inquiries generally result at most in orders for companies to divest of insurance lines that they would dominate.

If any operations land on the auction block, it'll be the companies' Medicare lines, McDonald said. A unified Sierra Health and UnitedHealth would claim 97 percent to 98 percent of the state's Medicare insureds, an ownership share that regulators could determine is anticompetitive.

Despite the challenges, Trout predicted the buyout will close as scheduled sometime in the fall.

McDonald agreed, saying: "There's a very high likelihood this buyout happens."

The Nevada Insurance Commission has scheduled a public hearing related to the sale on June 14. Concerned citizens can comment then on the effects they foresee.

Sierra Health's shareholders are scheduled to vote on the acquisition on June 27.

Shares in Sierra Health rose 9 cents, or 0.22 percent, Thursday to close at $41.49 on the New York Stock Exchange. UnitedHealth is offering $43.50 a share for the company.

UnitedHealth's shares on the New York Stock Exchange closed Thursday at $54.21, up 28 cents, or 0.52 percent, compared with Wednesday's close.