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Merger of HMOs May Be a Test of Wills : Medical care: Qual Med and Health Net, former adversaries in court, must now combine different management styles and personnel.

September 28, 1993|DON LEE | TIMES STAFF WRITER

WOODLAND HILLS — Health Net and Qual Med say their proposed merger will give them two strong assets to battle in President Clinton's new health-care arena: combined revenues of $1.7 billion, and the geographical reach in every state from California to Colorado.

But the success of the $725-million stock merger, expected to go through by year end, may well ride on another factor: How these two health maintenance organizations (HMOs) meld their sharply contrasting management styles and personnel.

Analysts say that won't be easy, especially given their quarrelsome past.

Dr. Malik Hasan, chairman of Pueblo, Colo.-based Qual Med, spent a year in courts trying to force Health Net and its chairman, Roger Greaves, to sell the company to Qual Med for $400 million. This even though Qual Med is one-third the size of the Woodland Hills-based Health Net.

Hasan, 54, a London-trained neurologist turned entrepreneur, had previously had his way in buying numerous HMOs in various states. But Greaves, 55, a shrewd businessman who rose through the ranks of management, methodically held him off. It was a nasty battle, with lawyers and private investigators throwing a lot of dirt at each other.

The dispute ended last month when the merger deal was signed. Greaves and Hasan now say they plan to work together happily, as co-chairmen, co-chief executive officers and co-presidents.

"Dr. Hasan and I have become good friends," says Greaves.

Perhaps. But analysts remain skeptical that the co-stewardship will last.

"They're now at a starting gate. Soon they'll be at the touch and feel phase. That will probably last six months," says John Edelston, a health-care consultant in Woodland Hills. "After that, I would anticipate no more than a year" before one of them will leave.

Adds a Bay Area money manager: "History shows that co-CEOs never last long, particularly with two guys who built organizations with big egos. When it's all over someone's going to be sitting on the throne by himself."

The way the deal is set up, it appears Hasan has the upper hand.

Hasan and other Qual Med shareholders will have roughly 70% voting control of the combined company. The rest will be held by Greaves and 37 other Health Net executives.

Board membership also favors Qual Med. Current plans call for the new company to have 15 directors--five from Health Net, five from Qual Med and five outside directors. But those five outside directors, who include former California Gov. George Deukmejian, are currently on Qual Med's board and own shares of Qual Med.

In May, however, Greaves will be able to appoint two new board members from the California Wellness Foundation.

The Wellness Foundation was created by Health Net last year. Health Net is in the process of endowing the foundation with $300 million, as part of a requirement set by state officials for Health Net to convert from nonprofit to for-profit status. The foundation will own 52% of the stock of the combined Health Net and Qual Med company. But all of those shares will be non-voting.

Despite their past differences, Hasan insists that the two management teams will get along.

"The integration of the two companies will not be difficult," Hasan said. "It will be doable." If they succeed, a merged Health Net and Qual Med could be a formidable player in the new health-care environment. Why? President Clinton's health-care reform is expected to direct more business to big HMOs that have economies of scale and a widely spread network of doctors, hospitals and medical suppliers, all of which the combined Health Net and Qual Med should have.

Health Net had been looking for a way to expand out of California and strengthen its presence in Northern California, where Qual Med has 175,000 HMO members. Overall Health Net has 900,000 members, but most are in Southern California. Qual Med also does much more business in handling Medicare patients--an area that Health Net has been trying to develop in anticipation that more federal and state public health programs will switch to HMOs.

Qual Med, too, has good reasons for teaming up with Health Net. In fact, Qual Med has long pursued Health Net, attracted to the lucrative Southern California market. In Health Net, Qual Med also gets a greater depth of management, according to analysts.

"They have a lot to offer each other," said Jeff Hendren, an analyst with Goldman Sachs in New York.

Greaves says he will oversee the new company's marketing, finance and human resources departments--which he says are his strengths. Hasan, meanwhile, will be in charge of medical management, developing relations with health providers and seeking new business opportunities.

"They've taken some pains to stay out of each other's way," said Doug Sherlock, a Pennsylvania analyst who tracks publicly traded HMOs.

Still, there are other, more lasting differences between the two companies that analysts say will be hard to blend.

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