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Two of California's Biggest HMOs Plan Merger

Health care: $3-billion deal between Foundation Health and Health Systems another step toward consolidation into a few large providers.


Two of California's largest HMOs, Foundation Health Corp. and Health Systems International, on Tuesday announced a $3-billion suturing that would create a managed-care giant with about 5 million members in more than a dozen states.

The "merger of equals" would form the nation's fourth-largest publicly held health maintenance organization in an industry where ranks are shifting rapidly because of consolidation. The new company would be called Foundation Health Systems.

The proposed merger, along with recently announced plans to combine PacifiCare Health Systems and FHP International, raises the prospect of a few large HMOs providing care for more and more consumers, which patient-care advocates contend would mean less choice.

If both deals are completed, at least 9 million of California's 13 million HMO members would belong to only three HMOs: the nonprofit Kaiser Foundation Health Plan, the combined PacifiCare/FHP plan and the proposed Foundation Health Systems, which would have 2.5 million California members.

"The new company will have highly complementary strengths," said Malik M. Hasan, chairman and chief executive of Health Systems. "The transaction will immediately establish FHS as a major national player, with strong market positions in California and the West and rapidly growing operations in Texas, Florida and the Northeast."

Foundation Chief Executive Daniel D. Crowley predicted the new company would become "one of the best and fastest-growing health-care companies in the United States."

Health plans have contended in the past that mergers provide cost savings that enable them to expand services, reduce premiums and spend more heavily on medical technology to monitor health outcomes and better coordinate care for their members.

But some consumer advocates worry that mergers may have more downsides than upsides for HMO members. For one thing, as HMOs continue to consolidate, consumers face diminishing choices among plans.

"There should be economies of scale with large plans, but bigger doesn't always mean better for consumers," said Jeanne Finberg, staff attorney for Consumers Union in San Francisco.

"It does seem like managed care has reduced premiums for employers, especially large ones. But it's not clear that employees are getting any of that reduced premium passed to them through higher wages or more care. With few exceptions, we're not seeing additions of consumer choice and flexibility. We're seeing a narrowing of access."

Steve Thompson, vice president of the California Medical Assn., a doctors trade group that has criticized HMOs, said such mergers raise concerns about "the enormous concentration of economic power in fewer and fewer hands, and thus the power of medical decision making in fewer and fewer hands."


The proposed Foundation Health Systems would post an estimated revenue of more than $8 billion in 1997, the companies said.

The new operation would eliminate two of three corporate headquarters. Foundation is based in Rancho Cordova, near Sacramento, and Health Systems maintains headquarters in Woodland Hills and Pueblo, Colo. The new headquarters location has not yet been determined, the companies said.

It would be run by Hasan, 58, the cost-cutting neurologist who heads Health Systems. Crowley, 48, would become chairman of the combined company for a year and then would leave, although he would remain a director.

Under Crowley, Foundation gained a reputation as a cutthroat competitor that used its clout to drive hard bargains with doctors. Health Systems' Hasan has a similar reputation in the medical community.

Foundation executives said the two companies decided it would be unworkable for Hasan and Crowley--both known to have strong personalities--to run the company together. Hasan got a taste of such an arrangement after his Colorado-based HMO, QualMed, merged with Health Net in 1993 to form Health Systems. Hasan and Health Net co-founder Roger Greaves shared the titles of co-chief executive, co-president and co-chairman, but the arrangement was confusing and led to friction between the two.

When Hasan's company attempted a merger last year with WellPoint Health Networks, a Woodland Hills-based HMO, it failed partly because Hasan and WellPoint Chairman Leonard Schaeffer had a highly publicized falling-out over who would get what job.


"The only way to get this deal done was for [Crowley] to step back out of an operational role into the chairmanship," said Kurt Davis, a Foundation spokesman. "The last thing we wanted was a 'co' anything."

The two companies said they expect to save at least $110 million a year in operating expenses by consolidating corporate overhead, merging overlapping operations in California and from the "benefits of combined medical contracting."

They acknowledged that some of the savings would come from layoffs. The two firms have 15,000 employees.

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