AIS's Health Business Daily
Strategic Business News from Experienced Health Care
Reporters at Atlantic Information Services, Inc.
January 10, 2008

AIS's Health Business Daily

Featured Story January 10, 2008
Overly Aggressive Acquisition Strategies Can Damage a Health Plan's Relationships With Providers and Customers
Reprinted from HEALTH PLAN WEEK (formerly Managed Care Week), the industry's leading source of business, financial and regulatory news of health plans, PPOs and POS plans.

UnitedHealth Group's Dec. 4 admission that its customer service and provider relationships have been hurt by its aggressive growth strategy highlights the significant integration problems mergers and acquisitions (M&A) can cause for health plans, even years after deals have been completed. CIGNA Corp., another insurer with a large purchase in the works, says it will not combine customer service or claims-payment systems in the deal, partly to avoid such snafus.

United officials this month pledged to revamp business strategies, forge better relationships with providers, improve administration systems and resolve member problems more quickly — in an effort to resolve problems caused by recent acquisitions, including damaged provider relationships, frustrated members and harm to its reputation.

Many of the problems cited by company leaders were related to the integration of PacifiCare Health Systems, which the company acquired in late 2005. "We pursued too much change too fast, and the results were too disruptive," Executive Vice President David Wichmann said at a Dec. 4 investor meeting in New York City. "After listening to the market, we decided we needed to slow down the pace of change if we ever expected to speed up the pace of true accomplishment."

While some industry observers say United's new strategy was prompted by fines levied against it by state insurance regulators, they acknowledge that, if successful, other insurers might be prompted to pay closer attention to post-acquisition integration processes.

"I give United credit for being forthright and for taking responsibility on the issues," says Henry Loubet, senior vice president in the Oakland, Calif., office of Keenan & Associates, an insurance brokerage company and third-party administrator (TPA). Between 1996 and 1999, Loubet was the CEO of United's West Coast operations. "There is a lot of complexity around the integration of information technology (IT) systems. I can't say that I have seen any [health plan] get it totally right. I think that's why some health plans have shied away from large-scale acquisitions."

Integration problems are far from unique among health insurers and often are driven by complex consultant-designed insurance products, myriad provider-discount arrangements and insurance regulations that vary from state to state. Some health plans rely on antiquated administration systems that are "held together with bailing wire and Band-Aids. Paying fines is sometimes cheaper than trying to solve problems," says one industry observer who asked not to be identified.

United's post-acquisition integration challenges are "a fundamental issue" for the health insurance industry, adds Chip Tooke, former CEO of Lumenos, a consumer-directed health care vendor acquired by WellPoint, Inc. in mid-2005. Insurers, he explains, tend to view employers, rather than enrollees, as their customers. "When you walk into Nordstrom's [department store], you know immediately that you are the customer." But health plans have a tough time seeing the member as a customer because it's the employer that is purchasing the coverage, he explains.

PacifiCare Loses More Members
In his remarks to investors, Ken Burdick, president and CEO of UnitedHealthcare, said the company expected its overall commercial membership would decline by 550,000 lives (350,000 risk-based and 200,000 ASO) in the first quarter of 2008 versus the end of 2007. Much of the membership loss will come from PacifiCare.

"Given our assets and resources, the organic net membership [growth] that we have achieved is an extreme disappointment," Burdick said. However, he predicted that the company would rebound later in the year and add 250,000 lives by the end of 2008.

Several industry observers who spoke with HPW say United approached the acquisition of PacifiCare with a certain level of arrogance and paid too little attention to the company's unique corporate culture. While PacifiCare had a strong reputation among local providers, United "swooped in with a team to show them the United way of doing business," says one industry executive who asked not to be identified.

The most evident difference in corporate culture between the two companies was PacifiCare's "high-touch" approach with its customers and providers, versus UnitedHealthcare's "high-tech approach," says United spokesperson Daryl Richard. "The speed of the PacifiCare integration impacted our ability to remain 'high-touch' in certain areas. We think a combination of the two is what we need to focus on in the future in order to grow our business and improve service and customer satisfaction."

Richard adds that operational issues related to the rapid pace at which United worked to grow PacifiCare's provider network affected some of the new physician and hospital contracts, although he did not identify specific tactics that caused problems. "We've acknowledged that these issues affected our customers and provider partners. However, the issues associated with the network transition were addressed and corrected months ago," he says.

Josie R. Williams, M.D., president-elect of the Texas Medical Association, says that when United has acquired other insurers in the past, providers sometimes were unaware that changes had been made to the fee schedule. "Small doctor practices might not realize why their payments are going down. There is a lot of frustration because they've done a lousy job of communicating with providers," she says. Such communication problems, she adds, are not unique to United and occur with most large health plans.

But acquisitions and mergers don't have to result in integration snafus. Health plans sometimes don't pay enough attention to system integration when they acquire or merge with other carriers, says former Maryland Insurance Commissioner Al Redmer. "Acquisitions in and of themselves are not necessarily bad for customer service or billing," he tells HPW. "The issue is a function of the priorities that the acquiring company puts in place after the acquisition, and the policies and processes that are used to consolidate the businesses." Redmer recently resigned as CEO of Coventry Health Care of Delaware to open a full-service insurance agency in Maryland.

Industry Mergers Will Continue
With a relatively static number of lives to go around, insurers often find it difficult to grow enrollment organically, says Tooke. "And that puts tremendous pressure on earnings," he says. "United has made pretty considerable profits over the years, but maybe more of that [profit] should have been invested in the infrastructure."

Once its proposed acquisition of Great-West Healthcare is approved, CIGNA says it will not combine customer-service or claims-payment systems. That strategy should help CIGNA avoid integration challenges, says CIGNA spokesperson Joe Mondy. The deal is expected to close by mid-2008.

Over the past nine months, Richard says United's "operating fundamentals" have improved substantially. "For example, today on our primary adjudication platform we pay more than 20 million claims per month, and 95% of all claims are paid within 10 days," he says. "Also, 82% of our claims are processed automatically…and 96% of claims require no member contact."

But providers and other industry observers say they will wait and see. "It's fair for [United] to say they would like to improve, but the jury is out," says Lou Felice, deputy chief of the New York insurance department's health bureau. "United will need to do a very strong outreach with providers to address previous issues."