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HEALTH PLANS: UnitedHealth keeps gobbling

United is buying Sierra Health Services, a regional HMO in Nevada for $2.6 billion. Sierra is a more traditional HMO than most of the health plans United’s bought in recent years (Golden Rule et al). The price is a modest 15% increase over Sierra’s current stock price, which last month was hit by the rather interesting news that it was taking a bath on its new Part D plan—mostly because a certain other plan (hint: it’s one of united’s big competitors) was shunting its sick people onto Sierra’s plan.

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  1. As I read above, all I see are comments about the business transaction, but nothing about how it affects people. Are we going to see the “Cherry Picking” as United Health Care did to Pacific Care? I’m sure everyone above was happy their stock went up when that happened, but millions of the more sick we tossed out. If anyone above has any faith, and wonders if they will meet God at the gates of heaven, they surely will, no doubt God will ask, did you do anything that made your fellow man suffer, so you could make a Buck? You better learn to like really HOT spots.

  2. I’d kind of figured this as a case of the old “when in trouble, buy something expensive” rule. I wouldn’t be surprised if we see more activity …

  3. Wall Street is pretty much negative on UNH stock. The feeling is that they are overexposed to competition from not-for-profits, whose large reserves are limiting rate increases. They feel that UNH operating margins in the risk-based business will be falling over the next few years and that membership will grow little, if at all. On the other hand, Goldman Sachs has just elevated Wellpoint to a Buy because it has little exposure to not-for-profits.

  4. Sierra was only succesful in Nevada. Any attempt they made to go out of state failed miserably. I believe they peaked. Back in 2000 with the Texas debacle you could have bought the whole company for 200 million. The quality of Medical Care in the past has not been that good in Vegas, most of the seriously ill people go to LA for care. I would suggest that Dr Marlon maxed out his profits and is taking the money and running.

  5. jd,
    I talk to the Investor Relations guy, who I think is very good. He’s been there quite some time and is a former sell side analyst. Also, a former colleague is a highly successful mutual fund manager who owns 35 million shares of UNH in his funds and for clients and still likes it a lot for the long term. He first started to buy the stock in 1991 at an adjusted cost of $1!

  6. By the way, Barry, who are you calling at United? Is this investor relations or some inside line?

  7. Interesting. So, if they didn’t want to buy Sierra stock with United stock, that suggests that they think Sierra’s price reflects fundamentals whereas United’s does not. Or at least, they think Sierra is less undervalued than United right now.
    One thing I didn’t consider that makes a cash purchase less of an operational problem: United has a ton of cash. They also announced that they’re buying back over $4 billion in stock in 2007.
    Watching United feed itself on other plans reminds me of the movie Highlander: There can be only one! Whether United is McCloud or that big scary guy I leave for others to decide.

  8. jd,
    Sounds like a pretty good analysis. For what it’s worth, United got back to me this afternoon. They say they didn’t want to issue stock at current prices, and Sierra was willing to do a cash deal. For Dr. Marlon (Sierra CEO), whose stake is worth roughly $200 million, United pointed out that Nevada, where Marlon lives, has no state income tax while the federal capital gains tax stands at an historic low of 15%.
    The problem with Sierra’s Medicare Part D plan that insures through the donut hole will disappear at year-end, as it will probably not be part of the offering next year. United may also be able to fix Sierra’s relationship with HCA, since UNH just recently negotiated a new multi-year contract with HCA. Southwest Medical is apparently an outstanding business which would be extremely difficult, if not impossible, to duplicate. Given UNH’s long term record for building shareholder value, I think they deserve the benefit of the doubt at the very least.

  9. Good question, Barry. I don’t think it has to do with United not wanting to give away its stock at bargain rates. Sierra’s stock has performed nearly the same as United’s over the past year (both have gone down, but Sierra slightly more). In any case, stock swaps are a relatively cheap and pain-free way to buy a company. Might the Sierra leadership did not want to hitch a ride on United’s wagon and cash out instead?
    And didn’t Sierra’s CEO load himself up with an unusually large number of stock options? Maybe United didn’t want to transfer them into United shares in light of recent problems they’ve had.
    All speculation, of course.
    The bigger story is that United bought yet another strong regional health plan, and once again they paid a premium price to do it. When everyone else shies away because they think a purchase is too expensive, United swoops in and finds a way to milk it for all it’s worth. Oxford and Pacificare were two previous examples in the same mold. (By the way, Matt, United’s offer was 21% above Friday’s close before the market got wind of it.)
    Don’t be surprised if there is some loss of Sierra membership due to robust rate hikes on selected accounts or lines of business, along with service “efficiencies,” that allow United to fluff up those margins a bit.
    United paid about $5,000 per member-equivalent. This is far more than double what most health plans can get from selling themselves. Sierra made a mint. (By a “member equivalent” I mean one fully-insured pre-65 medical member. I counted Medicare Advantage members as 2MEs, PDP members as 1/2ME, and Medicaid as 1ME for a total of 540K MEs).

  10. Does anyone have an opinion as to how to interpret the fact that the deal is for cash and not stock? Does it mean that UNH didn’t want to give stock at its current depressed (at least in its opinion) price or did Sierra’s CEO and Board not want to take stock in light of the internal UNH issues stemming from the stock options backdating matter? I note that Sierra’s CEO will face a considerable capital gains tax for cashing out.

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