FOUNDATION AMONG HMO MERGER PLAYERS.

Byline: Steve Sakson Associated Press 

Two more merger deals involving big managed health care companies are in the works, as executives try to cope with heavy competition and continued pressure of rising medical costs.

California-based Foundation Health Corp., which runs HMOs and other health networks in 10 states serving 3 million people, said Monday it is discussing a stock-swap merger.

In the second deal, two of the most respected nonprofit HMOs - Oakland-based Kaiser Permanente and Seattle-based Group Health Cooperative of Puget Sound - said they have begun merger talks.

Foundation wouldn't name the potential partner, but said if the deal takes place it would result in significant ``synergies'' for the combined company.

Analysts said the language suggests the partner is probably a direct geographic competitor. Speculation centered around Health Systems Inc., which runs California's HealthNet health maintenance organization and serves 2 million people in eight states, or WellPoint Health Networks Inc., which serves 4 million people, mostly through its California Blue Cross subsidiary.

The Kaiser-Group Health talks, ongoing for about a month, could result in anything from expansion of the companies' current joint marketing arrangement to a full merger, said Denise Honzel, vice president and health plan manager of Kaiser's Northwest division.

Managed care companies have been facing a financial squeeze this year. As they expand into new regions, they increase competition, resulting in lower rate increases. As enrollment grows, the companies have found it more difficult to keep a handle on medical costs, which have risen faster than anticipated.

Most HMOs plan rate increases this year and next of anywhere from 3 percent to 7 percent, ending several years of flat or declining rates.

At the same time, HMO executives theorize that if they grow bigger they can economize on administrative costs and improve their bargaining clout when setting their payment rates for doctors and hospitals.

Other major deals resulting from this trend this year are August's $2.1 billion purchase of FHP International Inc. by California competitor PacifiCare Health Systems, and April's $8.9 billion purchase of Pennsylvania-based U.S. HealthCare Inc. by Aetna Life and Casualty Co., based in Connecticut.

Foundation surprised analysts in its announcement by saying that the deal would likely value the company below its closing share price Friday of $36.12-1/2.

That statement, which the company refused to clarify, helped send its shares down $2.12-1/2, or 6 percent, to $34 on the New York Stock Exchange.

The company apparently feels there are other parts of the deal that will make it worthwhile for shareholders, analysts said.

``They will have to make a case for a combination that has more earnings power, better market position and better strategic position than either of the companies on a stand-alone basis,'' said analyst Edmund Kroll of Lehman Brothers in New York.

Foundation, like other managed care companies, has seen its profits and its share price hurt by rising costs, especially for drugs. But analysts have maintained optimism about the company, partly because of its multifaceted growth strategy, including buyouts of smaller health plans, and diversification into government health programs such as Medicaid for the poor and for the relatives of armed forces personnel.

Kaiser, the nation's largest health maintenance organization with some 8 million members, also has been growing through acquisitions and start-up operations in cities around the country. Group Health, which serves Washington state and northern Idaho, has won wide praise for the quality of its care and consumer satisfaction.

The two organizations, both about 50 years old, are facing the same cost pressures as the for-profit companies, yet since they don't sell stock, they don't have easy capital available to finance expansion.

Kaiser's Honzel said larger employers with workers in several locations want to minimize their heath benefits costs by dealing with fewer health plans.

A Kaiser-Group Health merger would provide national or Northwest regional employers ``with one health plan that can meet most of their needs,'' she said.

While the managed care consolidation trend could result in lower costs for consumers, skeptics suggest that larger organizations are much more likely to place the interests of patients behind those of the corporation.

John Penshorn, industry analyst at Piper Jaffray in Minneapolis, said heightened competition is forcing companies to avoid the kind of cuts in care that have caused a backlash against them among some patients.