PACIFICARE BUYING OUT RIVAL FHP.

Byline: Michael White Associated Press

Two big health maintenance organizations are combining in a $2.1 billion buyout.

PacifiCare Health Systems Inc. said Monday it will acquire competitor FHP International Corp. for cash and stock.

The buyout is the latest in a 3-year-old consolidation trend in the health care industry, but it also comes at a time when HMO profits and their stocks are weakening due to unexpected costs for doctor and hospital care and prescription drugs.

Analysts said that, due to its larger customer base, the combined company can reduce its per-patient costs and argue for volume discounts from medical care professionals.

``PacifiCare can go back to doctors and hospital groups and ask for more of a discount,'' said Thomas Snow, an analyst with New York-based Buckingham Research Group.

The deal also links two leaders in the new, but growing sector of the HMO business serving the elderly and disabled on the federal Medicare program. The combined company is expected to more rapidly sign up Medicare patients who, like others, are moving out of traditional health insurance.

Both companies are based in Orange County. Each has just under 2 million members - about half in California and the rest in 14 other states and Guam. The business combination will give PacifiCare about 436,400 customers in Los Angeles County.

Some layoffs are expected, but executives said it was too early to predict how many. While the service areas of the two companies overlap substantially in California, executives said they don't expect many members will be forced to change doctors.

The deal drew immediate condemnation from consumer activists who are pushing an anti-HMO ballot issue in California.

``These mergers come at the expense of patients, who are the subject of cost-cutting, greed driven diminution of health quality,'' said Harvey Rosenfield, a protege of consumer activist Ralph Nader.

Medicare is a key to the combined company's growth, executives said.

While the program has over 33 million beneficiaries nationwide, only about 3.7 million get their care through HMOs, said Westcott W. Price, III, FHP's president and chief executive.

Federal health officials and congressional leaders are trying to get more elderly people to join HMOs to cut the spiraling cost of the program.

The combined PacifiCare-FHP serves more than 900,000 Medicare recipients, the most of any HMO.

PacifiCare is one of the nation's fastest-growing HMOs, and analysts had already projected its profits to grow nearly 20 percent per year as enrollment rises rapidly.

However, it is also among the companies that have suffered setbacks this year as medical costs rose while competitive pressures prevented rate increases.

PacifiCare has said it is compensating by consolidating customer service centers and lowering other overhead costs. It has also raised rates 2 percent to 4 percent, analysts say.

It suffered an embarrassment this spring when the state ordered it to stop discouraging doctors from giving children a new chicken pox vaccine.

In addition, PacifiCare and FHP have had to set aside tens of millions of dollars this year to handle allegations that they overcharged the federal government to treat its employees.

FHP is not in as strong a position as its neighbor.

It is nearing completion of a reorganization that involved divesting its staff-operated medical centers and four hospitals and cutting its work force by about 4 percent.

The acquisition agreement calls for FHP shareholders to receive $35 per share, half of the payment in cash and half in PacifiCare common stock.News of the deal caused FHP shares to zoom $7.37-1/2 to $35.25 on the Nasdaq Stock Market. PacifiCare shares also rose, gaining $5 to $72.75.

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Box: (Color) HMO buyout

A look at PacifiCare Health Systems I nc. and FHP International Corp. two of the country's biggest HMOs. PacifiCare plans to buy FHP for $2.1 billion in cash and stock.

AP/Wm. J. Castello, Steve Sakson