Deal faces more scrutiny

United Health Group's $2.6 billion buyout of Sierra Health Services has passed a key step with approval from Nevada's insurance commissioner, but it now faces scrutiny from federal antitrust officials and state regulators.

Next up are decisions from regulators in California and Arizona, where Sierra Health has enrollees in its Medicare Part D prescription drug benefit. Sierra Health's presence in those states is limited enough that insurance commissioners haven't even called for hearings, said Peter O'Neill, Sierra Health's vice president of investor and public relations. The companies have submitted their documents to both states, and executives expect quick decisions from each after Nevada Insurance Commissioner Alice Molasky-Arman issued her decision Monday.

In addition to state approval, the Sierra Health purchase must get the nod from the federal Department of Justice, which is vetting the proposal for its antitrust implications. It's there that officials of Sierra Health and UnitedHealth are focusing their efforts. Both companies are still submitting documents the agency requested in June; O'Neill expects the companies will be "substantially compliant" with the information request sometime in September. Then, the department will begin its formal review, which could continue well into the fall, O'Neill said.

The biggest opponents to the deal plan to come out in force during the federal investigation.

The American Medical Association in March asked the Department of Justice to block the sale, and Monday, after the insurance commissioner agreed to the buyout, the Nevada State Medical Association and the Service Employees International Union released a joint statement saying they also would ask the federal agency to stop the proposal.

The groups are gathering new information for the federal government, including studies of the buyout's effects on specialty care and further analysis of the deal's economic repercussions. Because the proposal involves the relatively new arena of insurance mergers and acquisitions, rather than the more-common deals revolving around hospital operators, Matheis said he sees an opportunity to convince federal regulators that the Sierra Health buyout could hurt consumers.

"I don't think there is such a thing as a done deal," Matheis said. "There are so many new issues on the table that nobody can predict how this is going to come out."

Matheis and others seeking to halt the buyout are raising the specter of dwindling competition and the effects concentrated market power could have on consumers' access to health care.

"If this acquisition is allowed to go forward, that means a few big companies -- Cigna, Aetna, Wellpoint, UnitedHealth -- will go around the country like Pac-Man, devouring every freestanding, small, commercial competitor that exists," Matheis said. "Three to five years from now, we'll be looking at a situation where everybody's insurance will be handled by five or six companies, and they will make decisions about which doctors you pick, which hospitals will be contracted and what services will be contracted in those hospitals."

Jane McAlevey, executive director of the SEIU, said conditions placed on buyouts in other markets have traditionally been unenforced or ignored.

"This proposed merger is too big, and too dangerous to health-care access and to health-care quality," McAlevey said. "I don't see an avenue for conditions" that will satisfy the concerns of the union, whose members are both covered through Sierra Health and work with Sierra Health insureds in local hospitals.

In addition to asking the Department of Justice to prevent the purchase, SEIU officials want the Nevada attorney general's office to get involved, perhaps through an injunction that would stop the deal.

Nevada Gov. Jim Gibbons also has asked the attorney general's office to "take any and all legal steps to prevent adverse outcomes," and he's urging the Department of Justice "to closely examine the monopolistic potential in their review of this merger."

"I am deeply disturbed by some of the potential monopolistic tendencies that can result from this merger and by the constraints in Nevada law that prevented the insurance commissioner from acting more forcefully to curb these potential threats," Gibbons said in a statement.

Nicole Moon, a spokeswoman for Attorney General Catherine Cortez Masto, said the state agency has the power to issue an injunction stopping the deal, but state attorneys are still reviewing the insurance commissioner's decision to determine whether it complies with the law and serves the best interests of Nevadans. The office has no plans to announce any actions related to the merger, Moon said.

Despite concerns about the buyout, industry analysts and executives of Sierra Health and UnitedHealth said they believe the proposal will survive the scrutiny of the Department of Justice, and that the sale will close by the Feb. 29 deadline the Nevada insurance commissioner set Monday.

O'Neill said the conditions that the insurance commissioner placed on the buyout should address worries about market concentration. The conditions bar the companies from raising premiums or cutting benefits to cover the costs of the acquisition.

O'Neill said the insurance commissioner's decision indicated that regulators who consider the larger market, and not just the smaller segment of fully insured HMOs, will find that statewide competition for insurance customers is strong enough to thrive in the wake of the sale. In addition to commercial HMOs, businesses and consumers can choose from PPOs and point-of-service plans from companies besides Sierra Health and UnitedHealth, and a large number of self-insured companies, including many of the city's resort operators, could also peel away market share.

O'Neill noted that Sierra Health's membership increases have been smaller in 2007 than in previous years, a trend he partly credits to the increasing number of insurers moving into Nevada to take advantage of the state's population growth.

"Both companies are confident (of approval) at this point," O'Neill said. "We have believed from the beginning that the market-share concerns are unfounded."

David Trout, owner and publisher of The M&A Researcher, placed the odds of the merger happening at "90 percent or better."

It's common for governors, attorneys general, doctors' groups and community activists to take strong positions on health-care megamergers, but such involvement rarely results in a deal's overthrow, Trout said.

The Department of Justice will be looking not for market dominance in a couple of geographic areas or specific product lines, but for "a broader impact that can't be remedied," he said. And Sierra is already so dominant in parts of Nevada that the merger with UnitedHealth won't significantly alter the competitive climate, he added.

Federal attorneys would likely factor the Nevada insurance commissioner's findings into their decision. Additional conditions to the deal aren't probable, though similar conditions using different language are possible, he said.

Megan Gerking, a spokeswoman for the Department of Justice, said only that the bureau is continuing to review the merger. She declined to disclose a time line for a decision, and she wouldn't discuss whether Molasky-Arman's final report would affect the federal government's conclusion.

"UnitedHealth is good at this process, and they've factored (the opposition) in," Trout said. "I think they're in a pretty decent position."