Blue Cross Joins the Crowded Field Seeking Health Net

Add Blue Cross of California to the rapidly growing Health Net fan club.

Blue Cross on Tuesday became the fourth outside suitor to make a bid for Woodland Hills-based Health Net. It proposed to merge the state’s second-largest health maintenance organization with its much smaller HMO unit.

The frenzied bidding for nonprofit Health Net underscores how the HMO is viewed as a valuable asset at a time of industry consolidation. Health Net “is a very well-managed, rapidly growing HMO, and a lot of people think it has a great deal of potential,” said Albert Lowey-Ball, a health-care consultant in Sacramento.

Lowey-Ball said HMO mergers have been increasing recently, in part because some HMOs are seeking to improve efficiency and profitability by spreading operating costs over a greater number of members.

“In that framework, Health Net is a glittering prize,” Lowey-Ball said.

Ownership of the HMO is a prize that may elude Health Net’s management, which triggered the bidding for the HMO with its offer. It wants to convert it into a for-profit enterprise after acquiring it.

The bidding so far has called into question Health Net management’s contention that the $108 million it offered for the HMO reflects its “fair market value.” The three for-profit suitors have outbid management by a substantial margin.

The three are Humana Inc., a major hospital operator based in Louisville, Ky.; Shamrock Investments, a Los Angeles investor group, and Pacific Mutual Life Insurance Co., a large insurer based in Newport Beach.

Blue Cross, a nonprofit organization, proposes a straight merger that would keep both entities nonprofit and would not involve an exchange of cash.

Ironically, Health Net was created by the former Blue Cross of Southern California in 1977. After Blue Cross of Southern California and Blue Cross of Northern California merged in 1982 to form the current Woodland Hills-based entity, Health Net waged a bitter fight to win its independence in 1986.

Blue Cross, the state’s largest health insurer, has since started another HMO, CaliforniaCare, which has 325,000 members. Blue Cross wants to merge that unit with 840,000-member Health Net.

Health Net spokesman Jim Lucas said Blue Cross is barred “from interfering in our business” under a court injunction dating back to Health Net’s fight for independence. He declined to say if Health Net considered Blue Cross’ offer a violation or to comment further, except to say that the HMO expects to get even more offers.

Blue Cross said its merger proposal would eliminate the need for Health Net’s management, or the other bidders, to incur the millions of dollars of debt that would be necessary to purchase Health Net.

(State law requires that the payment be made to a charitable foundation, on the premise that the public should benefit from the HMO’s success to date under tax-exempt status. Final approval for any takeover would be made by the state Department of Corporations.)

Blue Cross, which has rebounded from serious financial problems a few years ago, said it has the cash to fund Health Net’s expansion. The 5-million-customer organization had assets of $1 billion as of May 31.

Blue Cross spokesman Tony Harris, noting that Health Net’s management said its plan was partly aimed at helping the HMO gain access to capital markets, said Blue Cross’ merger idea “meets the objective they’ve repeatedly stated, which is getting capital to increase enrollment and remain competitive.”