HMO Cites $20 Million in Failed-Merger Costs

Health Systems International Inc. said Monday that it spent $20 million--about $10 for each of its nearly 2 million members--to pay lawyers, investment bankers and other expenses related to its failed merger with WellPoint Health Networks Inc.

The report is the first official accounting of how costly the nine-month merger attempt was. The two Woodland Hills-based managed-health-care companies called off the deal in late December when their chairmen couldn’t agree on how the new firm would be managed.

Critics complain that mergers of managed-care companies are diverting money that could go toward improving medical care.

WellPoint will disclose its merger costs Feb. 27 with its quarterly financial results, a spokesman said.

Health Systems said Monday that a charge of $6.7 million related to merger expenses lowered its fourth-quarter net income to $23.4 million, or 48 cents a share. In the year-ago quarter, a merger charge of $672,000 resulted in net income $23.9 million, or 48 cents.

Health Systems, the corporate parent of the Health Net health maintenance organization, said its enrollment last year soared 31.6% to 1.94 million, mostly due to acquisitions of HMOs in the Northeast. Enrollment was “essentially flat” during January, the company said, citing “confusion” among customers in late 1995 as a result of the planned merger.

Chairman Malik M. Hasan said the company this year will seek to lower nonmedical costs, such as administration and advertising expenses. The company has frozen salaries for all employees, including senior management, for this year.

That move seems aimed, in part, at blunting criticism from doctors, employers and politicians who have complained that HMOs are enjoying healthy profits even as they demand rate cuts from doctors and hospitals.

“We cannot ask our providers to absorb cuts unless we are also willing to tighten our belts,” he said.

Company spokesman Don Prial said the salary freeze also aims to “show the political community that we’re very sensitive to questions of price and expenditures.”