Reality Plays Matchmaker

For a year, merger frenzy has gripped the health-care world. Giant drugmakers Merck & Co. and Roche Holding Ltd. have bought distributors and smaller rivals. Health-care providers Columbia Healthcare Corp. and HCA have agreed to combine operations. Amid the tumult, though, the insurance industry has been strangely quiet.

Until now. On June 14, Travelers Cos. and Metropolitan Life Insurance Co. announced they would combine their health operations in a transaction, valued at $1 billion, that will create the nation's largest health insurer (chart). MetLife also will buy Travelers' group life, disability, and dental-coverage businesses. "We decided to put Snoopy with the red umbrella," says Sanford I. Weill, Travelers' chairman.

On one level, the merger is simply a way for two industry also-rans to beef up. More important, though, is the huge shift it portends for the business. Travelers and MetLife, like many insurers, are rooted in traditional indemnity plans--under which they just pay medical bills as received. The new company will be almost single-minded in trying to move patients out of traditional policies and into HMOs and other such organizations. "There's no question that this deal is centered around managed care," says Gary D. Lake, a principal at consultant A. Foster Higgins & Co.

Rivals are racing to build managed-care businesses, too. CIGNA Corp. plans to increase membership in its health maintenance organizations by at least 10% annually for the next several years. Aetna Life & Casualty Co., in the midst of a strong drive to build a captive network of doctors' offices, estimates that the trend away from indemnity business will draw 80% of the $250 billion market into managed care by 1997.

Travelers and MetLife think they have found the right leader for that new reality. They are bringing in Kennett L. Simmons, former chief executive of United Healthcare Corp., a Minnetonka (Minn.)-based HMO, to oversee the combination. Simmons, who also built Prudential Insurance Co.'s HMO business, is well regarded in the industry.

BETTER DEALS. The new chief must quickly build up a managed-care operation almost from scratch. "It's clear that the top three are way ahead of Met and Travelers in terms of the managed-care base," says Lawrence G. Mayewski, senior vice-president of A.M. Best Co., an insurance rating agency. MetLife and Travelers have solid corporate-group health businesses, but both have lagged behind rivals in managed care. Combined, they have 391,000 consumers enrolled in HMOs. CIGNA has 3.1 million HMO customers, Prudential 1.5 million, and Aetna 1.2 million. One disadvantage of the MetLife/Travelers merger in offsetting this lag: Many of the two companies' managed-care networks overlap.

Still, the combined operations will likely negotiate better deals with doctors and hospitals. And back-office staff probably will be combined, cutting overhead. Indeed, say analysts, such efficiencies likely will drive more big deals in the sleepy insurance industry. Travelers and MetLife simply figured that fact out first.

Before it's here, it's on the Bloomberg Terminal.