Blue Shield of Calif., Lifeguard to Join Forces

Blue Shield of California has agreed to take control of Lifeguard Inc., a health maintenance organization with about 200,000 members concentrated in the San Jose area.

The merger announcement Thursday comes only weeks after San Francisco-based Blue Shield outbid rivals to win as many as 350,000 more CalPERS members. With the addition of Lifeguard, a well-regarded but financially struggling HMO, Blue Shield said its membership rolls probably would increase by almost 25% to 2.8 million by next year, its biggest growth spurt in years.

Financial terms of the deal were not released. Blue Shield and Lifeguard are not-for-profit entities that were started by physicians.

Some analysts viewed the merger as a sign of renewed consolidation in the managed-care industry after a relative lull in the last couple of years.

“I think that’s going to be typical,” said Clifford Hewitt, a health-care analyst at Legg Mason, a Baltimore brokerage. “It’s just become harder and harder for these [smaller] plans to be viable.”

Although Lifeguard would maintain its name and operate as a subsidiary of Blue Shield, the deal would reduce the number of commercial HMO companies in California to fewer than 20, from about 30 five years ago, said Allan Baumgarten, an independent analyst in Minnesota who researches HMOs in California and other states. Among those no longer doing business in California are United Healthcare and Maxicare.

Consumer advocates expressed concerns about the dwindling number of managed-care companies operating in the state, saying that greater market concentration will reduce choices for consumers and employers.

But Dr. Mark Smith, president of California’s Healthcare Foundation in Oakland, said Lifeguard’s members probably will benefit by becoming part of a stronger health plan with deeper resources.

In a conference call Thursday, Blue Shield’s chief executive, Bruce Bodaken, and his counterpart at Lifeguard, Mark G. Hyde, said the merger would strengthen the not-for-profit health-care sector in the state.

Blue Cross of California, which is owned by publicly traded WellPoint Health Networks Inc. of Thousand Oaks, is the state’s largest medical insurer with about 6.6 million members, followed closely by nonprofit Kaiser Permanente.

Bodaken said there would be no immediate changes for Lifeguard members.

The merger would double Blue Shield’s membership in Silicon Valley, where Lifeguard’s roster of employers includes Hewlett-Packard Co. and IBM Corp. Blue Shield also would vastly increase its presence in the San Luis Obispo area, where Lifeguard has about 22,000 members.

Hyde said Lifeguard has been profitable in the first four months of this year. But the company’s latest filing with the Department of Managed Health Care showed that it lost $24 million last year and that its assets as of Dec. 31 dropped by more than half from the previous year to $43 million. Lifeguard’s membership fell sharply this year when it lost 30,000 CalPERS enrollees.

Blue Shield said it would extend a line of credit to Lifeguard upon completion of the merger, which company executives are expecting within two months.

Lifeguard is unusual among HMOs in California because it pays its doctors on a fee-for-service basis, instead of capitated or monthly per-member fees other HMOs pay to physician groups.