UNITED HEALTHCARE TO BUY HUMANA -

United HealthCare Corp. announced yesterday that it will acquire Humana Inc. in a $5.5 billion stock swap, creating what some experts said would be the nation's largest managed health care company.

The deal continues a consolidation of power in the health care industry and a broader wave of corporate mergers and acquisitions.

The combination, which would require regulatory and shareholder approval, would have annual revenue of $26.9 billion and earnings of $755 million, United Chairman and chief executive William W. McGuire estimated.

United ranked largest among publicly traded managed-care companies as of Dec. 31, with 6.2 million insured members, and Humana ranked third with 5.6 million, according to Douglas Sherlock, an industry analyst. Those figures do not include members of employer-sponsored health plans for whom the managed-care company provides only administrative services. The deal would vault United above Kaiser Permanente, a nonprofit company, which reported 9.1 million members as of April.

Overall, the combined business would deliver health care to 19.3 million people, United officials said.

The merger would over the next couple of years enable the companies to reduce administrative, marketing and other overhead expenses by 3 percent to 5 percent, saving as much as $245 million annually, United said. The company declined to say how many jobs would be eliminated.

"What people want today includes flexibility and choice of providers . . . and greater affordability," United's McGuire said in a conference call with stock analysts. "To achieve these objectives, it is critical to create a larger enterprise."

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For Humana, the deal represents the end of a long and winding journey, from operating nursing homes to running hospitals to finally concentrating on health plans. The company jettisoned its hospitals years ago after finding them a poor fit with its managed-care business. More recently, Humana has been selling its health maintenance organization clinics in favor of a looser style of managed care based on networks of independent physicians.

Largely as a result of the combined company's increased bargaining power, medical payments to doctors, hospitals, pharmacies and other similar groups would be reduced by 0.75 percent to 1 percent, an annual savings of as much as $210 million, the company said.

The deal reflects a shift in the priorities driving managed-care mergers, said Joseph France, an investment analyst at Credit Suisse First Boston. "For years, consolidation was designed to increase clout with providers so you could go in and beat up the doctor and the hospital and get a better price," he said.

Now, that aim is taking a back seat to reducing overhead and offering consumers more choices of doctors and benefits, he said.

The companies overlap most significantly in Illinois, Ohio, Texas and Florida, United Senior Executive Vice President Stephen Hemsley said. Though United does business in the Washington area, Humana sold its money-losing Washington area operations to Kaiser last year.

Stockholders would receive one United share for every two Humana shares.

On the theory that greater size translates into improved efficiency and market clout, the health care industry has consolidated in recent years. Mergers include Aetna Inc.'s purchase of U.S. Healthcare Inc. and its planned acquisition of NYLCare Health Plans; PacifiCare Health Systems Inc.'s purchase of FHP International, and Cigna Corp.'s purchase of Healthsource. United has already swallowed MetraHealth, which was formed by Travelers Group Inc. and MetLife. Hemsley expressed confidence that United would avoid the pitfalls experienced by other companies that have resulted in unforeseen expenses and customer service problems. CAPTION: COMPANIES IN PROFILE: UNITED HEALTHCARE Business: Offers comprehensive health care management services through organized health systems and insurance products in all 50 states, the District, Puerto Rico and internationally. Based: Minnetonka, Minn. Established: 1974 Employees: 29,600 1997 revenue: $11.56 billion 1997 net income: $460 million Yesterday's closing stock price: $62.50, down $1.62A Web site address: www.unitedhealthcare.com HUMANA Business: Operates health insurance businesses and provides coordinated health care through health maintenance and preferred provider organizations in 16 states and Puerto Rico. Based: Louisville Established: 1961 Employees: 19,500 1997 revenue: $7.88 billion 1997 net income: $173 million Yesterday's closing stock price: $29.87A, up $3.62A Web site address: www.humana.com SOURCES: Bloomberg News, company reports CAPTION: Louisville-based Humana, which was co-founded by Chairman David A. Jones, left, will get a $5.5 million stock swap to merge with United HealthCare. United declined to say how many jobs would be eliminated.

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