Doctor Networks to Merge in Deal Valued at $2.5 Billion

Accelerating the trend toward ever-bigger health-care conglomerates, two of the nation’s largest physician management companies, MedPartners/Mullikin and Caremark International Inc., said Tuesday that they will team up in a merger valued at about $2.5 billion.

The new venture would immediately become the second-biggest doctors group active in Southern California, where its members would make up about 15% of the region’s physicians and provide care for about 1.1 million people.

The transaction, in which MedPartners/Mullikin would acquire Caremark in an all-stock transaction, would continue a nationwide frenzy of deal making among companies that manage doctors’ practices.

It is one of the biggest deals yet involving group physician practices, which are responsible for about $800 billion in annual medical spending, according to analysts’ estimates.

MedPartners, based in Birmingham, Ala., and Caremark, of Northbrook, Ill., have recently become major forces in the Southern California market by acquiring several large medical groups that specialize in caring for HMO members. Among the big Southland medical groups to be folded into the new entity are Mullikin Medical and Friendly Hills.

Medical groups have been consolidating throughout California and the nation, largely in hopes of countering the growing influence of HMOs and other managed-care insurers. Many doctors deeply resent efforts by HMOs to slash doctor and hospital fees while at the same time reporting robust profits.

If the merger is completed, the new entity, to be called MedPartners Inc., will be second in size in the region only to Southern California Permanente Medical Group, the Kaiser-affiliated group whose doctors provide care for about 2.2 million Kaiser members.

MedPartners would have nearly 3,000 physicians--or 15% of Southern California doctors--under its umbrella in a five-county region. Those doctors would, in turn, provide care for roughly 11% of all Southern Californians who belong to HMOs, MedPartners said.

MedPartners executives said they expect the merger to have little effect on consumers in the short run. But longer-term, they said, the combination should benefit patients by creating a more efficient health-care company better equipped to reduce medical costs and coordinate patient care.

“This is a superior way to put physicians in a position to have a bigger say in the way health care evolves, to the benefit of patients,� said Mark Wagar, president of MedPartners’ West Coast region.

Larger groups “provide more opportunity to spend health-care dollars on patient education, disease prevention and care management,� said Jim Hillman, executive director of the Unified Medical Group Assn., a Seal Beach-based trade group.

Lowering costs and improving patient care is at least the promise of health-care firms such as MedPartners that have scrambled in recent years to form so-called integrated medical networks. These networks typically tie together numerous doctor offices, medical clinics, hospitals and other services in specific markets.

MedPartners helps manage doctor offices, negotiates contracts with managed-care insurers on doctors’ behalf and provides capital for the purchase of medical computer systems and future expansion.

The emergence of large medical groups is gaining attention among legislators and employers who are concerned that HMOs may be spending too much money on advertising and other business matters and not enough on medicine.

Employers in California and elsewhere are beginning to rethink their relationships with managed-care companies and to consider contracting directly with smaller, organized groups of doctors and hospitals.

But skeptics say the creation of huge doctor networks merely imposes more big bureaucracies on the health-care system and that physicians’ main goal is to capture more of the health-care dollar by supplanting HMOs.

Because of its size, MedPartners would appear to be in a strong position to go head to head with HMOs to contract directly with employers. State regulators earlier this year granted MedPartners’ Mullikin Medical unit a license that would allow the medical group to function similarly to an HMO.

MedPartners’ Wagar said the company has no plans to compete with insurers.

MedPartners and Caremark said their combined operations would have annual revenue of about $4.4 billion.

The deal, approved by directors of both companies, is subject to regulatory and shareholder approval. It is expected to close in the third quarter.

Larry R. House, chairman and CEO of MedPartners, would have those titles with the new firm. C.A. Lance Piccolo, Caremark’s chairman and CEO, would become vice chairman and a director.