Lifeguard, Blue Shield discuss 'relationship'

Lifeguard Inc. is in discussions with fellow managed-care company Blue Shield of California to develop a "closer relationship," according to a May 13 memo sent to health insurance brokers.

The memo was sent out amid growing speculation that Blue Shield has or would soon purchase Lifeguard, whose officials have publicly denied that such a deal has taken place but are offering no other comment regarding a possible purchase or merger.

"You may have heard rumors that Lifeguard has been sold to Blue Shield," says the Lifeguard executives' memo to brokers. "We have no agreement with Blue Shield whatsoever nor have we discussed a merger."

But the company doesn't rule out a formal relationship with Blue Shield, the largest nonprofit managed-care company in California with 3.1 million members, an estimated 8 percent of whom live in Silicon Valley. That's compared with Lifeguard's 250,000 members, an estimated 33 percent of whom are in the valley.

"As fellow nonprofit companies, we have discussed ways our companies might develop a closer relationship (affiliation) that would be beneficial for both," the memo says.

Blue Shield officials couldn't be reached for comment.

A relationship of any kind would be big news for the companies, physicians and patients. In addition to being the largest nonprofit managed-care company in California, Blue Shield also is among the largest in the state.

Health insurance experts say Blue Shield, through any affiliation, would likely want to tap into Lifeguard's extensive medical provider network in Silicon Valley.

Lifeguard is one of the few managed-care companies that contracts with many local physicians, such as the Los Olivos group of obstetricians and gynecologists in Los Gatos. While many large managed-care companies contract with large medical groups, Lifeguard has focused on contracting with large groups and independent physicians.

Lifeguard officials said the company's memo speaks for itself and wouldn't offer further comment. When a decision will be made about the possible affiliation is unknown, but Lifeguard did schedule a May 16 meeting with brokers to discuss its business plan, new products and a bonus program for health insurance brokers.

Some brokers in Silicon Valley have stopped selling Lifeguard's products in anticipation of some announcement about what's going on with the only San Jose-based managed care company.

Andrea Trudeau, financial consultant with Advanced Professionals, a health insurance broker in San Jose, says her company has steered away from Lifeguard because of its uncertain future.

"You wouldn't want to sell it to an employer and then have the company get sold," she says.

When one health plan buys another, it's typically chaotic.

"Sometimes it can take two years for things to settle down," says Ms. Trudeau.

Peter Kuhn, health insurance broker with IBP Insurance Services in San Jose, says Lifeguard is a homegrown managed-care company created by doctors for doctors in Silicon Valley. The company often provided health insurance to many startup companies when others wouldn't.

To that end, Lifeguard has a good reputation in Silicon Valley and could benefit any company through a purchase or affiliation. But Lifeguard's absorption by another company could hurt employers in this market by reducing competition.

In the last five years, the number of health insurance companies offering products in Silicon Valley has dropped from about 30 to 10, Mr. Kuhn says.

"Lifeguard has been a quality alternative health plan," Mr. Kuhn says. If the company were purchased, "we would be concerned for our customers."

The company lost money in 2001. Though Lifeguard is late filing its year-end financials with the state, the Business Journal has obtained copies of the managed-care company's quarterly financials from last year.

Lifeguard lost an aggregate $17.3 million for the combined four quarters of last year.

"That was a great disappointment," says Tom Carter, chief marketing officer at Lifeguard. In the first quarter of this year, the company made money, and it doesn't expect to lose money in 2002.

A purchase or affiliation likely would need regulatory approval. Whatever happens to Lifeguard, officials say, it will survive.

"We're confident in our future, irrespective of the outcome of our discussions," Lifeguard said in its memo.