When the planned tie-up between two US health management organizations—United Healthcare and Humana—collapsed last summer, some Wall Street analysts breathed a sigh of relief, glad that these two big health maintenance organizations (HMOs) would not have a chance to augment the already large catalog of failed mergers. PacifiCare’s troubled 1996 acquisition of FHP, for example, led to a 40 percent decline in operating margins. Aetna’s excessively expensive purchase of US Healthcare destroyed up to $500 million of market value within a month of the deal’s completion.

(Terms printed in italics are defined in the glossary)

Do such well-publicized difficulties mean that no HMO mergers make sense? Since 1993, 94 deals have taken place among US health care payors. The authors studied in detail 15 of these agreements, representing about 90 percent of the total transaction volume of $24 billion. We found that acquirers actually created significant value. In the short term, they increased their postacquisition market value by almost $6 billion and improved their operating margins through better selling, general, and administrative (SG&A) costs, as well as through medical-cost synergies. In the medium term, they increased returns to shareholders. Payors that failed to create value often fell...