Definity Health Corp., a St. Louis Park company born six years ago with one table in a borrowed conference room, agreed to be sold Monday for $300 million to UnitedHealth Group Inc. in a deal that gives the Minnetonka health care giant another piece of the growing segment of consumer-driven health plans. The acquisition gives UnitedHealth access to nearly 100 Definity corporate clients, including more than 20 Fortune 500 companies, and 500,000 customers. Definity is a pioneer in offering a new breed of health plans that combine high-deductible health coverage with personal spending accounts. As these health spending accounts move from a maverick product into mainstream use, other large insurers are likely to look for similar acquisitions such as Definity's closest competitor, Lumenos Inc. of Virginia, analysts said.
In the UnitedHealth deal, Definity will keep its name and management structure as it joins the Uniprise division of UnitedHealth.
Its clients get access to UnitedHealth's network of 460,000 doctors and providers and 4,000 hospitals and will benefit from the cost savings that accompany that size.
Eventually, UnitedHealth will merge its iPlan line of consumer products into the Definity line and Definity will be the brand name for all UnitedHealth's consumer-driven health plans.
"Definity has the tools for the consumer, passion for health care and name recognition," said David Delahanty, a human resources consultant with Mellon Financial Corp. "Even across the country they're viewed as being an innovator."
"The name is that golden," said Stephen Parente, an assistant professor at the Carlson School of Management at the University of Minnesota who has studied the Definity model.
Among others, UnitedHealth's acquisition of Definity gives it access to Definity's sophisticated Web site for helping consumers make health care decisions.
Definity has 450 employees, of which 160 are in Minnesota. The company has grown from 5,000 customers in 2001 to a projected 500,000 by January 2005. Revenue for next year is projected at $100 million, up from $65 million this year.
The $300 million transaction -- all in cash -- will benefit a number of employees who received stock options over the years, as well as the institutional investors who provided $85 million of venture capital through three rounds of financing. The largest stakeholders include Merrill Lynch Ventures, Ultra Partners, VantagePoint Partners and Brightstone Capital.
Definity's original long-term plan was to take the company public in the first half of 2005. But the $300 million offer at this point was too attractive to pass up for a roll of the dice later in the stock market, experts said.
"A public offering was not without risk, and it would have been an incredible diversion of attention," said Chris Delaney, Definity's marketing vice president. "It's tough to change health care and turn the company upside down for an IPO at the same time."
UnitedHealth and Definity hope to receive approval to merge from the Federal Trade Commission and close the deal by the end of the year.
Part of Medicare reform
The consumer-driven insurance segment got a boost last year when health savings accounts were approved as part of the Medicare reform legislation. Previous account-type plans had restrictions that made them less attractive to consumers, such as portability from job to job.
The new health savings accounts, or HSAs, are similar to 401(k) plans. They can be employer- and employee-funded, unused portions can be invested and employees take the money with them if they change jobs.
Under the HSA model, consumers pay for their health care out of the accounts up to a certain level, such as $1,000. The philosophy is that consumers will shop around for the best prices on procedures and medications and the best outcomes for treatment. Catastrophic insurance covers big-ticket expenses.
"I really like the deal. I really like the company," Piper Jaffray analyst Ryan Stewart said.
The Definity acquisition follows UnitedHealth's purchase a year ago of Indiana-based Golden Rule Financial Corp., which offers a similar consumer plan for individuals and small employers. Next to Golden Rule, Stewart said, "Definity represents the next best asset along the consumer-directed development curve."
HSAs are not for everyone, so there is still a lot of guesswork about their popularity going forward, but industry observers still think the potential is real for them to take off.
"Consumers, whether they like it or not, are going to be more and more central to the health care purchasing equation," said Tracy Bahl, chief executive of Uniprise. "At the end of the day, it's all about assembling the tools and the resources to help the consumer."
David Phelps is at dphelps@startribune.com.