UnitedHealth's California Clash

UnitedHealth (UNH Quote) is starting to look like a company with too much on its plate.

For months, UnitedHealth leaders have been consumed by an escalating probe into the well-timed stock options they received in the past. That distraction has come at a crucial time for the company, as it seeks to overcome challenges tied to big recent acquisitions.

Take last year's buyout of PacifiCare, for example.

The acquisition greatly expanded UnitedHealth's presence in California, where competitors like nonprofit Blue Cross/Blue Shield have long dominated the market. But UnitedHealth made an important concession when pushing that acquisition through. UnitedHealth agreed to sever a close relationship with Blue Shield of California, which had been leasing its network of health care providers to the company for years, in response to antitrust concerns from regulators.

UnitedHealth, in turn, set out to establish its own health care network in California before its contract with Blue Shield expires. In the meantime, however, Blue Shield has decided that it would like to keep some of that business for itself.

In an aggressive move last week, Blue Shield offered attractive incentives for California employers that are willing to switch from away from UnitedHealth and sign up for its own plans instead.

"Our PPO network, medical management and administrative services are second to none in California," boasted Paul Markovich, senior vice president of Blue Shield's large-group business unit. "This offer guarantees that our administrative fees and performance guarantees are competitive with the largest national plans. We are so confident in our network coverage that we are willing to put financial guarantees around provider disruption."

Specifically, Blue Shield has promised to lock in current UnitedHealth rates for at least a year. It has offered multiyear agreements to those who prefer them as well.

For its part, UnitedHealth claims it now offers an even larger network than Blue Shield once provided the company. As a result, the company expects to hold on to its big California-based clients with "minimal, minimal disruptions."

Tom Epstein, vice president of public affairs for Blue Shield of California, says it is "still a little early" to measure customer response to his company's recent overture. But he expressed confidence in a Blue Shield network that, he estimates, boasts thousands more California physicians than UnitedHealth's own.

"We're certainly letting potential customers know about it," Epstein told TheStreet.com on Monday. "We're just capitalizing on an opportunity."

UnitedHealth stock inched up 43 cents to $43.93 on Tuesday, but remained near the bottom of its 52-week range.