Anthem's

(ATH) - Get Report

plan to buy

Trigon Healthcare

(TGH) - Get Report

for $4 billion is part of an ongoing trend among Blue Cross Blue Shield operators to expand and compete more effectively with bigger players. But analysts say industry dynamics make further consolidation across the managed care industry unlikely.

"This is really a special case," said Sheryl Skolnick, an analyst at Fulcrum Global Partners.

Anthem, which went public last fall, said Monday that it was acquiring Trigon to move into a "very important new Southeast region." Trigon's shareholders will receive $30 cash and 1.062 shares of Anthem in exchange for each Trigon common share. The deal is expected to close in three to six months, pending regulatory and shareholder approval.

Dwindling Pool

Mergers among Blue Cross and Blue Shield plans have reduced the number of Blues insurers by about a third over the past six years, and analysts expect this trend to continue. "But I don't know that you'll see much consolidation outside of the Blues world," said David Shove, an analyst at Prudential Securities.

That's because many larger firms continue to struggle with operational problems and simply aren't in a position to acquire a company like

Humana

(HUM) - Get Report

or

Oxford Health

( OHP), which are considered by some to be the perennial acquisition targets.

"

United Health Group

(UNH) - Get Report

certainly isn't looking,

Health Net

(HNT)

got burned,

PacifiCare

( PHSY) and

Aetna

(AET)

are in no position to do anything, so that just leaves

Cigna

(CI) - Get Report

, which has not been the most consistent performer," said Skolnick. "As you go down the list, there are more candidates than there are acquirers."

Aetna, which announced 6,000 job cuts in December, posted a first-quarter loss of $2.83 billion, including a $2.97 billion noncash charge, mostly for the writedown of the value of past acquisitions. PacifiCare, which has also struggled to realign costs amid escalating medical expenses, recently said it would take a charge of $897 million in the first quarter.

Robert Mains, an analyst at Advest, said large acquisitions in the managed care space "haven't worked out too well" in the past and that companies may not want to "revisit those old blunders."

In addition, although the outlook for the industry overall remains bright, there are a couple of looming problems that could keep a major takeover from occurring.

"The patients' bill of rights legislation looks like it's dormant but could be resuscitated, and there is a large class action lawsuit

against HMOs in Florida," Mains said.

A Bit Rich

Meanwhile, analysts say valuations in the group are beginning to look lofty. HMO stocks, as measured by the Morgan Stanley Healthcare index, have soared 44% since the start of the year amid hopes of double-digit earnings growth. Trigon has zoomed 41% while Anthem is up almost 34% year to date.

The results for the first quarter haven't disappointed so far. Both Anthem and Trigon reported higher first-quarter earnings on Monday and raised their profit outlooks for the full year.

UnitedHealth Group posted a 39% jump in first-quarter earnings and predicted that profits would rise 24% to 25% in 2002.

WellPoint

(WLP)

reported a 46% jump in first-quarter profits and raised guidance for the remainder of the year. In addition, Humana recorded an 18% rise in first-quarter earnings.

"Most HMOs have been pricing their policies ahead of rising hospital costs pretty successfully for the past two years, and that's unlikely to change this year," said Tom Goetzinger, an analyst at Morningstar.

Still, he added that most of the managed care stocks under his coverage are trading at a premium to fair value, with only one stock --

First Health

( FHCC) -- trading at a discount.

"Even with stellar profit numbers and strong membership growth numbers, they look expensive," he said.