Coventry Health Care, the Bethesda-based managed care company, yesterday announced it has signed an agreement to acquire health benefits services company First Health Group Corp. for $1.8 billion in cash and stock, extending its reach nationwide.

The Downers Grove, Ill., company is the latest in a series of acquisitions that Coventry has made in recent years in an effort to become more competitive. The company has said that larger firms have more leverage with hospitals, doctors and pharmaceutical companies when negotiating costs and also have better access to capital.

Coventry's stock dropped 11 percent, or $5.76, to close at $46.29. Some analysts, pointing to First Health's 19 percent drop in second-quarter earnings, questioned the price of the deal, and several said they did not see the acquisition giving Coventry a competitive advantage.

"Both companies will still struggle against the Blue Cross Blue Shields, the Cignas, Aetnas and UnitedHealths," said Steve Graybill, senior benefits consultant in Mercer Human Resources Consulting in Charlotte. "Whether they increased the value of company or not is yet to be seen."

Coventry, founded in 1986, operates about a dozen health maintenance organizations and preferred provider health plans for 3.1 million members in 15 states in the Midwest, mid-Atlantic and Southeast. It does not operate in the District.

Coventry has expanded rapidly in the past two years. Earlier this month, Coventry paid $12.6 million in cash for Omnicare, which had about 63,000 Medicaid members and annual revenue of $150 million. In September 2003, Coventry paid $41 million in cash for Altius Health Plans, a private Utah-based health care company with 116,000 members and annual revenue of $235 million. In February 2002, Coventry bought PersonalCare Health Management Inc. with 78,000 members in the Midwest.

The company has said it is generally able to improve the profits of acquired entities by reining in operating expenses. It monitors the use of diagnostic services to make sure they are not used too much or too little and encourages such things as outpatient surgery, according to its annual report. It also uses regional centers for processing claims and customer services, which the company says saves money.

Coventry is part of an increasing consolidation of the fragmented health care industry. UnitedHealth Group, a Minnesota health services company with 55 million members, recently paid $4.9 billion for Oxford Health Plans, which has 1.6 million members in the Northeast.

Coventry officials said that when the deal is done in 2005, Coventry will have operations in all 50 states. It will also add capabilities such as a national preferred provider organization, which would allow it to serve corporate clients with offices across the country. It will also allow it to enter new markets, such as administering workers compensation programs.

"Coventry Health Care has built a very successful market position in 15 regions throughout the United States. The acquisition of First Health enables us to extend our success far beyond our existing borders," Allen Wise, president and chief executive officer of Coventry, said in a news release.

But analysts were more skeptical. Goldman Sachs analyst Matthew Borsch yesterday summed up his response to the merger in the title of his research note: "Merger coincides with deteriorating results at both companies."

"[R]esults from [Coventry] and [First Health] suggest both companies are struggling with increased competitive pressure that we believe will worsen going into 2005," Borsch wrote. He maintained underperform ratings for both Coventry and First Health stock.

Spokesmen for Coventry and First Health declined to provide additional comment.

Coventry officials reported net income for the three months ended Sept. 30 of $87 million (96 cents per share), compared with $67.5 million (74 cents) for the same period a year earlier. Coventry officials credited a 4 percent rise in membership. Third-quarter revenue grew by 15 percent.