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Pennsylvania Official: Merger Would Have Hurt Healthcare

Les Masterson, for HealthLeaders Media, January 23, 2009

Consolidating two Pennsylvania Blues plans would have reduced competition, hurt providers, and meant fewer options for consumers, according to Pennsylvania Insurance Commissioner Joel Ario.

Knowing that Ario planned to reject their merger on January 27, Philadelphia-based Independence Blue Cross and Pittsburgh-based Highmark, Inc., withdrew their applications on Wednesday. The two insurers filed the proposed consolidation nearly two years ago and it was the topic of public hearings in which competitors, physicians, and consumers questioned the merger's affect on healthcare in Pennsylvania.

"Our conclusions were based on the fact that the consolidation of these two companies at this time would have worsened what already is a highly concentrated market for health insurance in this state," said Ario during a press conference Thursday. "In other words, we already have an anti-competitive dynamic at play here and the consolidation would make that dynamic worse."

Independence and Highmark are two of four Blues plans operating in Pennsylvania. Independence covers the Philadelphia area, Highmark has Pittsburgh and the middle portion of the Keystone State, Blue Cross of Northeastern Pennsylvania covers the northeast, and Capital BlueCross serves the central region.

The sticking points for the Insurance Department were the merger's adverse impact on competition and the health insurers' refusal to relinquish the use of either the Blue Cross or Blue Shield brand. (Highmark is a Blue Cross and Blue Shield company while Independence is a Blue Cross plan.) If the merged company relinquished one brand name, a competitor could have entered the Pennsylvania market under the Blues umbrella, which would have brought more competition.)

In announcing their withdrawal of the consolidation, Kenneth R. Melani, MD, president and chief executive officer of Highmark, and Joseph A. Frick, Independent's president and chief executive officer, said in a joint statement Wednesday, "Throughout the review process, we have stated repeatedly that we would not give up one of our brands. We have spent more than 70 years developing our brands' value in our marketing and they are an integral part of our corporate identities and reputation."

Though the merger would have benefited healthcare, the executives said, relinquishing one of its brands would "preclude the new company from delivering to our customers, communities, and the Commonwealth the full results we had projected."

At his press conference Thursday, Ario said a merged Independence/Highmark insurer would have received $17.4 billion in premiums and become the sixth largest health insurer in the country with a 51% market share in the state. The $17.4 billion figure would have followed only Kaiser Permanente in California for direct premiums in one state and it would have been fifth in market share percentage in one state.

The new company would have enjoyed a "more dominant position" in Pennsylvania than any national competitor has in any other state, he said.

Ario added the merged company would have given Highmark/Independence "undue leverage over providers to the detriment of the insurance buying public."

"The consolidation would have undermined competition. The proposed consolidation would have been likely to have a long-term anti-competitive effect, especially when combined with the limited presence of the national competitors in Pennsylvania. We would not tolerate this type of consolidation in any other line of business—imagine the auto or life markets without the significant presence of other leading national insurers," said Ario.

Ario said the state explored various conditions to "reform the transaction into a pro-competitive one," such as expanding Blue on Blue competition beyond central Pennsylvania, sharing efficiency benefits from the merger with the state, and limit anti-competitive practices in the areas of contracting and other market practices.

One of the opponents of the proposed merger was Capital BlueCross of Harrisburg, PA. Michael J. Merenda, executive vice president of Capital BlueCross, said Capital hopes state policymakers learn from the process.

"Commissioner Ario's hearings shined a stark light on numerous structural challenges in the Pennsylvania health insurance marketplace, and it is important those challenges continue to be considered, debated, and addressed," said Merenda.

Ario said policymakers should review new health insurance regulations proposed by the Pennsylvania Senate Banking and Insurance Committee, which would prohibit unfair contract terms, enhance transparency, and eliminate medical underwriting, to create a better health insurance system.

"The applicants' withdrawal will prevent the competitive environment from getting worse, but the fact is that the current market is not as competitive as it should be," said Ario.


Les Masterson is senior editor of Health Plan Insider. He can be reached at lmasterson@healthleadersmedia.com.

 

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