Under Pressure from Justice Department, Michigan Insurers Spike Merger Plans

A subsidiary of Blue Cross Blue Shield of Michigan that sought to buy the membership of its largest competitor collapsed following threats by the Justice Department that it would file an antitrust lawsuit to block the acquisition.

Blue Care Networks of Michigan, the subsidiary of BCBS Michigan, sought the merger with Physicians Health Plan of Mid-Michigan. Prosecutors said in a statement they opposed the insurance companies' plans because the acquisition would have given BCBS Michigan control of nearly 90% of commercial health insurance market in the Lansing area.

"We welcome the decision by Blue Cross and Physicians Health Plan of Mid-Michigan to abandon their deal, which would preserve competition among health insurance companies in Lansing," said Christine Varney, assistant attorney general in charge of the Justice Department's Anti-Trust Division.

Blue Care Network is a nonprofit HMO owned by BCBS of Michigan, but it is a separate company. BCBS of Michigan has a 70% market share in Lansing. In 2008, BCBS of Michigan reported revenues of about $21 billion.

Physicians Health Plan of Mid-Michigan is a nonprofit in Lansing, and the largest competitor with a 20% market share. Sparrow Health Systems Inc., the largest hospital system in Lansing, owns PHP. PHP had reported revenues of about $250 million in 2008, according to the Justice Department.

Prosecutors pressured the companies with possible anti-trust action because they said it would have given BCBS of Michigan the ability to control physical reimbursement rates, and would have resulted in higher prices, fewer choices, and a reduced quality of commercial health insurance plans in the Lansing area, Justice officials said.

The insurers had a different take on the failed merger, saying it would have spread administrative costs over a larger membership base for Blue Care Network, and would have helped keep healthcare costs more affordable. In addition, it would have allowed Sparrow a greater ability to focus its human and capital resources on providing quality healthcare services to the region, the insurers said in a joint statement.

Both parties concluded late last week, however, that the transaction would not get clearance without litigation, the insurers said in a statement. Originally, both companies anticipated that this transaction would receive necessary regulatory clearance by the end of 2009.

As a result, "Blue Care Network and Sparrow decided that the substantial cost and extended time period it could take to gain clearance of the acquisition are not in the best interests of either organization," the statement said.

"Unless we could obtain federal clearance in a relatively short timeframe, which we have been told is not possible, a prolonged period of uncertainty would be extremely difficult for client employers, health plan members, and employees at both organizations," said Kevin Klobucar, BCN president. "It was not a desire of either organization to continue to focus our time and resources to litigate this matter."

"In light of the current regulatory climate, it has become obvious that we should move on and continue focusing on the best ways to serve PHP's members and our region," said PHP Mid-Michigan's President and CEO Scott Wilkerson. "Despite this outcome, we are pleased that PHP has operated on a business-as-usual mindset throughout this lengthy regulatory process."

The Justice Department said it was pleased with the final agreement.

"The merger would have likely led to higher prices, lower levels of service and decreased quality of healthcare for consumers," Varney said.