State sets conditions for health insurance merger

Amid signs that Pennsylvania's insurance commissioner is laying out a course for Independence Blue Cross and Highmark Inc. to follow as they pursue their proposed and controversial merger, members of the boards of the two insurers are meeting tomorrow.

Even though by law an official decision cannot be rendered until next Tuesday, the Insurance Department has let the insurers know privately that it will not approve the merger unless the new company agrees to make an important change in how it markets health insurance in Pennsylvania, among other conditions.

The marketing change has to do with how the new company, which would become the largest health insurer in the state and one of the largest in the nation, would use the popular "Blue" trademark, according to one knowledgeable source who participated in a conversation on the merger with one of the top officials in the Insurance Department.

Right now, both companies use the "Blue" trademark. Highmark uses Blue Cross and Blue Shield, and Independence, obviously, uses the Blue Cross.

According to several sources, both in government and among lobbyists, the combined company could continue to use the Blue Shield trademark, but it would have to relinquish its rights to the Blue Cross trademark. That would create the opportunity for another health insurer to compete statewide using the well-known Blue Cross trademark.

Whether that condition would make the merger so unpalatable to Highmark and Independence Blue Cross that they would decide to withdraw their application is an open question.

But when that idea was floated during public hearings in July, executives from both companies objected vociferously.

"We're not talking about giving any comment on where things stand," Elizabeth Williams, a spokeswoman for Independence Blue Cross in Philadelphia, said last week. "We're awaiting a decision from the department."

J. Robert Baum, chairman of the Pittsburgh-based Highmark, said his board would meet tomorrow, but he refused to talk about what would be discussed.

Insurance Commissioner Joel Ario, the Gov. Rendell appointee charged with making the decision, declined to comment when contacted in Florida at an industry conference.

The two companies filed for permission to merge in March 2007, promising that operating efficiencies from the merger would yield nearly $1 billion in savings over three years. About a third of that money, they said, would help fund one of Gov. Rendell's key health initiatives, a program that provides coverage for the state's uninsured.

On the regulatory side, when Highmark and Independence sought permission to merge, the biggest issue has been how the proposed merger would affect competition.

The two companies said they now serve different geographic areas and would continue to do so; therefore, there would be no change in the current nature of the marketplace. They say they face stiff competition nationally from for-profit rivals such as Aetna Inc. and UnitedHealth Group Inc.

Other insurance companies, especially Highmark rivals Capital Blue Cross in Harrisburg and the University of Pittsburgh Medical Center Health Plan, strongly opposed the merger, saying the combined company's size and clout would discourage insurers from entering the Pennsylvania market.

This decision would resolve that issue - raising the possibility that the whole state could look like it does in central Pennsylvania and the Lehigh Valley, where two Blue plans, Highmark and Capital, compete vigorously for business.

Fresh competition would depend on any "Blue-branded" insurance company, such as Capital, Horizon Blue Cross Blue Shield in New Jersey, or powerhouse WellPoint Inc., of Indianapolis, having the financial strength to mount a full-fledged statewide push into Pennsylvania.

To understand how it works, it helps to look at the roots of Blue Cross and Blue Shield, which date to the 1930s.

Historically, Blue Cross and Blue Shield organizations had different missions: Doctors formed the Blue Shield organization to act as an insurer for their services. Hospitals formed Blue Cross. Both are governed by the national Blue Cross Blue Shield Association in Chicago, which decides which companies can operate in which territories using the Blue trademarks.

In Pennsylvania, the doctors formed a statewide association - Pennsylvania Blue Shield. But there were four regional hospital associations - Independence Blue Cross, Capital Blue Cross, Blue Cross of Northeastern Pennsylvania and Blue Cross of Western Pennsylvania.

In 1996, Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield merged to create Highmark. That gave Highmark a toehold in every region in the state.

Initially, Highmark competed with Independence Blue Cross, selling managed-care insurance packages to area employers. But Highmark sold that business to Independence Blue Cross for $350 million in 1996.

Mostly, Highmark worked in joint ventures with all Blue Cross organizations, as it does today with Independence Blue Cross in Philadelphia and Blue Cross of Northeastern Pennsylvania.

But in 2002, Highmark's friendly relationship with Capital Blue Cross ended. Capital had to scramble to write reimbursement contracts with doctors who had been affiliated with Highmark, and Highmark had to sign new agreements with hospitals that were part of Capital's group.

Because it holds the statewide Blue Shield trademark, Highmark could compete against Independence Blue Cross now, but has chosen not to, Highmark's chief executive officer, Kenneth R. Melani, told insurance regulators at public hearings in July.

The Philadelphia area is a "very difficult marketplace" and entering it is "something we would not entertain," Melani said.