Pa. insurer-merger hearings focus on competition

PITTSBURGH - When Carrie Schuck's father died 11 years ago, Schuck, now a 21-year-old college senior, couldn't find anyone who could relate to a 10-year-old's sense of loss and instability.

"Even my teachers didn't understand," she said, her voice shaking, describing the isolation she felt when her classmates made cards for Father's Day.

But a children's grief-counseling program sponsored by Highmark Inc., Pittsburgh's predominant health insurer, helped her deal with her loss.

It is no surprise that in Pittsburgh, home town of Highmark Inc., with its syringe-like building dominating the skyline, witnesses like Carrie Schuck came to praise Highmark's civic engagement yesterday during the first of three public hearings held by the Pennsylvania Insurance Department on the proposed merger between Highmark and Philadelphia's Independence Blue Cross.

The merger, if approved, would create the largest health insurer in the state and among the largest in the nation. The second of the three hearings takes place tomorrow in Harrisburg. Hearings are set for Tuesday and next Wednesday in Philadelphia.

Among the nearly 30 who spoke yesterday, it was also no surprise that there would be witnesses like Diane Holder, president of the University of Pittsburgh Medical Center Health Insurance Division, Highmark's chief insurance rival in the Pittsburgh area.

"We oppose this merger," she said.

The new company would control 72 percent of the market, Holder said, discouraging entrants into the market.

Equally worrisome, she said, was that the new company would have too much influence when it came to state policymaking on issues such as community benefit, consumer oversight, and the size of reserves and surpluses, a controversial topic.

While the Blues have said they would return more than $1 billion in savings from the merger to Pennsylvania residents in stabilized premiums, continued coverage for the uninsured, and other charitable initiatives, Holder said it wasn't enough. "A billion dollars," she said, "seems an unusually low contribution for the opportunity to control virtually all market segments in the state."

The hearings began with opening remarks by Highmark's chief executive Kenneth R. Melani and his counterpart at Independence, Joseph A. Frick. Both stressed the companies' impact on the state - 18,000 employees and a $4.2 billion annual economic effect. They said most of their vendors were also Pennsylvania-based companies.

If the companies combine, they said, they will be better able to afford "substantial and costly information system changes" that will occur as the country moves toward standardized claim coding and personal health records, Melani said. They will also use each other's best practices to become more efficient in handling claims.

Frick and Melani were hammered about whether they would compete with each other if they were not allowed to merge.

State insurance commissioner Joel Ario has stressed that a proposed merger's effect on the competitive climate of the state would be the most important consideration as the insurance department dealt with the merger request.

Melani said yesterday that the companies would not compete, adding that the Philadelphia area "is a very difficult marketplace" and that entering it was "something we would not entertain."

He said the company did not have relationships with Philadelphia-area hospitals, especially after Highmark sold its share of two managed-care health-maintenance organizations (HMOs) to Independence Blue Cross in 1996.

Ario asked why, if Highmark was not a threat, Independence Blue Cross had pressed for a noncompete agreement with Highmark when it bought those two plans.

Frick said it was customary in any transaction for an acquiring company to seek a noncompete agreement to protect its purchase. Independence paid $350 million for the two plans.

Economist Monica G. Noether, of Boston-based CRA International Inc., testified that despite the Blues' assertion to the contrary, she believed it was likely that Highmark would try to compete in Philadelphia if the merger were denied.

Noether, who was hired by Capital Blue Cross, said that the two companies had competed in the past and that Highmark already has some name recognition in the Philadelphia area, making its entry into the market less challenging.

A number of speakers voiced support for the merger if regulators would impose some conditions.

"I believe this merger would be good for Pennsylvania if appropriate measures are put in place for the protection of the people of Pennsylvania," said Charles E. Davidson, president of Managed Care of America Inc., a Pittsburgh company that offers insurance services such as technology consulting, claims handling, and wellness programs.

The insurance department should require the Blues to allow other insurers to use their relationships with doctors and hospitals, giving competitors a chance to benefit from the Blues' negotiating power for rates.

Davidson also raised questions about the propriety of some of the big donations that the Blues make. He pointed to a $25 million grant from Highmark to the Hershey Medical Center. After that, he said, Hershey switched its employees from Capital to Highmark. "If anyone thinks that's a coincidence, I have a piece of the Fort Pitt bridge to sell. Is this influence-peddling or is it charity?"

Several witnesses represented Pittsburgh consumer and community groups, such as the Mon Valley Unemployed Committee and the Consumer Health Coalition. Most of them said that the Blues had not provided enough information and that there should be an official public advocate to quiz them more thoroughly. Ario reiterated that he and the insurance department would be acting as advocates for consumers.