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Insurers IBC, Highmark withdraw merger plan

In the end, fears that competition would be quashed brought down what would have been a health insurance Goliath in Pennsylvania.

In the end, fears that competition would be quashed brought down what would have been a health insurance Goliath in Pennsylvania.

The petition for the proposed merger of Philadelphia's Independence Blue Cross and Pittsburgh's Highmark Inc., the state's two largest health insurers, was withdrawn yesterday by the companies.

The decision by Independence and Highmark came in advance of what they knew would be an adverse ruling by the Pennsylvania Department of Insurance.

Department commissioner Joel Ario, a Gov. Rendell appointee, was to have announced his decision Tuesday.

The proposed merger would have created the state's largest health insurer and one of the largest in the nation.

"I think the merger was well-meaning by two great companies who are great corporate citizens," Gov. Rendell said in an interview yesterday, "but I think it would have reduced competition in Pennsylvania."

When the two insurers filed their petition to merge, in April 2007, they promised the merger would yield $1 billion in operational savings over three years, with part of that money going to finance Rendell programs to cover the uninsured.

"If the merger came, there would have been conditions that would have helped us," Rendell said. "But competition is key."

Meanwhile, yesterday, legislators, trade groups and consumer advocates had mixed reactions to the news, including surprise.

Hospitals and doctors applauded the decision. They had generally opposed the merger, saying it would have given the new company too much power in setting reimbursement rates.

"When the majority of Pennsylvanians are getting their coverage through one plan, that plan has tremendous ability in its purchasing," said Paula Bussard, senior vice president of the Hospital and Health System Association of Pennsylvania.

Some Democratic legislators, including some from the Philadelphia area, had argued that in a world where businesses are consolidating, it was important to the business climate in the state to have a nationally powerful insurance company based here.

Sen. Michael Stack 3d, a Democrat from Philadelphia and a member of the Senate's Banking and Insurance Committee, said he was surprised at the Blues' decision to withdraw, because "they put a lot of energy into the whole process and spent a lot of resources, both financial and political, to get this done."

But in the end, they were not successful.

In private meetings with the insurers, the Insurance Department had proposed a way around its concern about competition.

Independence Blue Cross and Highmark could get their merger, which would put them in a better position to compete nationally for business with their for-profit rivals such as Aetna Inc. and UnitedHealth Group Inc. But, and it was a big but, they would have to agree to what amounted to a poison pill:

They would have to give up using either the popular Blue Cross or Blue Shield trademark to market their health insurance in Pennsylvania.

Highmark is a Blue Cross and Blue Shield company; Independence Blue Cross carries the Blue Cross trademark.

If the combined company had agreed to give up one of the popular Blue trademarks, it would have opened the door for another insurer to enter the Pennsylvania market and compete statewide, using the other Blue trademark, thus resolving the department's concern about competition.

When Ario first mentioned this possibility in the summer, it was met with resistance by IBC and Highmark.

"We have stated repeatedly that we would not give up one of our brands," the chief executive officers of IBC and Highmark said in a statement yesterday. "We spent more than 70 years developing our brands' value in our markets, and they are an integral part of our corporate identities and reputation."

Ario will explain his thinking in a news conference today in Harrisburg. "We welcome the applicants' decision to withdraw their proposed consolidation," Ario said in a statement issued yesterday.

"We were prepared to issue a disapproval order on Jan. 27, but this withdrawal smooths the process and allows all parties to focus on the challenges we all face in addressing the larger health-care crisis."

In their statement, Independence chief executive Joseph A. Frick and Highmark chief executive Kenneth R. Melani said that, "in recent days, it became clear to us that despite the well-documented advantages of the consolidation for our customers and our communities, the Insurance Department would not approve the transaction, because of its belief that there would be an adverse impact on competition.

"We fundamentally disagree: We have shown that the combination would not lessen competition in our markets," the statement said.

As it is, Highmark does have the ability to compete statewide and does compete with Capital Blue Cross in central Pennsylvania and the Lehigh Valley.

Highmark spokesman Michael Weinstein would not comment on whether Highmark would now try to compete with Independence Blue Cross in the Philadelphia area.

Independence Blue Cross could enter Highmark's Pittsburgh market, but would have to use a non-Blue name, the way it does in New Jersey, where it sells insurance as AmeriHealth.

Whatever the Blues decided to do in the future, one key opponent to the merger, State Sen. Donald J. White, said yesterday that Pennsylvania must do all it can "to foster an environment which encourages other insurers to enter the marketplace and provide real choice to consumers."

White, a former insurance broker from Indiana County and the Republican chairman of the Senate Banking and Insurance Committee, said yesterday that the competitive conditions "are still far from optimum, and the withdrawal of this proposed merger has only kept it from getting worse."