Merger on the Mind

Concerned about the impact on competition of a merger by Pennsylvania's two largest health insurers, state legislators are pushing for quick passage of a bill that would widen state authority over the companies.

"We're in rather what I call a hurry to get it passed," said State Sen. Donald C. White, an Indiana, Pa., Republican who is chairman of the Senate banking and insurance committee.

White sponsored the bill to increase state regulatory power over nonprofit insurers because of widespread talk that a merger between Highmark Inc., of Pittsburgh, and Independence Blue Cross, of Philadelphia, was nigh.

The two companies confirmed Friday that their boards would meet this week to vote on the merger.

A former insurance salesman and broker, White said he wanted a vote on his bill this week as well.

"Competition is good. It makes everybody better, and they have no competition," said

White, who remembers having few competing health-insurance plans to offer his clients.

The House and Senate versions of the bill would amend the state's definition of an insurer to include nonprofit companies such as Highmark and Independence Blue Cross, subjecting them for the first time to the same kind of scrutiny that for-profit companies that merge would receive. Their nonprofit holding companies are currently exempt from state oversight, although their insurance subsidiaries are regulated by the state.

Todd Eachus, a Luzerne County Democrat who sponsored the House version of the bill, is maneuvering to schedule his proposal for a vote on the first day state representatives return to work, April 16. The House bill regulating insurance mergers was the first out of committee this year, he said.

If the two insurance giants merge, Eachus said, "they'll probably seize up to 60 percent of the insured lives in Pennsylvania. . . . They have a tremendous amount of clout."

Because of that, he said, legislators "felt strongly that we should try to put some stronger consumer protections in place."

The bills have the support of the state Insurance Department, which consulted on their language.

Highmark said it supported the legislation. Independence Blue Cross did not respond Friday to a request for comment.

There is little geographic overlap between the two companies, which both hold licenses from the Blue Cross and Blue Shield Association. Independence Blue Cross operates in Philadelphia and its surrounding Pennsylvania suburbs, while Highmark provides health insurance in central and Western Pennsylvania.

If the companies vote to combine, legislators also said they would call for a series of public hearings.

White has deep worries about a merger, which he says would meld a "1,100-pound gorilla" out of two imposing primates that already dominate their regions. Even if the merger somehow resulted in significant financial contributions to the state budget, he said, he questions whether it would do what he wants: lower prices for his constituents.

"I'm at the point right now I don't care what they are able to hijack out of Independence Blue Cross or Highmark or all of them, I just cannot be convinced that this is in the best interest of the consumer," White said.

The Insurance Department currently could look at whether a merger reduces competition or damages the financial stability of subsidiaries, but not the parent companies. "In order to fully scrutinize any mergers or consolidations among Blues' plans, that legislation would be eminently helpful," said Rosanne Placey, a spokeswoman for the Insurance Department.

The bills require the holding companies to provide significant amounts of financial information. They give the state authority to reject the merger if it would "substantially lessen competition."

Sam Marshall, president of the Insurance Federation of Pennsylvania, which represents for-profit health insurers, said he had been fighting for this kind of legislation for a long time. "This is overdue," he said.

No matter what, he added, it's hard to control really dominant companies. "When you have the overwhelming market share," he said, "it is riding the tiger to regulate it."

The bills are also backdated to Jan. 1, a ploy that legislative leaders say has gone unchallenged in the past. Because the merger process would likely be long, legislators may still have some time to beat the companies to the punch. And Placey said the Insurance Department was taking the position that the new rules would apply even if a bill passes after the companies begin filing paperwork with her department.

"It may wind up being an issue for the courts," said Steve MacNett, general counsel for the Senate Republican caucus.

But, he added, the bills themselves should head off any surprise on the part of insurers. "This, I think, among other things, puts companies on full notice that this is an issue that the General Assembly is deeply interested in," he said, "and the rules of engagement may be being changed somewhat."

Independence

Blue Cross

Headquarters: Philadelphia.

Description: Operates as a nonprofit provider of health plans and benefits to 64,500 employers in Southeastern Pennsylvania.

Key event: Began doing business under the Independence name in 1989.

2005 gross underwriting income: $10.6 billion.

2005 net income: $167.5 million

Members: About 3.4 million.

Employees: About 10,000.

Founded: 1938.

Highmark Inc.

Headquarters: Pittsburgh.

Description: Operates as a nonprofit provider of health plans and benefits in 29 counties in Western Pennsylva-

nia and 21 counties in central Pennsylvania.

Key event: Formed from 1996 merger of Penn-

sylvania Blue Shield and Blue Cross of Western Pennsylvania.

2005 operating revenue: $9.6 billion.

2005 net income: $341.6 million.

Members: More than 4.1 million.

Employees: More than 12,000.

Founded: In the 1930s.

SOURCES: Company Web sites.EndText