Blues' merger plan: Will the public benefit?

Their proposed merger most likely will help Pennsylvania's biggest health insurers, Independence Blue Cross and Highmark Inc., compete for big employers' business, bargain for better prices with drug companies and save some administrative costs.

But what's in it for the rest of us?

"For both organizations, it's a good thing. They end up winners as a result of this," said Tom Tomczyk, a principal with Mercer Human Resource Consulting in Pittsburgh. "The public may not."

While the companies said last week that their union would generate $1 billion in savings over six years, their obtusely worded comments left some health-care experts confused and eager for tough oversight of the deal.

"People in Pennsylvania should be up in arms about this so at least we get some questions answered . . .," said Pedro Rodriguez, executive director of the Action Alliance of Senior Citizens. "I think every elected official should be scrutinizing directly this development."

The state Senate last week approved a bill that would subject the merger of these nonprofit giants - between them, they collect more than $16 billion in premiums yearly and control 53 percent of the state's health insurance business - to the same kind of scrutiny for-profit companies now receive. The measure still needs House approval.

In a statement, Gov. Rendell said the state needed greater authority to "review or stop" the merger. "I believe that the proposed merger may present improvements for Pennsylvania's consumers and help cut health-care costs, but I am not certain," he said.

Health-care experts and advocates wonder how much customers will share in the merged companies' savings. They worry that the new, as-yet-unnamed company could stifle competition, ultimately leading to higher insurance costs and, possibly, lower payments to the people who provide the care. Culture clashes as the companies meld could waste resources and hamper service. And, despite company assurances to the contrary, outside observers continue to worry that the merger is only a prelude to a for-profit conversion, a step many Blue Cross plans across the country have taken.

The companies have limited public discussion to a 11/2-page news release on the merger and a late-day telephone news conference with their CEOs: Kenneth R. Melani of Highmark and Joseph A. Frick of Independence Blue Cross.

How the merger would affect subscribers' premiums remains murky. The companies say they will use about $300 million of their $1 billion in savings to hold the administrative-fees part of premiums flat for two years. Such fees account for only about 10 percent of costs.

The companies also said they would spend $650 million over six years to expand coverage for uninsured Pennsylvanians. This year, they will contribute a combined $151 million to the Community Health Reinvestment fund, including $90.5 million earmarked for the uninsured. Their agreement with the state requires them to continue such payments through 2010.

The companies say that, because of the merger, they can extend those payments through 2013 and provide additional funds to help the uninsured.

At the news conference, Melani and Frick were asked three times whether the merger would lead to lower insurance premiums.

The first time, Frick said the merger would help keep "health care affordable and accessible to the people in the commonwealth."

The second time, Melani said the companies intended to "use the savings to give back to our customers" and subsidize the uninsured.

The third time, Melani said that holding administrative fees flat "equates to a premium savings they would not have otherwise experienced. So yes, that's the answer. There will be savings from this that will go to help make health care more affordable."

Health-care experts said there was little chance of falling premiums because other costs were rising.

"Lower premiums are not in the cards, just maybe to make them grow less rapidly than they would have," University of Pennsylvania health economist Mark V. Pauly said.

"Both Blue plans have accumulated a lot of assets, and as a subscriber, I'd like to get some of that back," he said, adding that that was not likely.

What happens to premiums will be more a political issue than a business decision, Pauly said. That is what worries him about the merger. The sheer size of the new Blue will make it more difficult to influence and give it even more political clout.

Currently, Highmark dominates Western Pennsylvania, and Independence Blue Cross dominates the Southeast, with little overlap in subscribers. Because of that, there will not be much immediate impact on local market clout, said David Lagnese, a health-care consultant with Towers Perrin in Pittsburgh.

The bigger company will have more power at the bargaining table, though, with drug companies and pharmacies. The companies say they will save $280 million over six years by better managing prescription-drug costs. And the bigger Blue will be more attractive to the many employers - and it is employers who buy most health insurance - who are expanding from their regional bases to become national and international.

The fact that Pennsylvania has four Blue Cross plans is very unusual, Lagnese said. It makes it hard for companies that operate statewide to set up coverage for workers.

Some view the merger as "long overdue," he said.

The question remains whether less competition can be good for consumers.

"Any time you eliminate some competition, you run the risk of paying more for the service or the product," Tomczyk said. "It can go either way."

Royersford insurance agency owner Ron Black said he believed the outcome of a merger could be good. The nonprofit Blues now write health insurance policies for anyone, regardless of their medical condition. The combined company, he said, would be stronger and better able to stave off competition from for-profit companies that write policies only for companies with young, healthy workers.

But Kevin Shivers, state director of the National Federation of Independent Business, fears the Blues are the only ones large enough to offer insurance to everyone, and they will use their political power to push rules forcing all companies to do it. That, he said, could drive away competitors and make insurance even less affordable for small businesses.

Nationally, the American Medical Association has been campaigning against the increasing consolidation of insurance companies. Between 1995 and 2005, the AMA said, there were more than 400 mergers involving insurers and managed-care organizations.

When one insurer dominates, it puts hospitals and doctors in a difficult position, said Jim Rohack, a Texas cardiologist and AMA trustee. They think, "Gee, if I don't sign this contract, I won't have the ability to see patients anymore."

Lance Haver, Philadelphia's director of consumer affairs, said he believed government should make sure that Highmark and Independence Blue Cross will not use the savings to fatten pay for company leaders or create even more for-profit subsidiaries. State leaders, he said, should "make sure the savings is as big as it could be and that it's equitably shared."