A hearing on Blues merger gets arcane

Economists battled over such issues as the meaning of "competition" and how merger of the two insurance giants would affect innovation and buying power.

It was almost as if economists had donned armor, grabbed lances, and charged into battle over the proposed merger of Independence Blue Cross and Highmark Inc.

The economists were jousting during recent statewide hearings over the issue of competition, with each side sending its best hired brains into the fray.

Arcane, perhaps, but the precise definition of competition - a concept that seems simple but apparently requires a Ph.D. to understand - will be key to approval or rejection of the plan to create the biggest health insurer the state has ever known.

The Pennsylvania Insurance Department, according to state law, must approve the merger of the "Blues" unless the transaction would "substantially lessen competition," among other standards.

In their battle, instead of pointed lances, economists brandished PowerPoint slides on screens. They thrust and parried with resumes and reports, not swords and shields.

Mounted on the Blues horse was Barry C. Harris, chairman of a consulting company called Economists Inc. in Washington.

Harrisburg-based Capital Blue Cross, which generally opposes the merger, dispatched Monica G. Noether, a senior economist with CRA International, a Boston firm.

And the state insurance department retained its own economist to assist it in sorting out the ideas as it decides on whether to approve the merger.

It was an economists' free-for-all in Pittsburgh at the first hearing, with four testifying in one day.

Blues man Harris led off, defining competition as the opportunity for buyers to choose among similar products in their geographic region.

"For example, automobile-repair services are not a substitute for appliance-repair services. . . . Automobile-repair services in Altoona are not a substitute for automobile-repair services in Allentown," he testified.

Likewise with insurance, Harris concluded. Regional subscribers today cannot choose between Independence Blue Cross and Highmark, so having a combined company would not change their situation.

That's why, he argued, insurance is essentially a regional market. And many other witnesses agreed.

Not so, countered Capital's Noether.

Once the companies merged, they would become a statewide company in a statewide market. Their combined clout, she said, would discourage new insurers from writing business in Pennsylvania.

While the economists mostly talked about competition in relationship to other insurers, some witnesses looked at the issue from a broader health-care perspective.

Buying power: Listeners could add monopsony to their vocabulary. Monopsony exists when the buyer, not the seller, holds all the cards, sort of the opposite of monopoly. In this case, one big insurance company would be able to dictate the price it pays to all doctors and hospitals, like Priceline on steroids.

That worries some doctors, hospitals and other providers. In their testimony, the Blues executives said they had no intention of taking that step.

Lobbying strength: "The proposed merger will concentrate even greater influence in policy-making matters into the hands of one organization," testified Diane Holder, chief executive of the UPMC Health Plan, Highmark's major rival in Pittsburgh.

For example, as the trend moves toward pay for performance and quality, who would have the most influence over setting standards?

Innovation: Since insurance companies ultimately decide whether they will pay for new medical devices or techniques, having more insurers helps advance medical technology, Debra Parrish, representing the National Center for Diagnostic Technologies, argued at the Philadelphia hearing.

If there are multiple insurers, the life-sciences companies have more chances to "present the case why this technology is ready for prime time," she said. If one is convinced, then it is easier to sell the others.

Expressing the view of device makers, she said that if life-sciences companies get discouraged because they lack opportunities, they might move, taking jobs and brain power with them.

Break it up: The last economist to speak was Stephen Foreman from Robert Morris University in Moon Township, who was riding his own horse. He represented no organization. He had opposed the 1996 merger that created Highmark from Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield.

He posited a choice: Either the nation moves to a government-run single payer system, or "if we intend to rely on competition, we should experiment with approaches that enhance competition."

Instead of merging the two companies, he said, each should be split into smaller competing companies.

Imagine what would happen, he asked, if Independence Blue Cross were split into five competing nonprofit organizations, one based in each county in the Philadelphia area.

That would set the stage for the most innovation, allowing each to learn and profit from one another's mistakes. Also, at a certain point, insurers become less efficient, not more efficient, as they grow.

"The [current] proposed merger," Foreman said, "may have provided us with our last great opportunity to rethink our approach to the health insurance industry."


Go to http://go.philly.com/blues for more about the proposed insurance company merger.


Contact staff writer Jane M. Von Bergen at 215-584-2769 or jvonbergen@phillynews.com.