Independence Blue Cross grows by partnering, not merging

The tsunami of mergers announced last month - Aetna's purchase of Humana and Anthem's purchase of Cigna - is expected to transform the health insurance industry, if the deals survive antitrust scrutiny by regulators.

The consolidation will create three national giants, including UnitedHealth Group Inc., each with more than $100 billion in annual revenue, and add to the pressure on smaller Blue Cross-Blue Shield operators to merge.

But don't count Independence Blue Cross, the region's largest health insurer and a major Center City employer, among those on the ropes.

That's partly because among merger partners, only Aetna has a big presence in the Philadelphia region, but also because Independence is big enough and has geographic and business diversity.

"We believe that we are of a size that if we continue to go it alone, we will be very successful, but we are very open to exploring strategic alliances, collaborations, and who knows what that means in terms of consolidations down the road," said Daniel J. Hilferty, chief executive of Philadelphia-based Independence.

Expert observers echoed Hilferty's view.

"They have enough revenue and enough interrelationships that they are what I would consider a much more secure group," said Peter L. Gualtieri, director of business development in the Philadelphia office of Savoy Associates, a health insurance agency in Florham Park, N.J.

Independence now has customers in 24 states, largely through its majority ownership of Philadelphia-based AmeriHealth Caritas, which competes nationally and is the nation's seventh-largest manager of Medicaid health benefits.

Meanwhile, in its core Southeastern Pennsylvania territory, Aetna and other national competitors have eroded IBC's once-overwhelming market share in the commercial health insurance market, but IBC still has 50 percent of the market - more than twice Aetna's share, according to data from Decision Resources Group.

In South Jersey, Aetna is far larger than Independence subsidiary AmeriHealth Insurance Co. of New Jersey. But to gain ground, Independence sold 20 percent of AmeriHealth New Jersey to Cooper Health System and offered a plan with lower out-of-pocket costs for services at Cooper.

The Cooper plan was one of several Affordable Care Act initiatives that helped Independence return to growth in its commercial segment.

In 2014, 285,000 new individual customers gained coverage in Pennsylvania and New Jersey under Independence policies bought through the act's online exchanges. Those policies propelled a 12 percent gain, to 2.35 million, in the number of people insured by Independence under commercial plans.

For consumers, Independence's determination to jump headlong into the new market created by the ACA has meant a wider array of choices - though expensive for some - that didn't exist before.

Hilferty called the mega-mergers a "game-changer" for insurers because of "their ability to achieve scale, efficiencies, and drive hard bargains with the provider community, and frankly be able to price very competitively."

What that means for Independence is that it will continue its strategy of trying to be a "magnet" for other Blue Cross companies, Hilferty said. Independence already has ventures with Blue Cross Blue Shield operators in Florida, Michigan, and elsewhere.

Nationally, Independence's $13.2 billion in revenue last year ranked it fourth among the so-called Blues behind publicly traded Anthem Inc., of Indianapolis, Health Care Service Corp., of Chicago, and Highmark Health of Pittsburgh.

Highmark, with $16.75 billion in revenue in 2014, acquired Blue Cross of Northeastern Pennsylvania this year and had negotiated for years to take over Independence, before abandoning the effort in 2009 because of anti-trust concerns.

After that deal fell through, Independence adopted Highmark's claims-processing system for its commercial and Medicare businesses, achieving at least some of the savings that would have come from a merger.

"They are finding these efficiencies without having to merge," said Mark Cherry, principal analyst for Florida and Pennsylvania at Decision Resources Group, a health-care data firm.

Perhaps more important, Cherry said, the rationale for insurance mergers in 2009 - gaining leverage over hospitals - is no longer quite as powerful. "Insurers are working more closely with health systems and saying, 'let's manage population health together,' " Cherry said.

Still, Independence in 2013 created a new corporate holding company, Independence Health Group, to simplify its corporate structure and ease deal-making.

Independence, with 9,234 employees overall, has yet to undertake a full-scale merger with another Blue, but partnerships - mostly through AmeriHealth Caritas - have been plentiful.

Independence owns 61.3 percent of AmeriHealth Caritas, which employs 2,218 at its headquarters near Philadelphia International Airport and had $5.8 billion in revenue last year, up from $4.8 billion the year before.

Blue Cross Blue Shield of Michigan owns the rest of AmeriHealth Caritas, which in the last two years had narrow profit margins - less than 1 percent.

This year, Michigan Blue Cross and Independence deepened their ties to each other through AmeriHealth Caritas.

The Michigan Blue spun off a Medicaid HMO into a joint venture with AmeriHealth Caritas. Each partner contributed $16 million to the venture, Blue Cross Complete of Michigan L.L.C., which is designed to take advantage of the state's expanded Medicaid program.

Another AmeriHealth Caritas joint venture, with Blue Cross Blue Shield of Florida, announced an agreement this month to buy the 60 percent of Prestige Health Choice L.L.C. - Florida's fourth-largest Medicaid managed-care company - that it didn't already own.

Beyond the extremely low profit margin, other threats to the AmeriHealth Caritas business include the regular need to bid for state contracts and the possibility of losing chunks of business when a contract is lost.

Take the AmeriHealth Caritas joint venture that did Medicaid business with Indiana, which had 133,000 members in 2012. This year that business - $209 million revenue in 2013 - is gone.

But deals such as those in Florida and Michigan are likely to help AmeriHealth Caritas compete with the behemoths UnitedHealthcare, Anthem, and Aetna. Iowa last week selected AmeriHealth Caritas as one of four companies to manage its $4.2 Medicaid program, which serves 560,000.

Executives at the merging giants have emphasized their desire to get more Medicare and Medicaid members, government-sponsored insurance for the elderly and the poor.

They face stiff competition in Southeastern Pennsylvania, where Independence has held steady in those markets since 2010, with 45 percent of private Medicare and half the managed Medicaid business, state data show.

Aetna, which employs more than 1,300 in Blue Bell and is Independence's main competition in Southeastern Pennsylvania, has faded in certain segments.

Over the last five years, Aetna's share of commercial HMO participants has fallen from 38 percent to 25 percent. Its share of Medicare Advantage last year was 13 percent, down 10 percentage points from 2010, state data show.

"We're really focusing our resources more on places where we can deliver the greatest value to consumers and grow our business," Aetna spokesman Walt Cherniak said. "Price competition has been a very big part of the shifting membership in the five-county area."

In South Jersey's Burlington, Camden, and Gloucester Counties, Aetna's Medicare Advantage business has held up better. Its share was 44 percent in July, compared with 47 percent five years ago.

AmeriHealth New Jersey, meanwhile, has increased its share to 38 percent in July, up from 4 percent five years ago, as Horizon Blue Cross Blue Shield of New Jersey fell sharply in that area.

"We've been very successful, and we are not taking our foot off the pedal," Hilferty said.

215-854-4651 @InqBrubaker