Editorial: Blue Cross Merger

For businesses and individuals in Pennsylvania that keep getting socked with higher and higher health-insurance premiums, it's hard to find any upside to the proposed merger of the state's two largest Blue Cross health plans.

The same goes for the many fine doctors and hospitals that say they are at the mercy of the two Blue Cross giants, which dominate the insurance markets in the Philadelphia and Pittsburgh regions - but conveniently never compete against each other.

It appears that the only real winners in the proposed merger would be the Blue Cross executives, who will likely receive huge bonuses for combining the regional giants into a behemoth that will further dominate the health-insurance market statewide.

Here's hoping that state insurance Commissioner Joel Ario will truly place the interests of consumers, businesses, and health-care providers first in weighing the proposed merger.

Ario held public hearings last week in Harrisburg and Pittsburgh. The hearings move to Philadelphia on Tuesday at 9 a.m. at the Sheraton Center City, 201 N. 17th St.

Now is the chance for consumers to be heard. Rest assured, the Blue Cross executives and their lobbyists have been talking up the deal to key stakeholders.

Indeed, Philadelphia's Independence Blue Cross and Pittsburgh's Highmark Inc. contend that the proposed merger will bring substantial benefits for the commonwealth. Chief among them: continued subsidies from the merged company toward health care for the uninsured and a "minimal" tamping down of future insurance-rate increases.

However, there's nothing in the deal yet about rate reductions on premiums, or other tangible benefits for individuals and businesses struggling to pay steady double-digit increases in health premiums.

With or without the merger, funds for the uninsured would remain - given the tax benefits that come with being a nonprofit.

As for the nearly $1 billion in expected savings over six years, most of that looks to be going straight to the Blues' bottom line.

Chief among the many questions posed by this merger is whether the firms could squeeze greater economies from their union, freeing up funds that could reduce premiums.

There's no question these firms are hugely successful, with combined cash reserves of $5.5 billion. The two executives are well paid: Highmark chief Kenneth R. Melani earned $3.2 million last year, while Independence CEO Joseph A. Frick received $1.6 million. And while both Melani and Frick will keep their jobs at likely increased pay and benefits, the merger will save millions by eliminating 1,200 positions - nearly 7 percent of the 18,000 employees.

So why can't the Blues make this a better deal for their customers?

Not only is the upside lacking, this merger also could have a substantial downside if it hampers the already limited competition. An expert hired by a competing Blue Cross plan testified last week that the combined company would have a lock on more than 70 percent of the statewide health insurance market. A business rival said the new company would have even further political clout in Harrisburg over health-care policy.

The counterargument from Highmark and Independence is that they don't compete against each other now, so the merger won't change the landscape. When Commissioner Ario pressed them last week as to whether the companies might compete if the merger was denied, Melani claimed that Highmark simply couldn't break into the tough Philadelphia market. (Where are the antitrust investigators when you need them?)

If state officials ultimately conclude that the two companies can compete, that means the merger would indeed reduce competition in the state.

An even more troubling prospect would be a possible move to convert the merged Blues' operations to for-profit status. Such conversions often unlock huge value (read: stock options and bonuses for executives) that was created while the companies enjoyed years of nonprofit tax savings. Any for-profit conversion also threatens the Blues' social mission.

Frick and Melani say becoming for-profit isn't in the cards. If the state approves the merger, that pledge should be etched in stone.

It's at least good to hear Ario say that the impact on competition will be the most important consideration as insurance regulators consider the deal.

Consumers would have greater assurance their interests were paramount had Gov. Rendell agreed to name an independent advocate to review the merger. Ario's consumer credentials are solid, but he's sitting as judge and jury in this matter.

Other states facing similar sales or mergers have held trial-like hearings to size up the deal. Let's hope Ario's hearings are more than a dog-and-pony show.