Independence Blue Cross, Highmark announce merger

The merger of Highmark Inc. of Pittsburgh and Independence Blue Cross of Philadelphia creates not only a dominant health plan in Pennsylvania but also one of the biggest health plans in the nation.

The two nonprofit Blues carriers on March 28 announced they would merge, ending about two years of talks. The newly formed company -- which does not yet have a name -- would insure 7.1 million out of 12.4 million Pennsylvanians.

The combined 2005 revenue of $20.4 billion puts the company among the top five largest health plans nationwide, for-profit or nonprofit. That revenue total would also make the company the nation's largest nonprofit Blues carrier, beating out Blue Cross Blue Shield of Michigan, which had $15.3 billion in 2005 revenue. The merged company has said it is committed to remaining nonprofit.

Highmark operates mostly in western Pennsylvania, while Independence operates mostly in the eastern part of the state. But the plans have a long history of working closely with each other, including an arrangement to jointly sell a Medicare prescription drug plan.

Among many in Pennsylvania, the Highmark-Independence deal was greeted with trepidation long before it happened.

The merger was such a hot topic among Pennsylvania physicians and others in the state last year that Sen. Arlen Specter, (R, Pa.) decided to chair a Senate Judiciary Committee hearing on the impact of megamergers. It was the first time physicians, including the AMA, got a formal legislative audience in Washington to air their concerns about health plan market dominance.

Meanwhile, a bill is moving through Pennsylvania's Legislature that would force greater review of the proposed merger. Introduced in January, the bill would give the state's insurance department full regulatory authority to examine and block the deal, which it cannot do now because Pennsylvania exempts nonprofit holding companies from such scrutiny. The bill would make the department's authority retroactive to Jan. 1, meaning it can review the Highmark-Independence deal.

The bill passed the Senate unanimously on the day the two plans announced their merger, and it moves on to the House. Pennsylvania Gov. Ed Rendell has pledged to sign the bill.

"It's important to ensure that the Dept. of Insurance has the authority to oversee this merger to make sure that the integrity of the market is protected," said Joe Pittman, a spokesman for state Sen. Don White, who introduced the bill.

Whatever happens with the bill, the Highmark-Independence merger will not be free of scrutiny. The U.S. Justice Dept. will examine it, as well as the Pennsylvania attorney general's office, which does have statutory power to fight terms of the deal in court, or refuse it entirely.

The Pennsylvania Medical Society says it is greeting the merger with caution and is asking state and federal regulators to examine the deal closely.

"We really don't know what the merger will do," said Mark Piasio, MD, president of the Pennsylvania Medical Society. "We're going to be paying close attention."

Dr. Piasio said the size of the merger may limit competition in the state by discouraging other health plans from entering the market. The state has two other Blues plans -- one in central Pennsylvania and another in the northeastern part of the state.

Highmark and Independence officials said they didn't not know when the deal was expected to close. Financial terms were not disclosed.

The two plans said the new company would provide more than $650 million to help expand access to health insurance and $280 million in drug cost savings for customers, and it would hold administrative fees flat for two years with a direct saving of $300 million to consumers.

"By combining our two organizations, we will be better able to maintain affordable programs, meet shifting consumer demands for new products and fund essential technological and infrastructure improvements in the face of challenges from much larger, for-profit out-of-state health insurance companies," said Joseph Frick, Independence's president and CEO in a prepared statement. In the combined company, Frick would take the title of president, while Highmark President and CEO Kenneth Melani, MD, becomes CEO.