Pennsylvania Blues merger could hinge on definition of market

As the proposed merger between two Pennsylvania Blue Cross Blue Shield-affiliated plans comes closer to resolution, the answer to one question could determine its approval or rejection: What is a market?

Whether nonprofits Independence Blue Cross and Highmark Inc. are allowed to combine could come down to which perspective regulators believe is more germane: the distinct local markets each Blues plan works in now, or the regional and national markets in which the combined plan wishes to compete.

The merger would create one of the largest health plans in the country, with 7 million lives covered and an estimated $22 billion in annual operating revenue. It would be the third-largest health plan in the country, measured by premiums collected.

By some estimates, the combined company would hold more than 70% of the commercial health insurance market in Pennsylvania by combining Highmark's market share in western Pennsylvania with Independence's share in the eastern part of the state.

The Pennsylvania Medical Society and the American Medical Association are among those arguing that a combined company would hold far too much market dominance in the state. But the health plans say they currently don't overlap in Pennsylvania, so the market share effectively does not change. The companies also argue that they need to get bigger to compete for national business against the nation's largest for-profit plans, as more health insurers try to sell themselves as being able to handle a corporation's health coverage everywhere it is located.

Pennsylvania Insurance Commissioner Joel Ario has said he hopes to have a decision to approve, block or place conditions on the merger by the end of 2008. With Justice Dept. approval already in hand, the state's approval is the regulatory finish line for Highmark and Independence.

With recent state and federal hearings on the proposed deal, all sides have had a chance to make their case.

Sen. Arlen Specter (R, Pa.) presided over the July 28 hearing of the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights to examine the deal and look at whether the Dept. of Justice was too permissive in approving the merger.

Testimony from Highmark President and CEO Kenneth Melani, MD, revealed the conflicting definitions of the health insurance market.

Dr. Melani told Specter that the two Blues plans -- Highmark, based in Pittsburgh, and Independence, based in Philadelphia -- need to combine to compete against national health plans such as Aetna and UnitedHealth Group.

He testified that Highmark and Independence do not currently share a market because their territories are on opposite ends of the state and do not overlap. Furthermore, he said, the two companies never would compete against each other if left separate, because it would be too costly for Highmark to build up business on the eastern side of the state.

"[Dr. Melani is] trying to have it both ways," said David Balto, formerly policy director at the Bureau of Competition at the Federal Trade Commission and an attorney at the Antitrust Division of the Justice Dept. "[He] is saying on the one hand, 'We're Lilliputian; we're so small there's no way we can enter into Philadelphia, but on the other hand, if you give us IBC, we'll be a giant and we'll be able to compete.' "

Balto is now a senior fellow at the Center for American Progress, a liberal nonprofit think tank. He testified at the Senate hearing and commented on Dr. Melani's statements in a phone interview a few weeks later.

Doctors' take on the merger

Physicians argue that the definition of a market for this deal is within local and state boundary lines, which is the definition used by the Justice Dept. to determine whether it should approve a merger. They stressed to state and federal officials that the Highmark-Independence deal would create a stranglehold on the health insurance market in Pennsylvania, and that it should not be allowed to happen.

In comments submitted to Commissioner Ario, Andrew W. Gurman, MD, an orthopedic surgeon from Hollidaysburg and a member of the AMA Board of Trustees, noted that in the past 12 years, there were more than 400 mergers in the health insurance industry. Of those hundreds of deals, the Justice Dept. required only two to sell off operations because of concern over market monopsony -- a condition where a few companies control a market. None were turned down in full.

"Patients are not benefiting from consolidation in the health insurance market," Dr. Gurman said in his statement. "Dominant health insurers have posted historically high profit margins, yet patients see their premiums continue to rise without an expansion of benefits."

Like the Pennsylvania Medical Society and the AMA, Deborah Haas-Wilson, PhD, a professor of economics at Smith College in Northampton, Mass., said the merger of Highmark and Independence would leave physicians with diminished bargaining power as they try to negotiate reimbursements.

"If it is allowed to proceed, the already very concentrated market for commercial health insurance in Pennsylvania will become even more concentrated," she said. "The proposed consolidation has the potential, too, for the exercises of monopsony power in the market for physician services."

Peter Lund, MD, a urologist from Erie, Pa., and president of the Pennsylvania Medical Society, said further tightening of the insurance market in his state would worsen the state's already urgent physician recruitment and retention problems. Doctors are leaving Pennsylvania for states such as North Carolina and Mississippi, where the cost of living is lower and reimbursements are higher, he said.

But Dr. Lund said the insurance department's lengthy review process and state lawmakers' calls for increased regulatory oversight for the deal gave him reason for hope.

"A lot of us in Pennsylvania thought it was already a done deal," he said. "I'm somewhat optimistic they are taking into account the other players."