Studies produce no consensus on Pennsylvania Blues merger

A pair of studies looking into the proposed merger of Highmark Inc. and Independence Blue Cross gave no clear answer to the question of whether the state's insurance deparment should approve the deal.

A report from LECG Inc., an Emeryville, Calif.-based company that offers expert testimony and analysis, said whether state law dictates that consolidation not be approved depends on how market share is defined. Another, by New York-based international financial consulting firm The Blackstone Group, was not conclusive as to whether the deal would fail to benefit policyholders and hurt network access. Blackstone said it had found no evidence that it would but noted that further data could change that conclusion.

The reports reflect the various definitions that regulators, experts, physicians and the plans themselves have offered in debating whether a Highmark-Independence merger should be approved. The Pennsylvania Dept. of Insurance commissioned the reports, released in early September, to help determine if it should approve the deal.

"In terms of the definition of what a market share is, the answer is going to be a combination of fact and interpretation of law," said Melissa Fox, a spokeswoman for state Insurance Commissioner Joel Ario. "Everything on the table will be considered."

The LECG report said that, assuming the two compete in a statewide market and using premiums as a measure of market control, the consolidated firm would have too large a market share as defined by the state statute that applies to mergers.

But if the market is examined by product line and region and is based on where employers that buy group health policies are located, then the two companies would not be considered too dominant, at least in the commercial group insurance line. Alternately, if defined by where members live, the combined commercial group health business would be too large under state law.

Blackstone's analysis is ongoing, and parts of its report are incomplete pending more information from Highmark and Independence Blue Cross. Therefore, Blackstone said it was not yet possible to say whether the consolidation would violate the conditions for mergers laid out in state law.

Consolidation opposed

The Pennsylvania Medical Society, the AMA and the Hospital and Healthsystem Assn. of Pennsylvania oppose the consolidation out of concern that the new firm would hold an excessively dominant position in the health insurance market across the state.

PMS spokesman Chuck Moran said the group was evaluating the reports and was not ready to comment on them. Moran said the medical society is preparing testimony for an Oct. 7 hearing before the state Senate Banking and Insurance Committee.

The U.S. Dept. of Justice has approved the deal, so the decision now rests with Ario. The commissioner's office held a series of public hearings in July and is accepting written comments through Oct. 10. A decision is expected by year's end.

If Highmark, based in Pittsburgh, and Independence Blue Cross, based in Philadelphia, were to consolidate as requested, the new entity would be the third-largest Blues plan by enrollment, with an estimated 8 million members and $23 billion in annual revenue. according to the Blackstone report. WellPoint, which operates 14 for-profit Blues plans, has 34.2 million members, and HealthCare Service Corp., which owns four nonprofit Blues plans, has 12.3 million.

The LECG report examined the competitive landscape in Pennsylvania and evaluated a completed merger's potential impact on that landscape, including the likelihood that Highmark would enter the Philadelphia area market if not for the merger. Highmark officials have said they would not consider competing in that market.

But LECG's analysis found otherwise. "Overall, the evidence suggests that there is a distinct possibility that Highmark would enter southeastern Pennsylvania absent the consolidation going forward," the LECG study said. "If such entry occurred, it is likely that both health insurance customers and health care providers would benefit."

The report weighed the prospect of Highmark entering the Philadelphia market specifically in light of the results of Highmark's competition with a third Blues plan, Capital BlueCross, in central Pennsylvania.

That competition hasn't reduced premiums for members, but it has produced better reimbursements for physicians, the consultants found.