"Inevitable" Blues merger implodes at 11th hour

Pennsylvania's Highmark Inc. and Independence Blue Cross scrap a deal rather than agree to state regulators' conditions. This could signal greater scrutiny for mergers nationwide.

By Emily Berry — Posted Feb. 2, 2009

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Just a week before the deadline for state regulators to rule on the merger of two large Blues plans, Pennsylvania Medical Society President Daniel Glunk, MD, had resigned himself to the deal's approval -- despite physician opposition in the 21 months since it was proposed.

"I really thought it was moving along," he said. "I thought it was inevitable."

But the merger of Highmark Inc. and Independence Blue Cross wasn't inevitable. (See correction)

On Jan. 21, the two companies, unhappy with state regulators' conditions for approval, announced they would withdraw their application.

To some experts, the Highmark-Independence failure -- along with campaign statements made by President Obama -- signal an age when health plan mergers will be scrutinized more than they have over the last decade, when hundreds of mergers went through without a regulatory hitch.

"It's sort of like the template has changed," said David Balto, a former policy director in the President Clinton-era Federal Trade Commission and now a senior fellow at the Center for American Progress, a liberal policy think tank. He testified against the Highmark-Independence merger -- as did the American Medical Association and the Pennsylvania Medical Society, among others.

The deal breaker was that the two companies would have to give up one of their Blues designations -- either Highmark's Blue Cross or Independence's Blue Cross. That would create the opportunity for a new Blues plan in Pennsylvania, keeping the number of such firms at four.

During a July 2008 public hearing when Pennsylvania Insurance Commissioner Joel Ario broached the idea, Highmark President and Chief Executive Officer Kenneth Melani, MD, insisted it wouldn't make sense.

"Why would we be here proposing a transaction or merger to create scale, which is the reason we're doing this, and then do something to take away that scale? It would be a silly move on behalf of the organization."

But he did not say at the time that the companies would kill the merger rather than accept these conditions.

The medical society's executive committee was meeting when the news came by e-mail, said Dr. Glunk, a Williamsport internist. For many, the first reaction was surprise, he said. Everyone in the room knew the deal had been OK'd, then re-approved by the Justice Dept. when the first approval expired.

"That just put more responsibility on the state, and I just think they stepped up and did their job," Dr. Glunk said.

Let's unmake a deal

Highmark and Independence had appeared poised to become the country's largest nonprofit Blues plan by revenue, with an estimated $23 billion each year.

In their 2007 application and in testimony by executives, Highmark and Independence claimed that they needed to merge to compete more effectively with national companies such as UnitedHealth Group and Aetna. They promised $1 billion in economic benefit to the state, and they said there would be no harm to competition.

While the Justice Dept. approved the deal, there was skepticism in Pennsylvania from the start.

Before the companies filed their application, Pennsylvania passed legislation to allow the state insurance commissioner to review -- and if necessary, block -- such a move.

Despite his own misgivings about the deal, Ario did give Highmark and Independence a chance to merge by meeting the series of conditions he said were designed to protect consumers, physicians and hospitals.

He wanted to see the insurers give more to charity care, and to enact new rules to govern the Blues' contracting with doctors and hospitals.

But the process never got that far. First and foremost, the combined company would have to give up either the Blue Cross name or the Blue Shield designation. That would let another insurance plan compete with the new company -- with the power of the Blue brand, which both Highmark and IBC chief executives said was their most valuable asset.

Melani and Independence CEO Joseph Frick hadn't changed their minds since the idea of a new Blue was first proposed. And in the days before his decision was due, Ario let the companies know he was not budging on giving up a Blues designation as a key condition.

After the merger's dissolution, Ario said the other conditions weren't discussed in detail because of what he referred to as an "impasse" on the issue of the Blues marks.

"We have spent more than 70 years developing our brands' value in our markets, and they are an integral part of our corporate identities and reputation," the two Blues CEOs wrote in a statement. "Giving up one of our brands would preclude the new company from delivering to our customers, communities and the commonwealth the full results we had projected."

Stopping mergers

For years, physicians have argued that health insurance market consolidation in Pennsylvania and elsewhere was harming not only doctors whose payment dropped but also patients, who ended up paying higher premiums.

"The AMA has long cautioned that the alarming consolidation trend among health insurers is responsible for the growing market imbalance, where patients and physicians are left vulnerable to the demands of a few giant health insurers," said Joseph M. Heyman, MD, an ob-gyn from West Newbury, Mass., and chair of the AMA Board of Trustees.

Ario's statement called the idea that health insurance company mergers benefit both the companies and consumers "an economic fallacy," a phrase that state-hired economists with the firm LECG Inc. used in a report to the insurance department.

Balto also noted that a backlash on mergers could come from the highest levels of government.

In 2007, Obama was the only presidential candidate who responded to a query sent to all campaigns by the American Antitrust Institute, a Washington, D.C, organization that lobbies for more vigorous antitrust laws and enforcement. Obama used the health insurance market to illustrate the danger of allowing over-consolidation and promised to "direct my administration to reinvigorate antitrust enforcement."

In Pennsylvania, Dr. Glunk said the merger application has helped raise awareness, at least among key state officials, of problems created by a concentrated insurance market.

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Death of a deal

The proposed merger of Pittsburgh-based Highmark Inc. and Philadelphia-based Independence Blue Cross was the subject of debate, legislation and regulatory review for more than two years.

September 2006: After talking to doctors and others about the impact of a potential merger, U.S. Sen. Arlen Specter (R, Pa.) holds hearings on competition before the Senate Judiciary Committee. AMA representatives testify to problems caused by market consolidation.

January 2007: Republican State Sen. Don White introduces a bill giving state insurance commissioners the power to block a merger. It does not pass.

March 2007: Highmark and Independence formally announce their intent to consolidate.

April 2007: The plans submit an application to the Pennsylvania Insurance Dept.

May 2007: The U.S. Justice Dept. and Federal Trade Commission give the go-ahead for the merger with a waiver of the 30-day waiting period, indicating the department will not block the consolidation.

July 2008: The Dept. of Insurance holds hearings in three cities to hear from Highmark and Independence Blue Cross executives, economic experts, physician organizations (including the AMA) and others.

July 2008: The Justice Dept. clears the way for the merger a second time. Meanwhile, Specter convenes a hearing. AMA attorney Henry Allen is among those who testify against the deal. Pennsylvania Insurance Commissioner Joel Ario proposes the firms merge but drop either the Blue Cross or Blue Shield designation.

October 2008: Public comment to the insurance department is closed.

November 2008: Members of the Pennsylvania State Senate Banking and Insurance Committee vote 10-4 to recommend that Ario block the merger. If he chooses to approve it, the committee presents a set of recommendations. A parallel state House committee doesn't take a formal vote, but its chair and senior Republican member also recommend conditions to protect physicians and hospitals should the merger be approved.

January 2009: Highmark and Independence withdraw their application, citing Ario's insistence that they give up one of their Blues designations.

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Independence was given the incorrect Blue designation in the print edition. The company is correctly identified here. American Medical News regrets the error.

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