- The Philadelphia Inquirer writes about the fact that Rendell could have applied pressure to the Blues to provide millions of dollars of his funding for his health plan; Cover All Pennsylvanians, promising them that the merger would be granted if they promised such funding. 

- The Inquirer also writes about the Blues’ renewed business plans.

- According to the Pittsburgh Post Gazette, Highmark still says that it’s not going to compete with IBC.

1. Independence Blue Cross and Highmark Blue Shield withdrew their application for a merger

2. Governor Rendell reported a $2.3 billion revenue shortfall and impending layoffs

Highmark & IBC sing the Blues

The last few days have seen an abundance of newspaper articles and editorials regarding the Blues’ merger. After being saddled with a condition they could not live with, both Independence Blue Cross and Highmark Blue Shield withdrew their application for a merger. The condition was that they could only operate with one of their coveted trademarks: Blue Cross or Blue Shield. This condition was suggested back in the summer during the public hearings and both companies voiced extreme opposition. Brand was one of the three conditions for the merger. The other two were: Public Benefit synergies and Fair Market Practices. They would have needed to expand their social mission and have maintained fair contracts with providers and increase transparency.

Insurance Commissioner Joel Ario, released a statement shortly after, explaining that he planned in issuing a disapproval of the merger application on January 27. He cited that the application failed to meet 2 of the 7 standards: competition and hazardous/prejudicial. This merger would provide an anti-competitive marketplace for new companies to enter and the merged company would have too much leverage over providers and pricing, according to the reports from Blackstone, LECG and Jay Anghoff.

The two insurers are obviously disappointed and maintain their position that a merged company would provide a tremendous benefit to the Commonwealth and would not stiffle competition.

Hard Times

Governor Rendell reported a $2.3 billion revenue shortfall during a press conference on Thursday. The informed the press that layoffs were coming. PA’s job loss rate is about 6.7 percent, but fares better than the rest of the country which came in at around 7.2 percent in December.

This bad news led Rendell to predict that state government would begin laying off workers later this year. He is hoping that the Commonwealth will receive $2 to $4 billion from President Obama’s stimulus plan. This may help close the gap, but with 5 months left in the fiscal year there will still be real-time bills to be paid. 

A look to Next Week

The legislature is back in session starting January 26.

But that is not the end of the story!  Newspapers across the state reported, and are still reporting on the development, and this morning Ario held a press conference detailing his would-be decision.

First, some biggie newspaper articles to check out: Philadelphia Inquirer (both an article and an editorial); Patriot-News; Pittsburgh Post-Gazette; and the Philadelphia Business Journal are just a few of many…

Second, some highlights from Ario’s press conference this morning.  (You can view the press kit from the conference, which includes many helpful charts and info packets, at the PID’s website).

- Highmark and IBC are both quality companies.

_ HOWEVER, in this case, bigger would not be better: Highmark and IBC are already the two largst health insurers in PA, and if allowed to consolidate, would have become the sixth largest health insurer in the nation.  This scale would have been concentrated in a single state:  The five largest insurers are spread out.  The resulting company would have had a more dominant position in PA than any other companies enjoy in any other state.

- The resulting company would have decreased consumer choice and access to healthcare.

- The resulting company would have had too much leverage over healthcare providers.

- We have a private health insurance system.  Private systems depend on competition.  Competition in healthcare is already low in PA.  To have even less competition would be of further detriment to the system.

- The merger could have worked only with appropriate conditions, which the Blues vehemently opposed.  One of these conditions was allowing the resulting company to keep only one of the Blues trademarks.   For more competitors to enter the PA market, one of the trademarks should be open for them to take up.

Independence Blue Cross is withdrawing its request to merge with Highmark Inc. in Pittsburgh, according to sources on the Independence Blue Cross board and in Harrisburg.

The boards of Independence Blue Cross and Highmark met this morning and decided to withdraw their application. They will make a joint statement this afternoon.

Their decision comes days before the state’s insurance department was set to render a decision on their merger.

That’s because the decision, expected Jan. 28, was not likely to please the companies, sources said.

The decision would have allowed them to merge, but would require them to give up the right to use the popular “Blue Cross” trademark in selling health insurance.

Instead, they could use the “Blue Shield” trademark, opening the door for another insurance company to compete statewide using the “Blue Cross” trademark.

When that idea had been suggested during public hearings in July, executives from the companies were vociferously opposed. The merger would have created the largest health insurer in the state and among the largest in the nation.

“Amid signs that Pennsylvania’s insurance commissioner is laying out a course for Independence Blue Cross and Highmark Inc. to follow as they pursue their proposed and controversial merger, members of the boards of the two insurers are meeting today.

Even though by law an official decision cannot be rendered until Tuesday, the Insurance Department has let the insurers know privately that it will not approve the merger unless the new company agrees to make an important change in how it markets health insurance in Pennsylvania, among other conditions.

The marketing change has to do with how the new company, which would become the largest health insurer in the state and one of the largest in the nation, would use the popular “Blue” trademark, according to one knowledgeable source who participated in a conversation on the merger with one of the top officials in the Insurance Department.”

Read many more details of this development at the Inquirer.

Writes Axelrod:

“Officials at Highmark and IBC say a merger wouldn’t lessen competition because — excluding competition from Harrisburg-based Capital Blue Cross and Highmark in Central Pennsylvania — the four Blues generally don’t compete.

Instead, they dominate their regions, with respective market shares of 59 percent for Wilkes-Barre-based Blue Cross of Northeastern Pennsylvania, roughly 30 percent for Capital and more than 50 percent for IBC around Philadelphia, according to the insurers. Highmark officials peg their Western Pennsylvania commercial insurance market share at 56 percent.

Meanwhile, a state-commissioned merger analysis by the consultant LECG Inc., of California, supports the Highmark/IBC contention they don’t compete directly and a merger wouldn’t change that. But the report also agreed with critics’ claims that a merger could hurt other insurers’ ability to enter Pennsylvania.

And the state’s consultant bolstered the argument that future competition could be hurt because Highmark and IBC — which began merger talks after a 10-year joint operating agreement expired in 2007 — might compete if they didn’t merge.”

Read more details at the Times-Tribune.

Write Daniel Axelrod:

“Nearly four years after the state set maximum ranges for Blue Cross and Blue Shield companies’ surpluses, critics still complain the savings are excessive and the insurers have too much leeway to grow them.

The old debate has grown louder because the four nonprofit Blues’ combined surpluses increased roughly 57 percent to $6.2 billion between 2003 and 2007, spurred by strong stock market gains.

As the surpluses have grown, insurance rates skyrocketed and 87,731 people — more than one in 10 residents in seven Northeast Pennsylvania counties — are uninsured.”

…

“Department officials contend they don’t need to reanalyze the Blues’ reasoning for the surpluses, because they reviewed decades of underwriting data to create an unprecedented, long-lasting regulatory framework.

“No other state insurance department has taken on the risk and done the analysis on surpluses quite like we have,” said Steve Johnson, a deputy commissioner with the state Insurance Department.”

Read much more at the Times-Tribune.

In an article titled “As nonprofits, what is Blues’ social mission?,” Daniel Axelrod writes:

“Critics argue the four nonprofit insurers — Blue Shield operator Highmark Inc. of Pittsburgh, Capital Blue Cross in Harrisburg, Independence Blue Cross in Philadelphia and Blue Cross of Northeastern Pennsylvania in Wilkes-Barre — are charitable organizations.

They contend the insurers should donate the bulk of their $6.2 billion, as of 2007, collective surplus to offset rate hikes and cover the indigent. The critics’ expectations come from the state and federal mandates establishing the Depression-era Blues to make insurance more affordable and accessible.

In exchange, most Blues have nonprofit status and some state tax breaks, but they must pay federal taxes.

…

Though the Blues acknowledge expectations to help, they say they run nonprofit businesses, not charities.

“We don’t have to do a darn thing with that surplus,” said Denise Cesare, BCNEPA’s president and CEO. “It’s not excessive. We can use it to mitigate risk, but we choose to try to invest it into the community to give back over the long run.”

That’s only a small snippet, however, of Axelrod’s extensive examination of the issue of the Blues’ nonprofit status and surpluses.  Read the entire article, linked to above, for the rest.

Another installment for today focuses on how Blue Cross of Northeastern PA will only give 35% of the money it promised towards funding for hospital upgrades and a new medical school.

Writes Axelrod:

The contributions from the insurer’s surplus, totaling $381 million as of October, were meant to strengthen area hospitals and foster alliances to create one big local health system.

BCNEPA’s leaders said the efficiencies created by the collaboration will keep health care costs down and provide better care to the public.

But the donations have stalled as the insurer and some of the hospitals couldn’t reach terms or make the state attorney general comfortable with part of the plan.

Read the article in the Times-Tribune for an explanation of why BCNEPA has not followed through with its funding promises, and what the hospitals and medical school have to say about the issue.

HEALTHPOINT PA READERS: COMMENT AWAY!

Reports The Bulletin:

The Bulletin: Why do you believe the Blues merger will limit competition, and ultimately, lead to higher health-care costs?        

Tom Knox: Over 10 years ago, IBC and Highmark entered into an agreement not to compete with each other in their respective areas.  During the 10-year period of that agreement, both companies embarked on a pattern of activity whereby they built such a dominant market share in their respective regions that no one could enter the market and compete against them and they now have monopolies.  As a result, the cost of health insurance in their areas is higher than it should be or needs to be.  There is simply no pressure to control spending and to increase the efficiency of their operations.  In addition, they have used this market power to drive down the reimbursement rates paid to hospitals and other providers so that the providers are forced to charge much higher rates for the same services to all other payers and uninsured patients.

Highmark and IBC typically get discounts averaging 80 percent off of billed charges.  Aetna and United Healthcare, the two largest competitors are lucky to get discounts averaging 60 percent off of billed charges and everyone else gets an average of 20 percent off if they get any discounts at all.  This huge advantage has not only kept any competition from entering their regions, but also has diminished the market share of any existing competitors.  All of these practices and activities are anti-competitive and in my view constitute serious antitrust violations.  

If the proposed merger is allowed to occur, it would put the proverbial icing on this cake and complete what obviously was a well thought out strategy to build a monopoly that was concocted more than 10 years ago.  The culmination of this plan is to combine the two entities into a single company.  While there may be some economies resulting from this combination, past conduct would lead one to believe that there is no real intention to use them to lower the costs of their products and pass them on to consumers. 

The Bulletin spoke at length with Knox, who delivered a solid argument against the merger.  Read the rest of the conversation at their website.

As the deadline for Ario’s decision nears, Balto is again reminding Pennsylvanians and policymakers of the reasons to reject the merger. His latest op-ed appears in the Pittsburgh Post-Gazette:

With a new administration coming to power in Washington, health-care reform once again has become a critical national priority. It is not a moment too soon.

The United States spends almost twice as much as any other industrialized country for health care. The number of uninsured has reached record levels — one in seven Americans. Health-insurance premiums have increased by more than 87 percent over the past five years, outpacing the growth of other health-care costs. It seems the players who profit most from the health-care crisis are large health-insurance companies.

President-elect Barack Obama has cited the lack of health-insurance competition as a major cause of rising health-care costs and a failure of antitrust law enforcement. He has criticized the Justice Department for taking a lax attitude toward health-insurance mergers, noting that “there have been over 400 health-care mergers in the last 10 years and … 95 percent of insurance markets in the United States are now highly concentrated.”

This concentration has led to higher prices, more anticonsumer insurance provisions, longer payment delays, less coverage and poor service.

The Pennsylvania Senate Banking and Insurance Committee, the House Insurance Committee and the state insurance commissioner are now grappling with this issue as Highmark proposes to acquire Independence Blue Cross. Although these two companies have imported armies of high-priced antitrust lawyers, economists and lobbyists, this is a deal that common-sense legislators and regulators should recognize as a bad deal for Pennsylvania. They simply should say no to this merger.

The facts seem relatively simple. Both Highmark and IBC are financially strong and Highmark, in particular, has been expanding into new territories from its base in Western Pennsylvania.

IBC has by any measure a monopoly position in southeastern Pennsylvania. If not for this merger, Highmark likely would try to invade Philadelphia, forcing IBC to compete for business. This would make both companies work harder, keep prices lower and improve services — which is just what happened when Highmark moved into Capitol Blue Cross territory in central Pennsylvania.

The insurance commissioner’s own experts have said that prices would be lower if the state denies the Highmark-IBC merger. They noted in one report that there is a “great deal of evidence to suggest that competition between Highmark and CBC has benefited health-care customers in central Pennsylvania.” Their analysis showed that Highmark offered “a significantly lower premium in central Pennsylvania versus Western Pennsylvania during the years immediately following Highmark’s entry into the central area.”

With the rapidly increasing cost of health insurance, that is a type of competition that should be protected, not discarded.

Highmark promises a billion dollars in cost savings that it would pass on to consumers. Those numbers seem too good to be true, and for good reason — no Blue Cross merger has ever achieved savings of this magnitude. The insurance commissioner’s experts found numerous reasons to fault Highmark’s estimates.

But a Highmark-IBC merger would cost more than simply money — it could frustrate efforts to reform the health-care system.

Any reforms likely to be enacted by Congress in the next few years will rely heavily on financing through health insurance, and competition between insurers in each state is critical to control costs. In those states with few insurance rivals, reform will falter.

So, the question is:

Would Pennsylvania be smarter to rely on competition to produce cost savings, which has been proven to work, or the unlikely-to-materialize savings promised by two companies who wish to stifle competition?

If this merger is approved, a single firm would have a virtual monopoly in western and southeastern Pennsylvania, providing it with more market share than any insurance company has in any other U.S. metropolitan market. If this merger is approved, you know who will call the shots when it comes time to enact national health-care reforms in Pennsylvania.

Highmark.