Business Publications

Questions abound in wake of proposed Blues mega-merger

Central Penn Business Journal, Apr 6, 2007 by Olenchek, Christina

REGION

A merger between Highmark Inc. and Independence Blue Cross would bring changes to Central Pennsylvania's health-insurance market. But it's too early to tell whether most of those changes would be good or bad for employers paying premiums.

The potential marriage of the state's two largest health insurers has fueled discussion and debate among the brokers who help companies buy coverage. It remains unclear whether the efficiencies and administrative savings realized by the new, larger company would be overshadowed by its ability to stifle competition, several midstate brokers said.

"It's a wait-and-see situation," said Paul Rovnak, vice president with Wilkes Barrebased Howell Benefits, which has an office in Lancaster County. "Like anything, it will come down to the details."

In late March, the boards of Pittsburgh-based Highmark and Philadelphia-based Independence Blue Cross agreed to combine the two firms. If approved by state and federal regulators, the merger would create a company with several million members and approximately 18,000 employees in Pennsylvania. Highmark, which does business as Highmark Blue Shield in this area, is one of the primary competitors in Central Pennsylvania's insurance market and has operations in Cumberland and Dauphin counties.

Several brokers agreed with Highmark and Independence Blue Cross executives' contention that the merger would create economies of scale that could save consumers money. A larger carrier would have more leverage to control reimbursements paid to doctors and hospitals, said Rob Heller, president of Alpha Benefits Group The Plymouth Meeting-based benefits-consulting firm has an office in Lower Allen Township, Cumberland County.

However, any administrative savings could be offset by the costs of integrating the companies' employees, products and systems, said Jennifer Geesey, president of Central Penn Benefits in York.

"The question is, 'what is the end result,'" she said. "It will be interesting to see where the rates play out."

The merger's effect on Highmark's and Independence's competitors is unclear, too. The competitive landscape in Central Pennsylvania should not be significantly altered because the merger will not remove any competitors from the market, Heller said. But the size of the new company could make competitors think twice about entering or putting more resources into the market.

Opinions also were mixed about what the merger would mean for Capital BlueCross. The Dauphin County insurer remains committed to serving Central Pennsylvania, the company said in a written statement.

Jim Schmucker, vice president with StoudtAdvisors in Lancaster County, believes Capital would be unfazed by the merger.

"Capital is a strong, aggressive competitor," Schmucker said. "I don't view them as going away."

The merger could put considerable pressure on Capital to reduce rates, Heller said. The move also could force Capital to invest in expanding its provider network, said Karl Fetterman, owner of York-based Kling Bros. Insurance Agency.

"I think (a merger) puts Capital at a disadvantage," Fetterman said.

The proposed merger would be the latest in a string of consolidations in the insurance industry. It's a trend many brokers feel will continue, at least as long as the government allows.

"We're seeing big companies becoming even bigger," Heller said.

About the Blues

Highmark Inc.

Headquarters: Pittsburgh

Top executive: Dr. Kenneth Melani, president and chief executive officer

Number of members: Almost 4 million statewide

Number of employees: 18,500

2006 financials: Highmark had net income of $398.3 million on operating revenue of $10.8 billion. Its surplus was $3.2 billion.

Web site: www.highmark.com

Independence Blue Cross

Headquarters: Philadelphia

Top executive: Joseph Frick, president and chief executive officer