Highmark-IBC union creates major player in Pennsylvania

NATIONAL REPORTS-The proposed merger of Highmark Inc., of Pittsburgh, and Independence Blue Cross (IBC), of Philadelphia, combines two large health plans into a single organization that would become the dominant player in the Pennsylvania market. It also represents another step in the consolidation of the health plan marketplace, say industry experts.

According to Joseph A. Frick, president and CEO of IBC, the combined companies will achieve savings by streamlining future investments in technology and administration and will generate revenue growth by strengthening sales of ancillary products. "By combining together, we will generate savings and revenue growth over six years that total more than $1 billion," he says. "This is new money that goes beyond any commitments we have today."

He says the missions of the two companies align as well.

Health plan consolidation such as this continues and the industry probably will see more activity in 2007 and 2008, according to Henry Loubet, senior vice president, chief strategy officer at Keenan & Associates, an insurance broker based in Torrance, Calif.

"Yet, the merger does build a large entity that is in fact separate and distinct from the other large health plans-such as WellPoint and United-and does strengthen the not-for-profit Blues plans as a separate and viable entity," he says. "It creates an interesting dynamic with the Blues plans who are either part of WellPoint or not. If they are not, how they can effectively compete-especially as not-for-profits?"

For the two organizations, the merger brings economies of scale relative to the Pennsylvania market. "It merges the two dominant players and allows them to leverage the Blues brand even more so in one of the largest states in the country," Loubet says. "It also in some respects makes it more challenging for the major for-profit players such as WellPoint, United and Coventry to have much of a foothold in Pennsylvania in comparison with the merged plans."

Beginning with repeal of the 1986 federal tax exemption for Blues plans (Blue Cross and Blue Shield), and the decision in 1994 by the Blue Cross and Blue Shield Assn. to allow its members for the first time to become for-profit entities, there has been substantial merger and consolidation of intra- and interstate Blues plans, explains Joseph M. Mack, MPA, senior vice president at Beecher Carlson's National Healthcare Practice, an integrated insurance and risk management consultancy in Irvine, Calif.

"Many of these plans have converted-or tried to convert-from nonprofit to for-profit, and a large number of previously independent plans have been acquired or become part of others," Mack says. "The number of independent Blue plans has decreased from more than 125 in the 1980s to less than 40 today."

If the newly formed organization eventually seeks to become for-profit, then profitability becomes paramount for its shareholders, according to Mack. "Shareholders of such organizations demand greater profit margins," he says. "If revenue could not be increased substantially because of market penetration and/or the inability to raise premium revenue drastically, then substantial cuts in expense would be required to obtain the target profit margins."

When looking at the proposed Highmark-IBC merger, the manner in which the organizations remain financially profitable will drive future strategy, according to Mack. "Will they remain nonprofit?" he asks. "If so, since together they dominate the marketplace, there may be less reliance on increasing revenue through product or market growth, and more reliance on decreasing costs. Concentrating on decreasing costs could lead to actions such as eliminating employees through consolidation of functions, reduction in less-profitable lines of insurance and/or products, reduction in offering plans to high-utilizing employers, etc. Revenue could potentially be increased by using the newly formed organization's market clout and raising premiums."

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