Merger Mystery with Pennsylvania Blue Cross

The two largest Blue Cross organizations in Pennsylvania, both still nonprofits, want to merge.  But why?

Confusion and a wait-and-see approach seems to be the main response to the annoucement of proposed merger by Highmark Blue Cross (business league, EIN 25-0558173, no Form 990 available, financial report) of Pittsburgh and Independence Blue Cross (nonprofit, but no info available) of Philadelphia. 

Each organization already dominates its market and the two service areas don't overlap (between them are two other Blue Cross associations in northeastern and central Pennsylvania).  The organizations claimed that the merger would produce a billion in savings due to administrative consolidation and increased bargaining power, but also that job reductions of 1,000 positions could be accomplished by attrition and reassignment rather than layoffs.   

In the mid-1990s, it looked as though the Blue Cross/Blue Shield organizations would eventually merge into maybe fifteen or so (as the head of the New Jersey Blue Cross organization speculated in this 1996 article in the New York Times).  But that didn't happen, and there are today just under forty organizations, down from a hundred.  There is one large system, Wellpoint/Anthem, which is for-profit (its tortuous early history is available at this site and later developments are reported here) and which has the Blue Cross operations from  California to Missouri to Ohio to Connecticut. Other systems combine just two to four organizations, generally in close proximity.   

Apparently the Wellpoint/Anthem acquisition program was stopped by state attorney generals who wanted to extract high compensation for conversion of plans from nonprofit status. 

Yet Pennsylvania is unusual with four remaining BCBS licensees.  The only other state with so many is New York.  Most states have just one licensee. 

When Senator Arlen Spector held a field hearing on the merger by the Senate Judiciary Committee, the comments seemed pretty noncommittal.  The only exception was Professor Lawton Burns from Wharton, who sharply questioned the claim of benefits and added that mergers of roughly equal partners tend to go badly.  He and others mentioned research (the source of which I haven't been able to find) that showed that economies of scale in HMO health plans max out at 100,000 participants, while both of these programs have millions. 

So what's the benefit?  Possibly it has to do with developing programs of national scope.  IBC featured in its annual report its development of a system for Medicare administration for a consortium of Blue Cross programs from Minnesota to Montana. 

It's definitely not about compensation.  Highmark CEO Kenneth Melani received $3.22 million in 2005, which included a $2 million bonus.  His 2004 salary was $1.67 million, which Trent Stamp's Charity Navigator considered reasonable in this 2005 story in the Pittsburgh Post-Gazette. 

This tends to confirm my theory that Mr. Stamp and Charity Navigator believe that just about anything goes as long as a charity doesn't use telemarketing or direct mail.

It could be executive transition.  IBC lost its long-time CEO G. Fred DiBona to cancer in 2005 (he was 53).  Current CEO Joseph A. Frick stepped into the position from his previous role as senior vice president for human resources and administration and could be viewed as a transitional appointment.  A merger could be the easiest way for IBC to move forward. 

Supporting this idea is the fact that a loophole in Pennsylvania law gives the state insurance commissioner no authority over mergers between nonnprofit insurers, while the McCarran Ferguson Act exempts insurance companies from most antitrust actions.  So perhaps the best answer to the question of why these two organizations want to merge is: because they can. 

Comments

[Maryland Health Insurance]

This may really be what they say it is; a way to save money by reducing overhead. Or they are ganging up to buy another company.

[Kimberly Long]

The reason why they want to merger is because the State of PA is going to vote on a Health Insurance program for all adults in the state. It will provide free coverage to all. If Highmark and Keystone merge they will have 70% of the states insured and will be the obvious choice for the bid of health carrier to handle all the new enrollees. Plain and simple: They want more money.