Blue Cross and Blue Shield Plans

Highmark, Independence File Voluminous Consolidation Plans, Offer Insight Into Entity's First Years

Reprinted from the May 2007 issue of The AIS Report on Blue Cross and Blue Shield Plans, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans.

Highmark Inc. and Independence Blue Cross began burying the Pennsylvania Department of Insurance (PDI) with their Form A consolidation applications, filing about 3,000 pages on April 27. That mushroomed to nearly 30,000 pages of information related to the merger by May 8. The filings include a profile of the consolidated company, financial statements, advantages of consolidation and the structure of the merged entity. Despite the volume of information, some are not satisfied with what has been publicly disclosed.

Critics allege that the health plan is trying to hide information related to the merger. Jonathan Stein, a lawyer with Community Legal Services of Philadelphia, told the Philadelphia Inquirer that the Blues' request to keep certain plans secret from the public is "a distressing sign that there may not be the needed transparency that such a transaction requires." Stein was referring to a form titled "Business Plan for Acquisitions, Mergers and Redomestications," which both plans' lawyers have asked PDI to keep confidential. Highmark spokesperson Michael Weinstein responds that "certain information we have asked not to be made publicly available," because it would reveal certain aspects of their business plans to competitors. He adds that other information isn't available because "many decisions have not yet been made."

The combined entity would be a giant in the Pennsylvania market. According to the plans, it would have about 7 million of the state's 12.4 million residents enrolled and would have $22 billion in annual operating revenue. The firms did not disclose market-share projections.

The two plans defended the merger against early criticism that the combined entity would monopolize the Pennsylvania market. In their application they also assert that "the combination of the two nonprofit corporations will not substantially lessen competition or tend to create a monopoly." But they maintain that their Blues charters keep them from competing in the regions. They also refuted earlier allegations that they would pursue conversion to for-profit status.

The consolidation will achieve greater than current cost savings generated by the combined entity's economies of scale, the plans say in their filings. The savings would be used to "improve access to healthcare insurance by supporting expanded health insurance programs for the uninsured and the underinsured." The companies say they will achieve $1.02 billion in savings over the first six years of the merger.

The savings, according to the PDI forms, will include $820 million in scale-based economies. The plans explained that the savings will come from consolidation of information technology and desktop infrastructure and data centers — with avoided costs of new center upgrades and investments. Scale also will lead to cost reductions in information technology, claims management, medical management, informatics, and enrollment and corporate systems. Other material savings will come from combined back-office operations as well as corporate management and administrative functions, the filings report.

$285 Million in Pharmacy Savings Seen

The plans say they will leverage their combined size to produce $285 million in pharmacy-cost savings over the first six years of the new entity's operations. Those savings would come from higher rebates, pharmacy discounts, and lower pharmacy benefit management administration and dispensing fees, they say in the filings.

An additional $178 million in savings will come via new growth opportunities over the first six years of combined operations. According to the companies, $91 million of that would stem from "best-of-both" products, $45 million from ancillary product sales and $42 million from "value-added services."

"Best-of-both" products will include expanded sales of unbranded third-party administrator services in "adjacent counties in Ohio, Virginia, Maryland, and New York," according to the filings, as well as increased national-account sales penetration and sales of Indepen-dence's pharmacy benefits manager (PBM) services to other Blues plans and insurers. Expansion of value-added services will include administrative services provided to other entities, among them Medicare claims processing for CMS, and additional opportunities created through the merger, they say. The new organization's integrated informatics platform also will support the sale of "product and service offerings such as predictive modeling, biometrics, utilization and productivity reporting, and care/case management services."

The total economic benefits of the consolidation will be $1.3 billion, but the companies say that amount will be offset somewhat by $269 million in "required investments." Such investments would be likely be related to technology, Highmark's Weinstein tells The AIS Report.

The combined company would use the savings to "provide over $650 million in support to Pennsylvania programs for the uninsured and underinsured," according to filings by the health plans. They add that the consolidation would improve the affordability of health care through $600 million in cost savings.

The entity would contribute $300 million over six years to existing programs targeting the uninsured "and/or to new initiatives aimed at expanding healthcare coverage by providing uninsured and small business employees with affordable coverage." The company also would extend its legacy companies' commitments to the state's Annual Community Health Reinvestment through 2013, the filings say.

The new entity, according to the filings, will save its employer group customers roughly $295 million by holding its per-member per-month administrative fees flat for the two years following consolidation. Highmark and Independence say they plan to pass $285 million in pharmacy-related savings on to the new company's enrollees in an attempt to help slow premium growth. Additionally, $36 million in savings will come from eliminated BlueCard fees that would otherwise apply to transactions between Highmark and Independence.

The entity will continue to offer the portfolio of products now marketed by Highmark and Independence. However, the companies contend that the merger will reduce duplicative future product development, and allow the new company to use its combined resources to bring new products to market faster and more cost-effectively.

As a combined entity, the filings say, the company will expand Independence's e-prescribing initiative into all of its service areas. That initiative allows providers access to free e-prescribing tools. The company also would "explore mechanisms to encourage the adoption and implementation of a standardized, interoperable system for Personal Health Records and Electronic Medical Records."

Highmark's CEO Would Head New Company

Under the proposed merger, Highmark CEO Kenneth Melani, M.D., would serve as CEO of the combined entity. Independence CEO Joseph Frick would serve as president and chief operating officer. The remaining senior management positions would be selected from Independence's and Highmark's current senior management teams prior to consolidation of the entity, the plans say.

The plans assert that the new organization's operating structure will allow it to realize economic gains from consolidated operations while permitting the company to maintain local consumer and provider-relations presences. The entity will have regional advisory boards in the east, west and central regions of Pennsylvania "to assure that the company maintains its local community focus," the two firms explain. Regional board members will consist of local business and community leaders, they add. The organizational structure also will have regional organizations to manage consumer and provider relationships and operations. However, it will have a centralized organization that is responsible for its information technology, finance, administration and specialty and ancillary products.

The entity plans to maintain its claims, customer service and information technologies operations and facilities in the same places that Highmark and Independence now operate. This includes corporate locations in Philadelphia, Pittsburgh and Camp Hill, Pa., as well as operations centers in Erie, Allentown, Harrisburg, Johnstown, Williamsport, and areas near Philadelphia suburbs.

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