2 Pa. insurers approve merger

Pennsylvania's two largest health insurers yesterday agreed to merge, a marriage that had been in the works for years and that gives the two nonprofit companies control over most of the state's health-insurance market.

The boards of Independence Blue Cross, of Philadelphia, and Highmark Inc., of Pittsburgh, separately approved a merger that would create the third-largest health insurer in the nation, a combination that was met with trepidation by doctors, hospitals and state lawmakers.

The two insurers said the combined company will have the financial resources to hold down administrative fees for the next two years, saving customers $300 million; to better manage drug costs to save consumers $280 million; and to provide more than $650 million to help the state's uninsured get access to health insurance.

"This is absolutely an exciting day for all of us," said Dr. Kenneth R. Melani, president and chief executive of Highmark, during a conference call with reporters. "We believe the people of Pennsylvania deserve a better health- care system, a more affordable health-care system, and that's what we're doing with this combination."

Both insurers will make filings seeking state and federal regulatory approval in April. Executives of the firms said they didn't know when the deal is expected to close.

Also yesterday, the state Senate unanimously approved legislation intended to require the merger to be reviewed by state regulators. The bill still needs approval by the state House before it can go to Gov. Rendell's desk.

The state Department of Insurance has no authority over mergers between nonprofit insurers at the holding-company level. The bill would change that, effective retroactively to Jan. 1.

The bill's sponsor, Sen. Don White, R-Indiana, said the creation of a "multibillion-dollar mega-entity" should create concern that it would crush competitors and send bills skyward.

Independence serves 3.4 million members, mainly in the Philadelphia area, and employs 9,500 people. Highmark has 4.6 million members, mostly in the western part of the state, and employs 18,500 people, more than half of them in Pennsylvania.

Executives said that any job cuts in the short run would be managed through attrition and that employees could be reassigned to positions in growing parts of the business.

Combined, they would become the nation's No. 3 health insurer behind UnitedHealth Group of Minneapolis and Wellpoint Inc. of Indianapolis, based on annual premiums collected. They also would control more than 53 percent of the state's insurance market, according to the 2005 report from the National Association of Insurance Commissioners.

Both are licensees of the Blue Cross Blue Shield Association, whose membership has undergone severe consolidation over the past two decades.

Melani will be the chief executive officer of the yet-unnamed combined company, and Joseph Frick, president and chief executive of Independence, will take on the roles of president and chief operating officer. They would maintain dual headquarters in Philadelphia and Pittsburgh.

Melani and Frick said the new company doesn't intend to convert to a for-profit business, a path that many other Blue Cross Blue Shield licensees have taken.

Independence posted 2005 revenues of $10.6 billion and profits of $143.6 million. It also had a surplus - or reserves - of $1.43 billion, up 11 percent from the prior year. Highmark's 2005 revenue came to $9.8 billion and earnings were $341.6 million. Its surplus was $2.8 billion, up 12 percent.

By combining, the two insurers could "compete with the Uniteds and Aetnas of the world," said Stephen Foreman, associate professor of economics and health administration at Robert Morris University in Moon Township.

But doctors, hospitals and consumer advocates expressed concern about the merger.

"The fear is always that small group and individual markets will get squeezed when there's less competition in the marketplace," said Laurie Sobel, senior staff attorney for Consumers Union in San Francisco. As a much larger insurer, they could focus only on "healthier, more profitable markets."

The Hospital and Healthsystem Association of Pennsylvania said it wanted to know more about how the merger would affect communities and health care.

The Pennsylvania Medical Society, which represents more than 18,000 doctors, said it has met with both chief executive officers and would continue talks with both firms.

"Due to the size of this merger, we would also like to know if it would somehow limit competition in the marketplace by discouraging other health insurers from entering the Pennsylvania market," said Dr. Mark Piasio, the society's president, in a statement.

Doug Sherlock, president of Sherlock Co., a North Wales health-plan-advisory firm, said consumers might not necessarily see any difference because Independence and Highmark serve different parts of the state with little overlap.

"There will be one fewer plan, but as a practical matter, as a consumer, you may not even really have a choice," he said. *