The state's two largest insurers may say their merger will produce operating efficiencies, but health-care economist Lawton R. Burns wasn't buying it.

Independence Blue Cross and Highmark Inc.'s chief executive officers were the first to speak at yesterday's public hearing - and they repeated what they had said before:

The merger would generate $1 billion in savings over six years through economies of scale, administrative efficiencies, and negotiating power with the drug companies. That would be enough to spend $650 million on coverage for the uninsured and to keep portions of premiums from rising for subscribers.

But Burns, a Wharton professor in health-care economics, didn't see how. "Merger efficiencies are difficult to achieve," he told Gov. Rendell and U.S. Sens. Arlen Specter (R., Pa.) and Bob Casey (D., Pa.) at the National Constitution Center yesterday.

The two Blues have "failed to provide a convincing rationale and game plan for extracting" value from their proposed merger, he said.

For example, the Blues have promised to save $280 million in negotiations with drug companies, but, Burns said, "suppliers grant discounts based on local market penetration; Highmark and IBC have already achieved this."

Each insurer plans to keep its own headquarters - Independence in Philadelphia and Highmark in Pittsburgh.

"As a consequence, it is difficult to envision where any savings and efficiencies will spring from," Burns said, adding that coordinating operations 300 miles apart may increase costs.

Burns said he could understand one motivation for merger: "The desire to confront the growing competition from out-of-state, investor-owned health plans."

Large companies such as UnitedHealth Group Inc. and Aetna Inc. have advantages the Blues do not - including less-restrictive medical-underwriting practices that leave the Blues as the insurer of last resort.

"These are not small mom-and-pop insurance companies, whom we would overshadow," Independence CEO Joseph A. Frick testified. "All have access to capital to buy companies and capabilities."

Much of yesterday's hearing centered on the effect the merger would have on competition among health insurers.

Because Independence Blue Cross and Highmark do not compete with each other, there will not be any anticompetitive effect for their customers. "I am convinced that this proposed combination will not reduce competition," Frick said.

But other witnesses worried that it would.

Decreased competition would also reduce the bargaining power of doctors and hospitals for reimbursement, while not necessarily producing lower premiums or more coverage for the uninsured, witnesses said.

"Econometric evidence shows that in the managed-care field, an increase in the number of competitors is associated with lower health-plan costs and premiums; conversely, a decrease in the number of competitors is associated with increases in plan costs and premiums," Burns said.

Specter arranged yesterday's first public hearing, telling reporters that "this is a big, big matter for Pennsylvania with very important antitrust implications, and we want to take a close, close look at it."

Rendell said it was important to make sure that the merger yielded savings in premium costs for businesses, while ensuring that doctors and hospitals were fairly compensated. "They are in a tremendously tight squeeze," he said.

But Rendell said he was heartened by the Blues' plans to spend $650 million on expanded coverage for the uninsured, which is part of Rendell's Prescription for Pennsylvania health plan.

The companies have offered to extend their Community Health Reinvestment Agreement with the state three years beyond the plan's 2010 sunset date.

Last year, the companies contributed a total of $154 million as part of the agreement.

At one point during the hearing, Specter asked Highmark chief executive Kenneth R. Melani pointed questions about his 2006 compensation, which topped $3.2 million and included a $2 million bonus.

Melani, who will lead the new Blue, reddened and responded that his compensation amounted to 10 cents per customer for Highmark's 28 million subscribers, most of whom are from other states. There are 4.8 million Highmark subscribers in Pennsylvania, he said.

After the hearing, Melani said that about 1,000 jobs would have to be reconfigured after the merger. Most of those would be lost by attrition, but would be regained through anticipated growth, he said.

The insurers' boards voted unanimously March 28 to merge, but there are significant state and federal regulatory hurdles. Melani said he hoped to finish the process in a year; Rendell estimated it would take two.

Contact staff writer Jane M. Von Bergen at 215-854-2769 or