When public hearings on the proposed merger of the state's two largest health insurers begin next month, speakers opposed to the deal are sure to complain that a combination of Independence Blue Cross and Highmark Inc. would quash competition.

In the Philadelphia marketplace, Independence Blue Cross dominates its competitors, commanding a lion's share of the business, though both it and Highmark say they need to get bigger to fend off national insurers such as Aetna Inc., which is gaining market share.

Independence has no Blue rival in the region - important in a state such as Pennsylvania, where loyalty to the "Blue" brand is strong.

However, in a broad swath from Harrisburg to Easton, two Blues insurers, Harrisburg's Capital Blue Cross and Pittsburgh's Highmark, are rivals. Besides the Blues, other insurers also have a noticeable presence. Competition not only exists, it is fierce.

And that's just the way car dealer Greg Kelly likes it.

Right now, Kelly has a bid in his office from Capital that would save him $25,000 to $30,000 on the annual premium he now pays Highmark to cover 180 employees of Kelly Automotive Group's seven Lehigh Valley car dealerships.

"We have an offer in hand from Capital, but we'll go back to Highmark and see if they can match it," he said. Kelly had been with Capital before, but left it four years ago when Highmark produced a better bid.

"Capital's margins are tight and Highmark keeps them honest," said Kelly's broker, Jonathan P. Warner, of JP Warner Associates Inc., which has offices in the Lehigh Valley and in Wayne.

Now it's contract-renewal time.

"We're getting the best of both worlds," Kelly said. "Can you imagine that happening if there was just one Blue? It would never happen."

In 2007, Capital had a million subscribers enrolled and Highmark had 800,000, according to their annual reports. Capital estimates that the two Blues have two-thirds of the market.

While other insurers, including Aetna and, in the Lehigh Valley, the home-grown Valley Preferred, help create a robust marketplace, the two Blues compete neck-and-neck for the bulk of business.

The Blue rivalry had its roots in the 1996 birth of Highmark, the product of a merger between Blue Cross of Western Pennsylvania and Blue Shield, a statewide insurer for doctor bills.

For decades before the merger, Blue Cross of Western Pennsylvania, Capital Blue Cross, Independence Blue Cross and Blue Cross of Northeastern Pennsylvania all had the same joint operating relationship with Blue Shield. The Blue Cross insurers covered hospital stays; Blue Shield was the insurer for doctor bills.

Several years after the merger, Highmark moved to acquire Capital. But Capital rejected the terms. Highmark ended the relationship, entering what had been Capital's territory as a competitor.

The split began on Sept. 10, 2001, and became final in April 2002.

Both insurers had to scramble to draft contracts with providers. Highmark needed the region's 40 hospitals, which already had deals with Capital. Capital had to sign up the 13,000 doctors and other professionals already affiliated with Highmark.

"This wasn't just competition," said Anita Smith, Capital's president. "This was piranhas - don't-put-your-hands-in-the-water competition."

To Robert Stover, the warfare looked like opportunity. Stover is the chief executive of Medical Associates of the Lehigh Valley, a group of 50 family doctors in 22 locations who together care for 130,000 patients, about a fifth of the total in the region, he said.

His organization negotiates insurance reimbursements for the doctors based on price and service.

"There seemed to be a large stalemate" with Highmark, Stover said. When Highmark's predecessor, Blue Shield, had most of the doctors in the state under contract, there would have been little he could do.

But, as talks continued, Stover prepared an advertisement to run in the papers explaining to Lehigh Valley residents why their doctors would no longer accept Highmark insurance.

"We had a final meeting the day before the advertisement was to run and we showed them the ad," Stover said. "They were horrified." The situation was resolved.

"Now we have a stable marketplace," he said. "There is give and take. They [all] know we can drop them. If you have no ability or inclination to drop a contract, you have no bargaining power."

The rivalry also looked like an opportunity to Elliot Sussman, the chief executive of the Lehigh Valley Hospital and Health Network, one of the area's largest. With two major insurers vying to sign a contract, he was able to punish a third, Aetna, for not meeting the network's terms on reimbursement rates.

Aetna had been an important insurer in the Lehigh Valley. But from 2002 until 2007, the network would not accept Aetna. "It took a little chutzpah to do it," Sussman said. "We were able to do that because of competition in the marketplace."

There are other advantages, Sussman said. When the network decided to expand the outreach of a dental clinic at its hospital in Allentown, Sussman went to the insurers, hat in hand, to fund a $900,000 mobile clinic. Capital ponied up $250,000, celebrating the occasion at a news conference attended by children at a local elementary school.

Highmark also has contributed, donating $100,000 in 2004 for a hospital-run osteoporosis prevention and education program.

Kitty Gallagher had hoped that competition would help her shake loose some key bargaining information.

As president of the Lehigh Valley Business Coalition on Healthcare, she negotiates health insurance for the 32,000 employees and family members of the Lehigh Valley's major employers, including Mack Truck Inc. and PP&L Corp.

"When the divorce first happened, I thought it was very positive," Gallagher said.

Most of her companies self-insure, meaning they pay claims directly. To service them, the insurers negotiate fee schedules with the hospitals and doctors, handle the claims and provide other services, such as disease-management programs.

Gallagher wanted to know what the insurers paid the doctors and hospitals. "We tried to play them all off against each other. I can't tell you how hard we fought toe-to-toe on it," she said. "They held us off."

Without that information, she still negotiates, but she would like to see more transparency.

Family practitioner Samuel Bub, of Emmaus, said competition was good in theory.

"But for the average physician in a small practice, we need to be part of both plans to capture the patients," he said. "A small group is in no position to bargain with either one of them.

"On a day-to-day basis, my focus is to see the patients."

Contact staff writer Jane M. Von Bergen at 215-854-2769 or jvonbergen@phillynews.com.