Independence Blue Cross and Michigan insurer to expand into Medicaid market

Independence Blue Cross is spending millions to increase market share in the expanding business of providing health insurance to the poor through Medicaid, a government-funded program.

The region's largest health insurer and Blue Cross and Blue Shield of Michigan, that state's largest health insurer, will spend $170 million to buy out Mercy Health System's 50 percent share in Philadelphia-based AmeriHealth Mercy Family of Cos.

Independence Blue Cross already owns 50 percent of AmeriHealth Mercy, which provides Medicaid coverage to 800,000 in Pennsylvania, South Carolina, and Indiana. Under the new arrangement, Independence will own 60 percent, and Michigan will own 40. The Mercy part of the name will go away in a year, assuming state regulatory approval of the deal.

The move represents a big bet by the two companies that they can snag some of the 16 million new people expected to be eligible for Medicaid by 2019 under the federal health-care overhaul passed in 2010.

Though Independence Blue Cross has long been a player in Medicaid, the deal opens the field for Michigan Blue Cross, which has not actively pursued that line of business, its chief executive officer, Daniel J. Loepp, said Tuesday.

Loepp and Independence Blue Cross' chief executive Daniel J. Hilferty said they saw a potential market within the national Blue Cross Blue Shield network, where two-thirds of the 39 plans do not offer Medicaid insurance. Loepp is chairman of the national Blue Cross and Blue Shield Association's board.

Loepp said many Blue companies were interested in Medicaid and might want to become minority partners in AmeriHealth, which would also look to acquire other insurance plans, particularly those run by hospital and doctor networks.

The goal is to provide "turnkey managed-care solutions . . . to the increasingly financially strapped states that provide Medicaid coverage," said Hilferty, who headed AmeriHealth from 1996 until December, when he started as Independence's chief executive.

Mercy Health System, of Conshohocken, operates four local hospitals, such as Mercy Fitzgerald in Darby. It is part of nonprofit Catholic Health East, of Newtown, which operates an 11-state network of hospitals. Mercy Health retains Medicaid business through a 50 percent share in Gateway Health Plan, which it owns with Highmark Inc., a nonprofit Blue plan in Pittsburgh.

"A lot of the Blues are in an interesting position. Many . . . have pretty substantial reserves, but there's not a lot of growth in the employer-coverage segment, where they've been strong, and Medicaid is where there is going to be coverage growth," said Alwyn Cassil, public-affairs director for the Center for Studying Health System Change, a Washington research group.

Insurers have lost members as the recession forced companies to lay off employees, who not only lost their jobs, but also their health insurance. That has been the case in Michigan, hit hard by the recession and the auto industry's troubles.

Medicaid, meanwhile, is expanding. Now a $391 billion program, its enrollment increased to 60 million in 2010 from 28.9 million in 1990.

"It looks like the gravy train is going to pull into the station, but even though there's going to be a lot more people, there's probably not going to be a lot of money for each of them," said Mark V. Pauly, a Wharton School health economist.

That raises a concern, he said, because Medicaid is funded by the government, "and the government, as we know, doesn't have money."

Loepp said the advantage of the deal lay with AmeriHealth Mercy's expertise in providing Medicaid through managed-care plans: "It will reduce our learning curve."

States prefer that approach, said AmeriHealth president Michael A. Rashid. They give insurers a fee per patient, instead of paying as they go for medical claims.

Though the health-care law is under attack, the insurers are not worried. Said Hilferty: "Regardless of what happens with the reform law, we expect the . . . market to continue to grow."

Michigan will kick in $215 million - $136 million to Mercy Health and the balance to underwrite growth initiatives at AmeriHealth. Independence Blue Cross will pay $34 million to gain its 60 percent share, but would not say how much more it will contribute.