Editorial: Health-Insurance Merger
From the start, it was difficult to figure out who really benefits from the proposed merger of Pennsylvania's two largest Blue Cross health-insurance plans.
But not anymore.
The two big winners recently emerged - Joseph Frick, CEO of Independence Blue Cross in Philadelphia, and Kenneth Melani, his counterpart at Highmark Inc., based in Pittsburgh.
According to a filing made public last week, if the state approves the merger, Melani stands to get a whopping 31-percent pay hike to $3.9 million annually. Frick's pay of $2.94 million would stay the same - for now - but maybe that's because it's been jacked up 84 percent since 2006.
Not too shabby for a couple of guys running benevolent nonprofits.
On a percentage basis, the pay hikes are a little above the annual increases in health-insurance premiums the Blues have been passing on to their customers across the state.
Short of the windfalls for the top execs, the proposed merger looks like a loser for other Pennsylvanians.
Up to 1,200 Blue Cross jobs are expected to be eliminated if the deal goes through. Mergers create job overlaps that lead to reductions and a big annual savings.
Of course, there's no overlap for the two chief executives, who instead will divvy up their duties
still get big paydays.
Independence Blue Cross and Highmark already have a stranglehold on their respective markets, which helps explain why they can jack up rates without much recourse by their clients.
The proposed merger won't lead to a reduction in premiums for customers, who have been socked with annual double-digit increases. The Blue Cross CEOs say the merger will have "minimal" impact when it comes to reining in rate hikes.
If the merger is approved, the prospect of any real competition among health-insurance providers in the state will disappear.
The merger would give the new firm a combined market share of roughly 65 percent - making it the largest private health insurer in Pennsylvania. The result will be a more dominant health-insurance provider, making it even harder for other existing insurers to expand while scaring any new competitors from entering the state.
The two Blues have unwieldy boards of directors loaded with political insiders who appear to lack much industry expertise.
Under the proposed merger, a couple dozen board members will give up their plumb posts, but there will still be 20 directors, plus the two executives. By comparison, Microsoft has six outside directors and two executive board members.
Another concern is down the road. What happens in a few years if the merged nonprofit decides to become a for-profit in order to have access to capital markets and grow bigger still?
Frick has said it won't happen, but that's been the pattern in other states. Just last week, New Jersey's largest health insurer, Horizon Blue Cross Blue Shield, filed to become a for-profit. Horizon is dangling a $1 billion windfall to the state to approve the deal. That's the payoff for the years Horizon created its value while operating as a tax-exempt nonprofit. Meanwhile, the stock options generated through a for-profit conversion will create a separate windfall for executives.
Frick and Melani shouldn't be the only winners in Pennsylvania.