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For Immediate Release
July 10, 2008
Back
 
Testimony
of Senator Don White
Before the State Insurance Department/Blues Merger
Commissioner Ario, distinguished panelists, I would like to open
by thanking you for the opportunity to present my views and concerns regarding
the proposed merger of Highmark and Independence Blue Cross. As Chairman of the
Senate Banking and Insurance Committee, I have a number of concerns about the
potential impact this extraordinary merger would have on all aspects of
healthcare in Pennsylvania. Moreover, as a Senator representing a rural
district in Western Pennsylvania, where Highmark and its subsidiaries already
have a vast majority of the market share, I know first-hand the consequences
that a lack of competition has on health care providers and premium payers.
I simply do not believe that Highmark and IBC have clearly
demonstrated the long-term benefits of this proposed merger. And I emphasize
'long-term' as I believe this merger must be considered based on its potential
impact on the Commonwealth 10, 15 or 20 years from now. I would encourage the
Insurance Department and its consultants to consider two questions before
rendering a decision on the merger. First, will this merger truly provide
LONG-TERM benefits to the policyholders of Highmark and IBC? And if the
Department determines that it would provide these benefits, then what safeguards
will be in place to ensure they actually come to fruition?
Personally, I am extremely skeptical that any true long-term
benefits will be derived from this merger. I urge you to consider the Blues’
positions on four points:
Highmark and IBC have pledged to freeze administrative
fees for two years. This proposed freeze really stretches the
definition of a long-term benefit -- except maybe for the principal parties
involved in the merger. It stands to reason that any merger of this
magnitude should result in substantial enough savings to ensure that
administrative costs remain stable or – as in most merger business models –
actually decline. If this merger truly develops efficiencies that otherwise
could not be achieved without this union, then it certainly is realistic to
believe that administrative fees could be held in check for longer than two
years. Therefore, I would encourage the Department and its experts to
consider setting a higher, more realistic standard that would truly provide
long-term benefits. Perhaps administrative fees should be frozen for five or
10 years? Or, should they be reduced from the outset and then frozen, or at
least tied to a certain rate of increase?
This merger will produce $1 billion in 'savings' of which
$650 million will be granted to the Commonwealth. This is certainly
worth extensive consideration and review. Let’s be upfront and clear and
call these proposed ‘savings’ what they really are -- excess premium dollars
– plain and simple. In fact, the Insurance Department should be asking why
these dollars should be given to the Commonwealth in the first place. Why
should the Commonwealth reap the rewards from individuals and businesses
being overcharged for their health insurance? Even if all is above board,
this proposal gives the appearance of being a quid pro quo. If the merger
must meet the standard of being a benefit to the policyholders, then why are
those dollars not being returned to them as premium reductions?
Moreover, if the $650 million in savings is given to the
Commonwealth, I do not believe that it should be considered as a benefit
solely derived from the merger. Consider the Blues' current Community Health
Reinvestment Agreement (CHRA) which expires in 2010. Highmark and IBC
already give the Commonwealth at least $80 million annually under the CHRA.
Therefore, any future contributions should augment the contributions set by
the existing agreement. Pledging $650 million, while being left off the
hook for $80 million annually after 2010, is nothing more than a shell
game. And let's remember that the pledge of $650 million comes in place of
paying premium taxes on Highmark's and IBC's non-profit business. So is this
truly new money or just another way of packaging what the Blues should
already be doing to fulfill the social mission that excuses them from these
taxes?
The Blues contend this merger does not eliminate
competition in the market place. That is simply unfathomable. In no
uncertain terms, this merger would certainly eliminate potential and
existing competition from the marketplace. Highmark could compete with IBC
today in southeastern Pennsylvania, yet "voluntarily" chooses not to do so.
Just as importantly, both Highmark and IBC have extensive packages of
subsidiary plans that are able to compete with each other outside the
predetermined boundaries established the Blue Cross/Blue Shield
Association. Make no mistake; this merger would limit competition now and
into the future in Pennsylvania’s health insurance marketplace.
I wholeheartedly agree with Governor Rendell when he
referred to the potential merger in an August 3, 2006 article in the
Pittsburgh Post Gazette: "One of the things we're going to do is set a
pretty high bar to see whether this will further decrease competition in the
Commonwealth. That's not a good thing for employers and that's not a good
thing for physicians and hospitals." I hope Commissioner Ario, you
and the Department share the standard set forth by the Governor.
Many community groups will benefit from Highmark and
IBC’s generosity. While such generosity is notable and admirable, it
should not influence the decision to approve this merger. Please remember
that premium payers are the source from which those dollars are ultimately
derived. Highmark and IBC are redistributing excess premium dollars in the
name of benevolence – which serves as much to their marketing advantage as
the community groups’ benefits. Therefore, any commitment that the new
unified conglomerate would support community projects should not be a
standard of consideration for the merger – this is something they should do
as responsible members of Pennsylvania’s business community irrespective and
in light of the benefits that the parent companies receive as not-for-profit
entities.
To be clear, such benevolence does not exist because these
entities are kind hearted – it is a product of the preferential tax status
they enjoy as non-profit entities. Such status not only provides them with
a competitive advantage over for-profit insurers, but also obligates them to
be the benevolent institutions their limitless advertising budget says they
are.
While I firmly believe the Insurance Commissioner should not
approve the merger, based on the record I’ve seen so far, I would strongly
suggest that certain contingencies be in place if it is approved. These
contingencies could include the following:
1. Providers must have proper recourse when negotiating
appropriate reimbursement rates. In today’s market, small and rural hospitals
rely almost exclusively on Highmark reimbursements, which unfortunately all too
often means that they are almost literally beholden to Highmark’s rates. There
is already documentation available showing great disparity in reimbursements for
the exact same procedures based on size and location of the treatment facility.
This situation, which is already very detrimental for health care consumers and
providers, would likely be exacerbated with the combined market share power of
the merged Blues. In the short-term, the new conglomerate could easily “buy or
bury” smaller providers, essentially swallowing up what little competition
remains. Under that scenario, the long-term market view would be very grim for
health care providers and consumers. Essentially, health care in Pennsylvania
could devolve into a quasi-Medicare or Medicaid system under which the
conglomerate would set reimbursement rates and health care providers could "take
it or leave it." And if all of the competition is gone, consumers will have few
options to consider when purchasing health insurance. In order to avoid this,
an independent arbitration system must be established to mediate reimbursement
negotiations. Witness the current stand off between Conemaugh Hospital and
Highmark as an example of the unfortunate consequences of ‘take it or leave it’
negotiations.
2. Require the 'new Blue' to only community rate their small
group and individual products. Such a rating restriction will ensure stable
rates in these markets while allowing smaller insurers to compete through their
ability to continue medical underwriting. The side benefit to such a
contingency would be to ensure competition in the health insurance marketplace
while providing small employers with young and healthy workforces the ability to
provide their employees health insurance.
3. Administrative fees must be frozen longer than the two
years proposed by the Blues. A merger of this magnitude should have a much more
positive impact on reducing administrative overhead – particularly in the
long-tem.
4. Require the $1 billion in 'savings" to go directly to
consumers through reductions in premiums. Why should the Commonwealth receive
this money to redistribute? The rate payers should reap the benefits of the
merger – not the Commonwealth.
5. Require the Blues to shed their investments in other Blue
plans, such as Highmark’s operational ownership of BlueCross of Northeastern
PA’s largest for profit subsidiary, First Priority Life Insurance Company (FPLIC).
Also, the conglomerate should not be able to have a 'vertical' monopoly over
products and services, such as what Highmark currently enjoys through Davis
Vision.
6. Require the New Blue to support the two remaining
Pennsylvania blue plans opportunity to offer Blue-branded products statewide.
It is unfortunate that a national association, hiding behind a curtain in
Chicago, has the ability to dictate to where and how Pennsylvania Blue Plans
market their products. Yes it is a franchise agreement, but as a resident of
Indiana, Pennsylvania, I can still patronize a McDonalds in Philadelphia if I so
choose. Why can’t health care consumers have the same opportunity? In fact,
rather than merger, perhaps IBC should be given the ability to offer a
Blue-branded product statewide. Quoting here: "Competition is good for
everyone; it keeps you focused on the customer, it keeps you being
innovative,". Those are not my words, but the words of Dr. Melani in the
Tribune Review on May 8, 2005. I’m certain Dr. Melani still holds that
view and by supporting his peers ability to compete statewide he will have the
ability to place what he believes in practice and ensure the benefits of
competition he sees will come to fruition in Pennsylvania’s health insurance
market.
As the Senate Banking and Insurance Committee prepares
additional recommendations for your consideration pursuant to the provisions of
HB 1150, it is my hope you will consider the five recommendations I’ve set forth
this afternoon.
Commissioner Ario, I believe your review of this proposed merger
must place the burden of proof upon Highmark and IBC to justify beyond a
reasonable doubt that this merger will provide meaningful and long-term benefits
to the people they insure, the providers they reimburse and the health care
interests of Pennsylvanians at large.
I appreciate your time and consideration and look forward to
working with you as the merger review goes forward. Thank you.
Contact:
Joe Pittman
(724) 357-0151, cell (724) 541-0552
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