IBC/Highmark Merger
On June 26, 2007, Bruce A. MacLeod, MD, chair of the Pennsylvania Medical Society's Board of Trustees, presented the following testimony to the Pennsylvania Senate Banking Insurance Committee.
Good morning. I’m Bruce A. MacLeod, MD, chair of the Pennsylvania Medical Society’s Board of Trustees.
Let me begin by thanking Senator White and this committee for inviting the Pennsylvania Medical Society to speak today on the proposed merger of Independence Blue Cross and Highmark Blue Cross and Blue Shield.
The proposed IBC-Highmark merger is a mega-merger. It would form the third largest health insurance company in the country. By far, it would be the largest in Pennsylvania. It is estimated that the merged company would control 53 percent of the Pennsylvania health delivery market. Based upon the enrollee figures, the new IBC-Highmark company is estimated to have 8 million enrollees. Some of these would be out-of-state residents, but the majority would be Pennsylvanians. Census numbers suggest that there are roughly 12 million Pennsylvanians; so this new company would insure the majority of our state’s residents.
The Pennsylvania Medical Society believes that no merger should move forward until the benefits to patients and health care professionals are clearly demonstrated. The Pennsylvania Medical Society will closely monitor the proposed merger and articulate our concerns. We have shared this opinion with the leadership of Highmark and Independence Blue Cross.
It is our concern that consolidation within the health insurance market has the potential to stifle competition. It’s possible, even likely, that a merger of this size could deter new competition in those markets. The potential consequences for market dominance include rising costs to the consumer. Our first question is “will the size of this merger be a barrier to entry for other health insurers into the Pennsylvania market?”
IBC-Highmark officials claim that economies of scale will be gained through the merger and this will favorably impact the cost of health insurance. This leads to our second and third questions. How long will those economies of scale benefit the public? And, when those economies of scale end, what happens?
The joint news release from Highmark and IBC on March 28, 2007, stated that “the new, combined company will have the resources to hold administrative fees flat for two years.”
Published studies show that health insurers exhaust their economies of scale at 100,000 to 150,000 enrollees. Our own work supports this conclusion, albeit at a slightly higher number. Insurers with one million, two million, four million, or five million enrollees are not any more efficient and may, in fact, be more inefficient than smaller ones. As stated earlier, based upon adding enrollee figures from both companies, the new IBC-Highmark company is estimated to have 8 million enrollees.
But, based upon the IBC-Highmark promise to hold administrative fees flat for two years, does that mean that after two years, we can expect a big jump in the merged companies operating costs? And, during those two years, will competition in Pennsylvania be stifled? When the IBC-Highmark promise to hold fees flat for two years ends will competition exist to keep their costs in check? Competition generally improves price, service quality, consumer choice, and clinical quality. Will the reduction in competition negatively impact those considerations?
If so, this could negatively impact everyone from patients to hospitals to health care professionals to government. With an insurance market dominance, the new company could almost exclusively control the insurance market that currently allows for premium competition. That could negatively impact employers, patients, and government. Similarly, could this create a monopsony in which there is only one buyer in the market? If so, this would negatively impact health care professionals and hospitals, because of the inequity of negotiating power based on market dominance.
If this merger goes through, will there ever be a balanced playing field between health insurers and health care professionals? Will those who contract to do work for health insurers be able to select which insurance products they accept, or will the single mega-company dictate providers accept all of their products or none. Will there be fair contracts? Or will the standard “take it or leave it” approach and insurer imposed cost-cutting mechanisms be used?
The lack of competition among health insurers in health delivery markets throughout the country and in Pennsylvania, as well as the consolidation of health insurers across the nation, raises serious concerns for the availability of affordable heath insurance and subsequent quality of health care. As patient advocates, physicians are undermined by market dominant insurers and prevented from providing necessary care. As a result, dysfunctional markets have produced:
- annual double-digit health insurance premium increases going back to the early 1990s
- unilateral decisions about hospital payment
- physician fee schedules that are unilaterally imposed and have provided stagnant or declining compensation
- substantial profit levels for health insurers
While many large Pennsylvania insurers are posting huge profits and have excess surplus reserves, premiums continue to skyrocket (Pennsylvania has some of the highest premiums in the nation), and patient cost sharing strategies continue to increase without any increased in benefits.
Furthermore, based on a 2005 update by the American Medical Association, the Pennsylvania statewide Herfindahl-Hirschman Index (HHI) for all HMO and PPO products is 1513. This would make the Pennsylvania market “concentrated” based on the 1997 Federal Trade Commission / Department of Justice Horizontal Merger Guidelines (FTC/DOJ guidelines). This number is probably low since it is very difficult to obtain accurate PPO numbers. Under the guidelines, a merger in these markets that raises the HHI by more than 100 points may raise significant competitive concerns. If the market has an HHI above 1800, which the Pennsylvania statewide market probably is if accurate PPO numbers were known, the market is considered “highly concentrated” under the guidelines. A merger in these markets that raises the HHI more than 50 points may raise significant competitive concerns and mergers that raise the HHI more than 100 points are presumed to be anti-competitive. It is therefore imperative that the Pennsylvania Insurance Department and/or the Pennsylvania Attorney General collects accurate HMO / PPO numbers to determine the correct HHI for the Pennsylvania market. If the HHI were found to be above 1900, a combination of Highmark and IBC would not be permitted under existing FTC/DOJ merger guidelines.
In conclusion, I ask, “Will the proposed IBC-Highmark merger be good for Pennsylvania?”
And that’s why we support review of the proposed merger by our state government’s regulators.
Thank you.
Last Updated: 8/6/2008