[Senate Hearing 110-582]
[From the U.S. Government Publishing Office]
S. Hrg. 110-582
CONSOLIDATION IN THE PENNSYLVANIA HEALTH INSURANCE INDUSTRY: THE RIGHT
PRESCRIPTION?
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 31, 2008
__________
Serial No. J-110-115
__________
Printed for the use of the Committee on the Judiciary
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U.S. GOVERNMENT PRINTING OFFICE
45-007 PDF WASHINGTON : 2008
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Stephanie A. Middleton, Republican Staff Director
Nicholas A. Rossi, Republican Chief Counsel
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma
Jeffrey Miller, Chief Counsel
William Castle, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
prepared statement........................................... 139
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 2
WITNESSES
Allen, Henry S., Jr., Counsel, Private Sector Advcacy Department,
American Medical Association, Chicago, Illinois................ 17
Balto, David, Senior Fellow, Center for American Progress,
Washington, D.C................................................ 15
Frick, Joseph A., President and Chief Executive Officer,
Independence Blue Cross, Philadelphia, Pennsylvania............ 8
Harris, Barry D., Board Chairman, Economists, Inc., Washington,
D.C............................................................ 19
Laign, Michael B., President and Chief Executive Officer, Holy
Redeemer Health System, Huntington Valley, Pennsylvania........ 14
Marshall, Samuel, President, Insurance Federation of
Pennsylvania, Inc., Philadelphia, Pennsylvania................. 12
Melani, Kenneth R., M.D., President and Chief Executive Officer,
Highmark Inc., Pittsburgh, Pennsylvania........................ 4
Miller, Henry, Managing Director, Navigant Consulting, Inc.,
Washington, D.C., on behalf of UPMC Health Plan................ 20
Scanlan, Carolyn F., President and Chief Executive Officer, the
Hospital and Healthsystem Association of Pennsylvania,
Harrisburg, Pennsylvania....................................... 10
QUESTIONS AND ANSWERS
Responses of Henry S. Allen to questions submitted by Senator
Specter........................................................ 35
Responses of David Balto to questions submitted by Senator
Specter........................................................ 51
Responses of Joseph Frick to questions submitted by Senator
Specter........................................................ 53
Responses of Barry C. Harris to questions submitted by Senator
Specter........................................................ 58
Responses of Samuel R. Marshall to questions submitted by Senator
Specter........................................................ 69
Responses of Kenneth R. Melani, M.D., to questions submitted by
Senator Specter................................................ 72
Responses of Carolyn F. Scanlan to questions submitted by Senator
Specter........................................................ 79
SUBMISSIONS FOR THE RECORD
Allen, Henry S., Jr., Counsel, Private Sector Advcacy Department,
American Medical Association, Chicago, Illinois, statement and
attachments.................................................... 86
Balto, David, Senior Fellow, Center for American Progress,
Washington, D.C, statement..................................... 109
Frick, Joseph A., President and Chief Executive Officer,
Independence Blue Cross, Philadelphia, Pennsylvania, statement. 122
Harris, Barry D., Board Chairman, Economists, Inc., Washington,
D.C., statement................................................ 130
Holder, Diane, President and CEO, UPMC Health Plan and Insurance
Services Division, Pittsburgh, Pennsylvania, statement......... 140
Laign, Michael B., President and Chief Executive Officer, Holy
Redeemer Health System, Huntington Valley, Pennsylvania,
statement...................................................... 152
Marshall, Samuel, President, Insurance Federation of
Pennsylvania, Inc., Philadelphia, Pennsylvania, statement and
attachment..................................................... 157
Melani, Kenneth R., M.D., President and Chief Executive Officer,
Highmark Inc., Pittsburgh, Pennsylvania, statement............. 181
Miller, Henry, Managing Director, Navigant Consulting, Inc.,
Washington, D.C., statement.................................... 189
Scanlan, Carolyn F., President and Chief Executive Officer, the
Hospital and Healthsystem Association of Pennsylvania,
Harrisburg, Pennsylvania, statement and attachment............. 194
WellNet Healthcare, Harry Kovar, CEO, Southampton, Pennsylvania,
statement...................................................... 210
CONSOLIDATION IN THE PENNSYLVANIA HEALTH INSURANCE INDUSTRY: THE RIGHT
PRESCRIPTION?
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THURSDAY, JULY 31, 2008
U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:17 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl and Specter.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good afternoon to one and all. Today we will
be examining the consolidation in the health insurance market
with the proposed merger of the two largest health insurers in
Pennsylvania--Highmark and Independence Blue Cross. We are
holding this hearing at the specific request of my colleague
for whom I have the very highest regard, Senator Arlen Specter.
As this merger most directly impacts Pennsylvania residents, I
have asked him to preside over today's hearing, and he will.
After the merger, these two insurers' combined market share
in Pennsylvania is estimated to be more than 70 percent.
Allowing a single health insurer to gain such a high market
share in Pennsylvania obviously raises significant competition
concerns for the citizens of that Commonwealth, especially
since these two companies apparently agreed not to compete a
year ago.
But it is also important that we consider competition in
health insurance across the country. As health insurance costs
continue to rise, consumers face ever increasing premiums. At
the same time, we hear complaints from physicians and hospitals
of declining reimbursements and take-it-or-leave-it contracts
that negatively affect patient care. New competitors face high
barriers to entry, so allowing high levels of concentration can
have serious and lasting effects for many years to come as the
stats point to substantial evidence of rising consolidation in
an already high concentrated health insurance market.
In 299 of the 313 metropolitan areas studied by the
American Medical Association last year, health insurance was a
highly concentrated insurance under Justice Department
guidelines. The number of health insurers nationwide has fallen
by 20 percent since the year 2000, and this has clearly
contributed to rising insurance rates. The AMA study found
insurance rates were 12 percent lower in States with more
competitive choices.
The burden of ever rising insurance rates is borne
particularly heavily by small businesses who find it
increasingly difficult to offer health insurance for their own
employees. And the problem of increasing concentration is
compounded by the failure of the Justice Department to enforce
the antitrust law in this insurance.
According to the 2007 AMA study, in the last 12 years, out
of 400 health insurance mergers, the Justice Department
challenged only two. Vigorous competition in health insurance
is essential to lowering health insurance premiums for
consumers, for businesses, and to assuring adequate payments to
health care providers.
We on the Antitrust Subcommittee will pay close attention
to competition in health insurance markets in the months ahead.
We will consider holding hearings on health insurance
competition at the national level. We plan to ask the GAO to
study the impact of consolidation on rising health insurance
prices.
For all these reasons, today's hearing is a particularly
relevant one for our Subcommittee, and I thank Senator Specter
for his work on this very important issue. And so we now turn
the gavel over to Senator Arlen Specter to preside at this
hearing.
Senator Specter.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. [Presiding.] Well, thank you very much,
Mr. Chairman. I appreciate the outstanding work you have done
on the Antitrust Subcommittee of Judiciary and the outstanding
work you have done as the senior Senator from Wisconsin now for
20 years. It has been quite a responsibility, and you and I
have worked together generally and on the Judiciary Committee,
and this is a very important hearing, and I very much
appreciate your authorizing it and turning the gavel over to
me.
Last year, I was Chairman of the Committee. I was about to
say I ``owned the gavel,'' but you do not own anything in the
U.S. Senate. It is all leased, 6 years at a time. And now I
have it for part of the afternoon. So it is nice to have, and I
will use it sparingly, and I hope effectively.
As Senator Kohl has outlined, this is a very important
hearing. The issue of health care in America is a dominant
factor. Estimates nationally run as high as $1.7 trillion in
health care expenses, and we have a situation where it is
estimated that some 47 million Americans do not have health
insurance. And no one knows better than I about the importance
of good health.
As you can tell, a Pennsylvania cable network is carrying
this. People within the room can see it better, how pale and
bald and thin I am compared to the way I used to be. I am just
finished a bout of chemotherapy for Hodgkin's, and my slogan
is: ``It is tough, but tolerable.'' But it is a rugged process.
And I have had more comments about my hair style than I have
about my positions on public policy. I have had some
suggestions that I should wear a toupee, and I have rejected
that. Some people say I should shave my head and become a sex
symbol like Joe Frick or Henry Miller.
[Laughter.]
Senator Specter. And I have rejected that also on the
ground that--two grounds: number 1, my wife is opposed to it;
and, number 2, I am not qualified. So I will let nature take
its course. I was very deferential to Senator Kohl in not
bringing him into Mr. Frick and Dr. Miller's categories here.
But in a very, very serious vein, it is a major matter. I
note that the Department of Justice has given approval to the
merger. I know that it is under consideration by the Insurance
Department in Pennsylvania. And Congress has a keen interest
with the Judiciary Committee and the Antitrust Subcommittee.
We are aware of the considerations of economies which have
been represented about what can be saved if there is a merger
of Highmark and Independence Blue Cross. We are concerned at
the same time about the market share. The projection has been
made that Independence Blue Cross has about 30 percent of the
market in the East, principally, and the estimate as to
Highmark ranges from 27 to 42 percent of the market, so that
competitors have a hill to climb, and perhaps a steep hill, and
we will talk about that.
Some of the competitors in the West have thought that the
combination between UPMC and Highmark made it difficult for
entry, and UPMC has taken a position in opposition. I have been
interested to see that Temple University Medical System and the
University of Pennsylvania have not taken a position. The
Hospital Association has and the doctors' associations have. So
there are a lot of competing interests.
We had a hearing on this matter in Philadelphia last year,
and we thought it would be a good idea to convene another
hearing and to explore these very important issues.
Senator Casey could not make the hearing today. He has been
invited to attend, and I know he will be following it very
closely because it is a big, big matter for Pennsylvania.
You see the lights we have here. Green means you are within
the first 4 minutes, and yellow means you are within the last
minute; and when the red sign goes on, it means you are
supposed to stop talking. We have a big panel today, and we had
started with six witnesses, and I wanted to add two more
besides Dr. Melani and Mr. Frick, who were in favor of the
merger, to have a balanced presentation.
So with my red light about to go on, 5 seconds left, I
would ask all of you to stand and raise your right hands. Do
you affirm or swear that the testimony you are about to give
before this Committee, this Subcommittee, will be the truth,
the whole truth, and nothing but the truth, so help you God?
Dr. Melani. I do.
Mr. Frick. I do.
Ms. Scanlan. I do.
Mr. Marshall. I do.
Mr. Laign. I do.
Mr. Balto. I do.
Mr. Allen. I do.
Mr. Harris. I do.
Senator Specter. May the record show that each of the
witnesses has answers in the affirmative.
Our first witness today is Dr. Kenneth Melani, who is the
Chief Executive Officer of Highmark. He began his career with
the company in 1989 as a corporate medical director in the
Medical Affairs Department, graduated summa cum laude from
Washington and Jefferson College with a bachelor's degree in
chemistry and biology, and received his M.D. from Wake Forest
University.
Thank you for joining us today, Dr. Melani, and we look
forward to your testimony.
STATEMENT OF KENNETH R. MELANI, M.D., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, HIGHMARK INC., PITTSBURGH, PENNSYLVANIA
Dr. Melani. Thank you, Senator, and good afternoon. My name
is Dr. Ken Melani, and I am the President and Chief Executive
Officer of Highmark. With me is Joe Frick, the President and
Chief Executive Officer of Independence Blue Cross. We want to
thank the Committee for the opportunity to speak to you today
about why the proposed combination of Highmark and Independence
Blue Cross into a new company is good for Pennsylvania and how
it will create value for the communities in which we operate,
for our customers, for health care providers, and, most of all,
for the people of Pennsylvania.
Since we spoke to the Senate Judiciary Committee in April
2007, we have been engaged in an extensive review process
involving State and Federal regulatory agencies, with input
from State and Federal public officials. This is an important,
cooperative, and open process. Today, we continue this open
dialog about how this combination will better serve the needs
of the people of Pennsylvania.
Our companies have a proud tradition of serving
Pennsylvania as not-for-profit companies. For 70 years, IBC and
Highmark have had a common mission: to help ensure that health
care is available, affordable, and of high quality for all
Pennsylvanians.
Throughout our history, we have made health insurance
programs available to everyone, regardless of age, gender, and
health status. We have provided assistance to people in
financial need, by subsidizing health insurance programs for
children, lower-income individuals and families, and older
adults. Moreover, we have provided financial support for health
education and community health programs.
At the same time, according to a study performed by a
market research firm, Tripp-Umbach, Highmark and IBC have had a
significant, positive impact on Pennsylvania, with a total
annual economic impact of $4.2 billion on the State's economy.
The companies employ approximately 18,000 people in high-
quality jobs in the State and purchase a significant amount of
goods and services from Pennsylvania-based companies.
This transaction, however, is not about the past or the
present. It is about the future and about preserving our
nonprofit status. And it is about laying the foundation for
positive change in the way health care is delivered and paid
for in Pennsylvania. Coming together, our two companies can
remain a financially vibrant Pennsylvania-based company and
achieve tangible savings and growth opportunities of more than
$1 billion that will be used to address health care costs,
quality, and access to medical care in Pennsylvania.
This combination will also allow us to strengthen our
contribution to the Pennsylvania economy--by the way we employ
people, by creating new businesses opportunities for
Pennsylvania-based businesses, and by supporting the community
through programs and services that we have historically
embraced.
The proposed combination is important given the challenging
health environment that exists today. Health care costs are
rising dramatically. We know that the cost of health care is
making health insurance less affordable for businesses today.
As a result, fewer businesses are able to maintain health care
coverage, and more people are going to the ranks of the
uninsured. We are also seeing more people moving to public
health insurance programs, which means more health care
coverage is being financed through Federal and State government
programs.
The demographics of Pennsylvania also present challenges.
The State has an aging population that is creating more demand
for health care services. We also have an aging workforce in
many industries, including health care. This places an added
strain on the health care system as the aging population uses
more medical services. Questions are also being raised about
the quality of health care today and the variation in medical
care from community to community for people with the same
medical conditions.
With these critical issues facing us across Pennsylvania
and nationally, rapid change is occurring in health care.
Consumers are taking a greater responsibility for their
personal health care decisions and their costs. This change is
creating the need for investments in technology so people can
access their own personal health information and have programs
available to better manage their own health.
As these forces shape health care, two points have become
very critical to business success. First, scale has become
increasingly important to achieve greater efficiency and lower
administrative costs. The scale of competition has shifted from
a local to a regional and now a national basis. We have a
growing need to be a multi-product, multi-market company to
compete in the future, to spread our risks, and to better serve
our customers. Second, there is a growing need for capital for
investments to meet the marketplace demands that I outlined
earlier.
The health insurance industry is responding by
consolidating. In the past 15 years, the top 20 insurers have
substantially increased their share of subscribers in the
commercial health insurance market. Even more significant,
during the same period, large, well-capitalized for-profit
insurers have gained a much larger share of commercial health
insurance subscribers compared to not-for-profit health
insurance companies.
The largest players in health care today are WellPoint,
United HealthCare, Aetna, and CIGNA, and anywhere from 13
million up to 35 million subscribers reside in each of these
companies. They have the scale, the product diversity, and the
geographic diversity to spread their operating costs over more
subscribers. They also can leverage their large subscriber base
to obtain better pricing from national suppliers of laboratory
services, durable medical equipment, radiology services, and
pharmaceuticals--in contrast to Highmark and IBC who have,
combined, 8 million members.
Consolidation is not unique to the for-profit health
insurance companies. It is happening in the Blue Cross/Blue
Shield system in the United States as well.
Today, there are 39 independent Blue Cross and Blue Shield
companies. That is a third the number since 1980, when there
were 115 such companies. In fact, Blue Cross/Blue Shield
companies operate in multiple States. These companies have
gained operating efficiencies and can better serve their
customers.
And Pennsylvania stands alone in that we have four
independent Blue Cross/Blue Shield companies. It is problematic
because we are operating less efficiently than we could be by
investing in redundant technologies and capabilities that add
more cost to the health care system.
As the two companies have looked at the changing health
care environment and the need for greater scale and more
capital, it has become clear that the combination of IBC and
Highmark is a natural fit that would bring significant benefits
to the people of Pennsylvania. The two companies have almost
identical missions and have worked together for over 50 years
to better serve the community, through programs like the Caring
Foundation. We also have complementary products. Highmark's
vision, dental, and stop loss lines of business complement
IBC's pharmacy benefit management--
Senator Specter. Dr. Melani, how much longer will you
require?
Dr. Melani. About 30 seconds.
Senator Specter. Go ahead.
Dr. Melani. Complement IBC's pharmacy benefit management,
third-party administration, and workers' compensation programs.
Together, our two companies can offer a core blend of products
to better serve our customers on a common platform.
What is most important is that bringing our companies
together will not lessen competition in the commercial health
insurance market or reduce choice in any market in Pennsylvania
in the future. Our subscribers will continue to have the same
wide variety of choice from a competitive health insurance
market as they have today.
Although over 100 witnesses appeared at the recent
Pennsylvania Insurance Department hearings--and many others
have filed comments with the Insurance Department--we are not
aware that any of our over 50,000 commercial customers have
complained that they will have less choice for insurance the
day after the transaction than they have today.
And, last, as you both well know and have articulated, the
United States Department of Justice has twice reviewed this
transaction for consolidation of the two companies and both
times cleared the transaction under the Federal antitrust laws.
I thank you very much. I am going to turn it over to Joe to
talk about the benefits of the consolidation.
[The prepared statement of Dr. Melani appears as a
submission for the record.]
Senator Specter. I am going to ask everybody who testifies
to stay within the time limit. Nine witnesses and a question-
and-answer session, which is very important, is going to run us
very late. So please stay within the time limit.
Dr. Melani, I do not intend to pursue questions after each
witness, but I have listened to your testimony, and some of the
generalizations you have made might be relevant to a concern on
my mind. But I do not hear you addressing the fundamental
question as to whether this merger, which purports to have
economies of scale, has the potential to lower the premiums for
health insurance, it will cost less for people to buy health
insurance. How about that? That is what the consumers are
interested in. How much is it going to cost them? Did you
address that in your opening statement?
Dr. Melani. Senator, I did not get into the detail, but Joe
has some of that in his comments.
Senator Specter. Never mind the detail. Is it going to
result in lower cost to the consumer?
Dr. Melani. It will result in lower administrative cost to
the consumer. We are guaranteeing that we will fix our
administrative fees flat for 2 years. The difficulty with the
remaining part of health care costs is the variables; 90
percent of the health care costs are really in the provider
side of the equation in units used and units paid, and it is
very difficult to put a cap on what happens in the cost of
health care on that side of the equation with so many unknown
variables in that side. But the part we do control, which is
administrative cost, we absolutely will guarantee a benefit in
lower premium from that perspective.
Other things that we will do we hope will help with the
other part of the health care cost equation, like investments
in new technology, disease management, and other capabilities.
Senator Specter. Dr. Melani, candidly, I do not understand
much of what you just said. Talking about variables, talking
about administrative costs, I heard you say the administrative
costs will be reduced and that will have an impact on premiums.
Well, administrative costs are only one aspect of a very, very
big picture. I would like to see you tell this Subcommittee--if
not this afternoon, later--what is the impact going to be to
the consumer. I am going to come to--I do not consider that a
detail. But we will listen to what Mr. Frick has to say about
it. But I think we need something a lot more specific on that
point because that is the whole issue. The generalization of
administrative costs being reduced and that being passed on to
the consumer is not the big-ticket item.
We turn now to Mr. Joseph Frick, elected President and CEO
of Independence Blue Cross in January of 2005, previously was
Senior Vice President. Prior to joining IBC, he was Vice
President of Human Resources at Philadelphia Newspapers, Inc.;
received his undergraduate degree from the University of Notre
Dame and an MBA from Loyola College.
The floor is yours, Mr. Frick, for 5 minutes.
STATEMENT OF JOSEPH A. FRICK, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, INDEPENDENCE BLUE CROSS, PHILADELPHIA, PENNSYLVANIA
Mr. Frick. Thank you, Senator, and I appreciate the
opportunity to be before the Committee as well. As Ken said,
our two organization have a proud tradition of serving our
subscribers and our local communities as Blue plans, and we
know we have a responsibility to promote the value and enhance
the trust of the Blue brand, which serves more than one in
three Americans.
So while coming together is a logical extension of our
historical partnership, we believe that the growth
opportunities, the efficiencies, and the savings will enable us
to achieve several real and important goals. And as you just
articulated, first and foremost, we are committed to help make
health insurance more affordable. It is the number 1 issue with
our subscribers; we have a responsibility to do better on that
issue.
At the same time that our subscribers are demanding that we
control costs, they also want us to invest in products and in
services to help improve quality and health and health care
outcomes and expand our efforts in promotion and wellness
programs.
Physicians, hospitals, and health care providers, who we
pay 88 cents back for every dollar of premium that we take in
from our customers, they are valued partners in our companies'
mission of assuring access to high-quality networks of
providers. And we are committed to maintaining these well-
established relationships and enhancing incentives to ensure
the delivery of high-quality care and keeping costs manageable.
We will continue to be a viable and successful leader in
our communities, and we expect to generate new business, which
can bring more jobs to Pennsylvania and stimulate additional
business opportunities for Pennsylvania-based business.
Finally, we need to be more effective and use technology,
and this combination will enable us to be a company that is
easier for our subscribers and providers to do business with.
And by combining our two companies--and only by combining
our two companies--will we be able to generate over $1 billion
in additional economic benefits over 6 years. And this is new
money beyond any commitments that our two companies have today.
These dollars will be generated by business efficiencies
and growth opportunities that our companies could not produce
individually. And unlike with consolidations of for-profit,
publicly held companies, we pledge that every dollar of these
economic benefits will go back to improving health care in
Pennsylvania.
In addition to this $1 billion, we voluntarily agreed to
extend the Community Health Reinvestment Agreement with the
Commonwealth for an additional 3 years, an estimated $350
million that can be used to help more Pennsylvanians obtain
health care coverage.
So for our subscribers, as Ken said, we pledge to freeze
the administrative fees for 2 years. This represents $295
million in tangible savings.
With our new pharmacy business, we believe we can save
another $285 million on prescription drug costs which goes
directly back to our customers.
We expect that an estimated $100 million of the
efficiencies will be used to fund expanded health care quality
programs--ePrescribing, personal health records, electronic
medical records. Use of these tools leads to higher-quality
care, fewer medication errors, and that does result in greater
savings to subscribers in the long run.
We will expand the best of the health promotion and
wellness programs offered by our two companies, which will
enable a healthier workforce to be more productive, consume
fewer health services.
We are proud of our longstanding relationships with
physicians, hospitals, and providers. The value of our brand is
based on the fact that we offer our customers high-quality
provider networks, and they will remain important partners with
us in the future.
In the past few years, IBC and Highmark have invested in
technology and pioneered a tool called NaviNet to simplify
administrative transactions with physicians and hospitals. We
will build on this capability so that physician offices and
hospitals can spend more time to improve patient outcomes,
patient safety, the health and wellness of their patients, and
worry less about administrative tasks.
And here is one very important point about providers. Not
one dollar of the $1 billion in net economic benefits will
result in any reductions in provider reimbursements.
Over the past few years, Highmark and IBC have developed
close working relationships with hospitals and physicians,
partnerships focused on improving safety and reducing
prescribing errors. The new company will expand these
partnerships.
Last, let me talk about how the consolidation will benefit
our local communities. Last year, our two companies committed
over $200 million in programs in the community, funding clinics
and nurse scholarships, programs to reduce childhood obesity.
And the new company intends to take all of these initiatives
statewide. So together these commitments total $1 billion in
new money, plus $350 million, in the Community Health
Reinvestment Agreement.
The consolidation is important for us to remain a viable,
not-for-profit company to strengthen our commitment to the
community and the economy of Pennsylvania. Do we expect to grow
our business? Absolutely. And this business growth will be
beneficial to Pennsylvania.
No one company can solve the health care problems of this
country alone, but we believe together this consolidation does
lead to a pathway for positive change for 10 Pennsylvania and
all of our Pennsylvania communities.
Thank you both very much for your time and attention.
[The prepared statement of Mr. Frick appears as a
submission for the record.]
Senator Specter. Well, thank you, Mr. Frick.
You list a large number of innovations which you propose,
and you say that they will be savings to subscribers in the
long run. But I am still looking for something specific on
savings now in the short run or within a year or two.
You talk about $1 million in economic benefits over a 6-
year period. But the question in my mind is: Where is that
going to go? When we talk in the question-and-answer session
later, we will get into the $4 billion in reserves which
Highmark has and the $2 billion in reserves which Independence
Blue Cross has. And the question on my mind is: How much of
this $1 billion that you are going to save over 6 years is
going to go into reserves and how much is going to go to reduce
premiums? I think if you talk about reduced premiums, you have
a much more attractive proposition. When you have savings,
economies of scale, that is really the money that comes out of
the pocket of people, and reduced premiums allow more people to
be covered. And you have a great many programs where you decide
on the allocations of money, and you give the Commonwealth of
Pennsylvania some money. But the Commonwealth of Pennsylvania
has many sources of funds.
You talk about people who pay your premiums. This
Subcommittee is interested to know what savings there would be
for them and what lower premiums would enable more people to
have health insurance, would not have to go looking for it
someplace else.
Well, those are matters which I would like you to address,
Mr. Frick, and we will come back to it in the question-and-
answer session. Our next witness is Ms. Carolyn Scanlan, the
President and CEO of The Hospital and Healthsystem Association
of Pennsylvania since 1995; undergraduate degree from Skidmore
College and a master's degree in health services administration
from Russell Sage College. Thank you for joining us, Ms.
Scanlan, and we look forward to your testimony within 5
minutes.
STATEMENT OF CAROLYN F. SCANLAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE HOSPITAL AND HEALTHSYSTEM ASSOCIATION OF
PENNSYLVANIA, HARRISBURG, PENNSYLVANIA
Ms. Scanlan. Thank you, Senator Specter, and thank you,
Chairman Kohl, for allowing us the opportunity to speak today.
As you know, Senator, the association represents and advocates
for the more than 250 hospitals in Pennsylvania, and we
appreciate the opportunity to present our views in regard to
the proposed merger.
Over the past year, the association has raised questions
and concerns with both Federal and State officials regarding
the proposed merger of these two plans and has called for a
thorough review by Government. Most recently, in hearings
before the Pennsylvania Commissioner of Insurance, we have
taken the position of opposition as this merger is currently
proposed. We think it is important for the regulators to review
the current health insurance marketplace in Pennsylvania, which
we believe is already skewed toward Highmark and Independence
Blue Cross' advantage, and a merger would create a health plan
with an overwhelming presence or ``footprint'' across the
Commonwealth.
We have expressed four areas of concern, two of which are
germane to this hearing. The four areas are the issues around
competition, provider contracting, social and community
mission, and health insurer accountability.
The first two--competition and provider contracting-would
fall under the auspices of the Federal agencies, and we were
disappointed that another early termination of review was
granted to the plans by the Department of Justice.
With the amount of penetration of already insured people
contained within these two plans--and Chairman Kohl and you
both referenced those numbers--we have continued concern about
the consolidation.
Market competition in health insurance is important, we
believe, in achieving competitive premiums--I think as you have
pointed out, Senator Specter--for employed groups and, from the
perspective of hospitals, competitive payments to health care
providers. Both Highmark and Independence Blue Cross already
enjoy dominant positions, which make it difficult for that kind
of competitive payment.
I am going to leave it to others on this panel to discuss
the underlying legal issues of competition, monopoly, and
monopsony, which I know that their testimonies will cover. But
it is the concern of hospitals and physicians regarding the
monopsony power that it has not been properly analyzed and
evaluated and serve as a center of HAP's concerns regarding the
impact this merger will have. And so at the State level--and we
would have, before the Department of Justice, also asked for
very specific issues in regard to provider contracting, most-
favored-nation issues, all product clauses. We are asking for
the ability for providers to jointly negotiate, concerns about
the development of an arbitration process, and, last, issues
around allowing clinically and financially integrated
organizations to negotiate as a unit with the merged plan.
There are three things that we think that this
Subcommittee, that you, Senator, could address in the near
future.
The first is that we would request a briefing from the
Antitrust Division as to why the Division failed to thoroughly
investigate the merger. As you know, they do not have to issue
any kind of detail on their review, and that would be helpful.
Second, the line of case law that permits the type of
market allocation the Blues are involved in is still an
unsettled law of antitrust law. And we would ask, in addition
to Chairman Kohl's request of the GAO to look at rising health
insurance prices, that the GAO also do a study looking at the
state of the law in this area and whether Congress needs to
ensure that joint ventures that undermine competition, such as
the Blues' process of licensure, would be also reviewed from
the perspective of competition in the marketplace.
And then, third, as you, along with Chairman Kohl, your
colleague on the Subcommittee Senator Grassley, as well as
other colleagues in the Senate, Senator Durbin and Senator
Whitehouse, said to the FTC, we would ask that both the
Department of Justice and the FTC take immediate action to
approve the hospitals' request for more guidance on clinical
integration by approving in some manner the working paper that
was recently developed by a group of antitrust luminaries on
behalf of the AHA.
The rest is clearly contained in my testimony, and so I
thank you for the opportunity to ask for these three items
today.
[The prepared statement of Ms. Scanlan appears as a
submission for the record.]
Senator Specter. Ms. Scanlan, I note that neither the
Hospital of the University of Pennsylvania nor Temple has taken
a position here, and when the times comes for Q&A, I would like
you to comment on the solidity of the Hospital Association and
the opposition which you have articulated.
Our next witness is Mr. Samuel Marshall, President and CEO
of the Insurance Federation of Pennsylvania. He has served as
counsel to the Insurance Commissioner, previously chief counsel
to the Medical Catastrophic Loss Trust Fund; bachelor's degree
from Haverford and law degree from Villanova.
Thank you for coming in today, Mr. Marshall, and we look
forward to your testimony, 5 minutes.
STATEMENT OF SAMUEL MARSHALL, PRESIDENT, INSURANCE FEDERATION
OF PENNSYLVANIA, INC., PHILADELPHIA, PENNSYLVANIA
Mr. Marshall. Thank you. Sam Marshall with the Insurance
Federation of Pennsylvania. We represent the commercial
carriers that we have been talking about obliquely. We
represent them in all lines of coverage.
I do not think consolidations are inherently good or bad,
whether for competition or consumers. I do think that this one,
absent the conditions that we and others have recommended, will
be bad on both counts.
The underlying question is whether competition, even more
so than consolidation, is good or bad. And I do think that this
consolidation will impact competition First off, it gets rid of
the potential for Highmark and IBC to compete with each other.
They may not intend to do that now under current management,
but managements change.
Second, it is going to make it more difficult for other
insurers to compete. There is a lot of talk about the ability
of other carriers to raise capital. Capital only goes into
markets that are open and viable. As you have a dominant, an
increasingly dominant market in Pennsylvania, that does not
attract capital for the smaller players.
But going to the question of is competition good or bad, it
is a legitimate question in the world of health reform. I think
that competition is a hallmark of any viable insurance
marketplace. I think it makes sure that consumers have choices.
I also think it makes sure that insurers, no matter how big or
small, face both the opportunities and the penalties that come
from either answering or failing to answer consumer demands.
I am a Pennsylvania-centric person, so I will talk about it
in terms of examples that we have seen in Pennsylvania over the
last 20 years.
In our Commonwealth, veritably every line of insurance has
faced the same problems that you see in health insurance now,
namely, consumers not getting the coverage they want at a price
they can afford. The only answer that has worked in all other
lines has been to foster competition. The most prominent
example, especially for those from Philadelphia, is our auto
marketplace. Back in the 1980s, it was a very limited and
expensive market. A number of reforms were tried. The only one
that worked was a law in 1990 that was spearheaded by the late
Governor Robert Casey, hardly an ally of the insurance
industry. But he recognized the need to encourage and reward
new carriers, new ideas, and more competition.
As a result, over the past 18 years, the rates have been
flat, and there has been broad availability of coverage for all
drivers. Would that we had the same result in health insurance.
It has worked in other lines, too. The second more
prominent example in Pennsylvania would be workers'
compensation insurance. Again, it faced many of the same
problems you see in health insurance now. They enacted reforms
that brought in new carriers, new ideas and more competition.
And that has worked well in that market.
What we have not seen in Pennsylvania are reforms that have
encouraged competition in health insurance, and I think that is
one of the main reasons we have not seen anywhere near the
progress that consumers need.
I do recognize that competition alone is not the only
answer, but I would say that if you do not have a strongly
competitive health insurance market, all the best intentions,
whether they come from Highmark and Independence Blue Cross or
from smaller carriers, you simply do not have the cattle prod
of the consumers choice making sure that they come to fruition.
Again, I do not think that means that consolidations, even
those of this magnitude, are inherently flawed or fatal to the
prospect of competition; but I do think that consolidations,
especially of this magnitude, have to be scrutinized and only
approved if they come with the types of conditions that we and
others have recommended in the proceedings before the Insurance
Department.
One note in closing: There was an op-ed piece in Sunday's
New York Times by William Poole of the Cato Institute on Fannie
Mae and Freddie Mac, and I do not get down to Washington much,
but I know that is a great debate here. What he talked about
was the danger that we are all seeing across the country in
allowing a crucial market to have only two operators. And he
pointed out that ``markets work best when numerous firms
compete against each other.'' I think that is worth remembering
here: Any market that becomes a private monopoly is in danger
of becoming a hostage to that monopoly, no matter how extensive
or well intentioned the regulatory oversight. It is not just
that competition gets stifled, and with it the pressure to do
better. It is that consumers can be harmed by the absence of
the checks, balances, and safety valves that come from a
competitive market.
Thank you for the chance to be here. I am happy to answer
any questions.
[The prepared statement of Mr. Marshall appears as a
submission for the record.]
Senator Specter. Thank you very much, Mr. Marshall.
Our next witness is Mr. Michael Laign, President and CEO of
the Holy Redeemer Health System, located in Huntingdon Valley,
Pennsylvania; previously served as Executive Vice President of
the Frankford Health Care System; bachelor's degree from the
University of Pittsburgh and an MBA in hospital and health care
administration from Temple.
Thank you for coming in today, Mr. Laign, and we look
forward to your testimony, 5 minutes.
STATEMENT OF MICHAEL B. LAIGN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, HOLY REDEEMER HEALTH SYSTEM, HUNTINGDON VALLEY,
PENNSYLVANIA
Mr. Laign. Thanks for having me here. Holy Redeemer Health
System is a nonprofit organization which provides a wide range
of health care and health-related services, including an acute
care hospital, home health and hospice services in Pennsylvania
and New Jersey, two skilled nursing facilities, assisted
living, a retirement community, low-income housing, an active
living community, and a transitional housing and
resocialization program for homeless women and children in
North Philadelphia.
We employ over 4,000 people. Every day, we touch 20,000
individuals. Twenty-five percent of our revenue is derived from
IBC and/or IBC family of products. We offer IBC to our
employees as one of their health insurance offerings. We also
offer a competitor to our employees as well. I appreciate the
opportunity to share our views with the Subcommittee on the
proposed merger and consolidation of IBC and Highmark.
While I share some of the fears and concerns expressed by
some of the other witnesses here today or that will be
expressed, on balance I see this merger as an opportunity to
address needed change to the health care delivery and financing
system in Pennsylvania. I believe a Blues plan whose core
business and interests are focused on Pennsylvania is in our
collective long-term interest. Holy Redeemer Health System
would rather deal with a plan and a plan leadership with a
vested interest in making Pennsylvania a better place to live
and work.
I know arguments have been made on both sides of the issue
about the competition or lack of competition between Highmark
and IBC in southeastern Pennsylvania and other parts of the
State.
In a sense both arguments are ``right,'' but both miss the
underlying long-term challenge we face in making our health
care system better for all stakeholders.
From my perspective, our health care system has and will
continue to suffer from an abundance of short-term thinking,
everyone, including Government, is out to cut the best deal for
themselves at the expense of creating an affordable,
sustainable system that serves all of our interests.
I think we all recognize both in Pennsylvania and across
the Nation that the rate of increase in health insurance costs
is not sustainable over the long run. Employers, consumers,
State and the Federal Government are all struggling to maintain
coverage not to mention the continuing growth of under- and
uninsured citizens.
In short, for us in Pennsylvania I think the merger between
Highmark and IBC represents an opportunity to begin to
rationalize and transform the health care system in the
Commonwealth for the future. This is a once-in-a-generation
opportunity to help reform and shape the health care system
through an insurance enterprise that by all estimates would be
responsible for over 50 percent of the health care lives and
revenues in our State.
The merger done properly, with the right leadership,
appropriate safeguards and appropriate, sustained Government
oversight, could help to, as it has been mentioned: reduce
administrative costs; improve quality; achieve greater
uniformity in our patient safety and process improvement
efforts; improve access to coverage; enhance the affordability
of coverage; and, very importantly, create a more transparent
system.
If coordinated with complementary and consistent Government
health programs and policies, it should be possible to help
drive many needed reforms of Pennsylvania's health care system.
In making this case, I fully understand how difficult it will
be to achieve these kinds of objectives. But not seizing this
opportunity will result in business as usual.
A couple of examples of how we have seen glimpses of what
the future could be.
IBC has engaged the provider community in a series of
partnerships. One is with the Health Care Improvement
Foundation, an organization that I chair. That organization
formed the Partnership for Patient Care to coordinate patient
safety and clinical process improvement efforts. Its focus is
to accelerate the effective adoption of evidence-based clinical
practices by pooling resources, knowledge, and efforts for all
health care providers in our region. Every acute care hospital
in the Delaware Valley has participated in the partnership, and
it has now been expanded to long-term care providers and other
stakeholders.
On another level, my system and IBC and Cardone Industries,
a major manufacturer of auto parts with over 4,000 employees in
the Philadelphia market, have collaborated to create a virtual
partnership for the provision of high-quality, cost-effective
health care, wellness screenings, and illness prevention and
education services for Cardone and their employees--clearly an
effort not only to improve care, but to reduce costs so those
employees and those jobs would stay in Pennsylvania.
As I indicated previously, any merger of Highmark and IBC
must include some important safeguards or conditions built into
the approval process. I have outlined a number of those in my
testimony that was written, so I am not going to go into those
today. But I would be happy to discuss those--I am looking at
the time--during the question-and-answer time.
[The prepared statement of Mr. Laign appears as a
submission for the record.]
Senator Specter. Thank you, Mr. Laign.
We turn now to Mr. David Balto, Senior Fellow, Center for
American Progress, focusing on competition and health care;
previously served at the Antitrust Division of the Department
of Justice and at the Federal Trade Commission; received his
undergraduate degree from the University of Minnesota and his
law degree from Northeastern University School of Law. The
floor is yours, Mr. Balto, for 5 minutes.
STATEMENT OF DAVID BALTO, SENIOR FELLOW, CENTER FOR AMERICAN
PROGRESS, WASHINGTON, D.C.
Mr. Balto. Thank you, Senator Specter. CAP wants to applaud
the Chairman and appreciate the Chairman and the Ranking Member
for all of their hard work and the recent hearings on many
antitrust issues which deserve a lot of scrutiny.
I am here representing CAP, several consumer groups, and
the National Association of Self-Employed. My testimony
outlines at the beginning the alarming trend of consolidation
that the Chairman spoke of. The groups I represent feel that
every day. The National Association of Self-Employed find it
increasingly difficult to provide insurance coverage for their
members and their employees, as consolidation has led to
increasing premiums.
On the consumer side, this increasing consolidation has led
to a dramatic increase in the number of uninsured which have
increased by 17 million to one out of every seven Americans
over the past several years.
The Highmark-IBC merger may seem complex, but is really
relatively simple. Let's go back to Justice Potter Stewart and
see what he had to say about the antitrust laws. Thirty-five
years ago, he instructed us, ``The central message of the
Sherman Act is that a business entity must find new customers
and higher profits through internal expansion--that is, by
competing successfully rather than by arranging treaties with
its competitors.''
These two companies had a treaty. It was a non-compete
agreement. And when that agreement expired, they decided to
make that treaty not to compete permanent. And that treaty
should be stopped because it will prevent competition in
southeast Pennsylvania.
What are the simple facts?
First, IBC and Highmark used to compete in southeast
Pennsylvania.
Second, in 1996, they entered into an agreement not to
compete. It expired in 2006, and a few weeks later, they
entered into this agreement. They could compete right now
today. The consumers in southeast Pennsylvania could receive
the benefits of that competition.
Third, Highmark's CEO has been explicit about the company's
desire to be a statewide provider of Blue Cross/Blue Shield
services. Their incentive to expand to the rest of the State is
clear.
Finally, we know what the impact of that expansion would
be. Highmark entered into central Pennsylvania 6 years ago, and
within that 6-year period, because they rolled up their sleeves
and they competed, they have acquired a 33-percent market
share. And because of that, Senator, CBC rolled up its sleeves,
and it is competing more aggressively. And because of all of
that competition, employers of all sizes, consumers, and
providers are doing better.
Now, imagine, Senator Specter, if it is 2001 and instead of
Highmark-IBC, it is Highmark-CBC, and they came in before you
and they said, ``Please let us merge. We have no desire to
enter into central Pennsylvania.'' And if the antitrust
authorities had permitted that merger, all of that competition
that has occurred over the past 6 years would be lost.
Now, one of the things that the parties say is we have no
intent to enter, but decades of Supreme Court and lower court
decisions have said that when you look at the evidence of entry
in a potential competition case, you do not accept their
assertions at face value. You do not rely on subjective
evidence. You look at objective evidence, in part because
subjective evidence is just basically the party's statement.
And the objective evidence here tells a compelling story that
Highmark has the incentive and ability to enter, and that entry
would improve competition in southeastern Pennsylvania.
In this regard, I have to say as a former official and
antitrust enforcer for over 15 years, it is particularly
disturbing that the Justice Department cleared this
investigation in less than 60 days on over two occasions. If
you did an investigation in less than 60 days, you would not
have the time to actually test propositions and seek objective
evidence.
Now, let me touch on efficiencies. These parties have made
a scale argument: We need this merger because we need to
compete better against big guys. That reminded me of the same
argument that was made in Philadelphia National Bank, when
Philadelphia National Bank wanted to acquire another bank in
Philadelphia so it could compete better against the banks in
New York. And Justice Brennan said, no, that is not kosher. You
cannot go and deprive the consumers of Philadelphia of
competition just because you want to compete more aggressively
elsewhere.
The law makes it clear that efficiencies have to be merger
specific, that there is no less anticompetitive way to achieve
these efficiencies. These are two successful, extremely
profitable, extremely talented companies, and I would venture
to say that on their own they would be able to achieve most of
the efficiencies they seek through this merger. Thank you for
the opportunity to testify, and I look forward to your
questions.
[The prepared statement of Mr. Balto appears as a
submission for the record.]
Senator Specter. Thank you very much, Mr. Balto.
Our next witness is Mr. Henry Allen, Senior Attorney at the
American Medical Association, working primarily on antitrust
issues. Prior to joining AMA, he practiced in health care law
and litigated cases in forums ranging from the Superior Court
of Alaska to the U.S. Supreme Court. Graduated magna cum laude
from Washington University, bachelor's degree in economics, and
a J.D. master's in public administration.
Thank you for coming in today, Mr. Allen, and the floor is
yours for 5 minutes.
STATEMENT OF HENRY S. ALLEN, JR., COUNSEL, PRIVATE SECTOR
ADVOCACY DEPARTMENT, AMERICAN MEDICAL ASSOCIATION, CHICAGO,
ILLINOIS
Mr. Allen. Thank you, Senator Specter. The American Medical
Association commends this Subcommittee for leadership in
recognizing the threats that unchecked health insurer
consolidations pose to the delivery of health care in
Pennsylvania and across the country. We appreciate the
opportunity to present testimony on consolidation in the
Pennsylvania health insurance industry.
In Pennsylvania, where health insurer entry from outside
the State has been difficult and little incumbent competition
exists, the potential competition that Highmark poses to IBC is
the only market mechanism that protects patients from higher
premiums.
This potential competition also offers the prospect that
physicians practicing in IBC's territories will have somewhere
else to sell their services. A merger would foreclose this
alternative and deprive physicians of the ability to negotiate
competitive health insurer contract terms that touch on every
aspect of patient care. Accordingly, the AMA opposes the
proposed merger of Highmark and IBC.
The market shares of Highmark and IBC are more than
sufficient for the merger to be found presumptively illegal.
The merger would result in a combined entity with more than 70
percent of the fully and self-insured commercial health
insurance market in the Commonwealth. In short, this proposed
merger is so anticompetitive that it results in a statewide
monopoly. This monopoly characterization is buttressed by the
substantial barriers to market entry. Health insurers that have
successfully competed in other parts of the Nation have barely
any presence in Pennsylvania. Because there has been little to
no entry in either of Highmark's or IBC's dominant market
areas, this merger would permanently eliminate each firm's
biggest potential rival.
Highmark and IBC assert that they do not compete in the
same market, that they operate in different regional markets.
Even assuming the insurance market in Pennsylvania is regional,
the merger will substantially reduce competition. IBC is
dominant in its alleged regionalized market. In the absence of
a merger, Highmark's entry as a competitor would result in a
substantial deconcentration of IBC's regional market.
IBC has the means, other than through merger, to enter
IBC's territory. In the past, Highmark would have marketed its
Blue Shield Plan in IBC's territory but for Highmark's
agreement with IBC to exit that territory for 10 years. That
market division agreement expired around the time this
consolidation was proposed. Today, Highmark is free, capable,
and desirous of offering its services in the southeastern
Pennsylvania territory where IBC presently sells.
There is no meaningful difference between this potential
competition and actual competition. As Areeda and Hovenkamp
observed in the leading treatise on antitrust law, once a firm
like Highmark is recognized as a factor ``in future predictions
about the market, that firm must be counted as a competitor
even though that firm has not yet won its first bid or indeed
has not made any bid at all.''
To reason otherwise understates the competitive significant
of mergers that, like here, occur in highly concentrated,
noncompetitive markets. Indeed, where the merger results in a
market share of monopoly proportions, the merger should
constitute a Section 2 offense of maintaining a monopoly
because it eliminates either actual or potential competition.
DOJ's clearance of this merger greatly concerns the AMA.
The Government has challenged only three of more than 400
mergers involving health insurers and managed care
organizations over the past 12 years. As a result, markets for
third-party payers, especially commercial insurance plans, have
grown increasingly concentrated. Studies show overwhelmingly
that in this market environment, physicians across the country
have virtually no bargaining power with dominant health
insurers.
Competition is essential to the health of the free market.
Competition among insurers forces them to hold the line on
premiums and provide improved service. Accordingly, the AMA
respectfully requests that this Committee urge the Federal
antitrust enforcement agencies to more rigorously enforce the
antitrust laws with respect to proposed health insurer
consolidations.
Thank you, Senator. I would be happy to answer questions.
[The prepared statement of Mr. Allen appears as a
submission for the record.]
Senator Specter. Thank you very much, Mr. Allen.
We now turn to Dr. Barry Harris, Principal and Board
Chairman of Economists, Incorporated, former Deputy Attorney
General for Economics in the Department of Justice Antitrust
Division; bachelor's degree in mathematics from Lehigh
University and Ph.D. in economics from the University of
Pennsylvania.
We welcome you here, Dr. Harris, and the floor is yours for
5 minutes.
STATEMENT OF BARRY C. HARRIS, BOARD CHAIRMAN, ECONOMISTS, INC.,
WASHINGTON, D.C.
Mr. Harris. Thank you, Senator. As you said, my name is
Barry Harris, and I am an economist. I have been doing work in
antitrust and competition issues for more than 30 years. And as
you pointed out, I was at the Department of Justice. I was the
chief economist there. My official title was Deputy Assistant
Attorney General. I hope to be brief today.
My full testimony was presented to the Pennsylvania
Insurance Department, and it is part of the public record. The
analysis considered relevant markets; it considered competition
within these relevant markets; it considered potential
competition; and it considered other issues as well.
The overall conclusion I reached is that there is no basis
to conclude that the proposed consolidation of Highmark and IBC
would reduce competition. The reason for this is simple.
Highmark and IBC do not compete with each other in the sale of
commercial insurance for any customer. That is--and this is
important--no customer will have fewer choices after the
transaction than they do today.
Now, as you have heard, there is a lot of speculation about
issues of potential competition, and at least what I have seen
is it is just speculation. I agree with Mr. Allen and Mr. Balto
that it should be based on objective criteria. And perhaps you
may want to ask Dr. Melani later, but he laid out at the PID
hearings a list of reasons why Highmark does not believe it is
in its interest to enter southeast Pennsylvania in the absence
of this transaction.
Now I would like to turn to my overall conclusion, which is
that the transaction will not harm competition. Again, as other
people have said, the Department of Justice has reviewed this
transaction twice. My understanding of that process is a bit
different than has been presented.
Thousands of documents were presented to the Department of
Justice. The parties gave the Department of Justice additional
time so that it could complete its investigation. The
Department looked at direct competition; it looked at potential
competition; it considered sales of both commercial and non-
commercial products. And twice the Department of Justice
provided clearance.
My take on that is that the Department of Justice reached
the same conclusions that I have reached, and that is that the
proposed consolidation of Highmark and IBC will not lessen
competition in any insurance market in Pennsylvania.
One last point. There have been several claims that there
is a State market here and that the shares are very high. And
it is a basic tenet of antitrust law and competitive analysis
that shares only make sense in a properly defined market. And
there is no State market for health insurance products in
Pennsylvania. If you are a consumer in Philadelphia, you have
no ability to access the same products that are offered
consumers in Pittsburgh. The prices may differ; the products
themselves may differ.
Basically, the product in Philadelphia is not a substitute
for Pittsburgh and vice versa. And it is true throughout the
State. So, consequently, any shares or conclusions drawn on the
whole State do not provide you with the basis for appropriate
economic and competition analysis.
Thank you, and I, too, would welcome questions during the
question-and-answer period.
[The prepared statement of Mr. Harris appears as a
submission for the record.]
Senator Specter. Thank you, Mr. Harris.
Our final witness is Dr. Henry Miller, Managing Director of
Navigant Consulting, Inc. More than 35 years' experience in the
field of health care practice, a CPA, Dr. Miller developed
research costing as a method for measuring costs of health
services; a bachelor's degree and an MBA from the City College
of New York, Ph.D. from the University of Illinois.
Thank you for joining us, Dr. Miller, and we look forward
to your testimony for 5 minutes.
STATEMENT OF HENRY MILLER, MANAGING DIRECTOR, NAVIGANT
CONSULTING, INC., WASHINGTON, D.C.
Mr. Miller. Thank you, Senator Specter. As you indicated, I
have worked on health insurance and health finance issues for
more than 30 years, including work for clients based in
Pennsylvania, in other States, and for the Federal Government.
I was asked by UPMC Health Plan to analyze the impact of
the proposed consolidation of Highmark and Independence Blue
Cross and to testify today on my findings. UPMC is an
integrated delivery and financing system and the second largest
nongovernmental employer in Pennsylvania. UPMC Health Plan
provides commercial group coverage to over 6,000 employers with
approximately 330,000 members, Medicare and Medicaid coverage
to another 185,000 beneficiaries, and services an additional
700,000 members through a variety of other benefit programs
such as behavioral health, CHIP, short-term disability,
employee assistance, and wellness programs.
I have prepared a detailed report for UPMC Health Plan on
the impact of the proposed Highmark and IBC consolidation, and
I would be happy to provide a copy of this report to the
Committee if it is requested. Today, in my testimony I want to
concentrate on four issues:
First, briefly identify the markets that are going to
affected by the consolidation;
Second, cite evidence that previous health insurer
consolidations have not led to administrative savings;
Third, that Pennsylvania's hospitals will be adversely
affected by the increased financial pressure that will result
from the combined entity's leverage during hospital contract
negotiations;
And, finally, that the proposed consolidation will
adversely change the market for health insurance in
Pennsylvania to the detriment of health care consumers and
providers.
There was just some recent discussion on the issue of
whether the market was a statewide market or a regional market.
My point would be that the commercial health insurance market
is a complex market that includes markets that are separate for
individuals who are purchasing coverage for small groups and
for large groups. And at least some of those customers operate
in a statewide market.
Understanding that the health insurance market operates on
a statewide basis for some customers is important because the
consolidation of Highmark and Independence Blue Cross will
create a single entity that will obviously have a dominant
market share in the State. In testimony that I provided to the
Pennsylvania Insurance Department, I carefully calculated
market share for Highmark and IBC in Pennsylvania and
determined, based upon the 12 million people who live in
Pennsylvania and the 7,649,000 who have commercial health
insurance, that approximately these two--not approximately, but
these two entities combined will cover 68.8 percent of the
population.
When considering a merger or a consolidation, it is
important to determine who will benefit. Reduced administrative
costs are commonly cited as a benefit of consolidation. Despite
the fact that this benefit is cited frequently, it is important
to understand that few, if any, health insurance company
mergers in the past 10 years have resulted in lower
administrative costs. The complexity of health insurer
operations and their reliance on information technology has
meant that administrative savings have been elusive.
Last year, I served as the financial consultant to the New
Jersey Commission on Rationalizing Health Care Resources. The
commission was established by Governor Corzine to address
concerns about the financial instability of many of the State's
hospitals. My review of hospital finances in Pennsylvania
raises similar questions about hospitals' ability to withstand
increased financial pressure. Pennsylvania hospitals have lower
margins, less liquidity, and are less able to cover their
existing debt than the average U.S. hospital. More importantly,
Pennsylvania hospitals have physical plants that are more than
14 percent older than the plant of the average U.S. hospital.
The consolidated Highmark/IBC entity will have extraordinary
leverage in hospital contracting at a time when hospitals are
considerably less able to withstand that leverage. Analyses
that I have completed indicate that reimbursement rates are
lower and premiums are higher in States that have health plans
with large market shares.
Because of their size, Highmark and IBC already have
significant competitive advantages in the Pennsylvania market.
Their advantages are evidenced by the difficulty other health
insurers have in competing in Pennsylvania as compared to other
States. If the consolidation is approved, the combined entity
will provide coverage to at least two-thirds of Pennsylvania's
residents and have substantial financial resources that can be
used to further increase their market share. Consolidation will
certainly not make it easier for other health insurers to
compete in Pennsylvania and likely will make such competition
more difficult than it is today. Furthermore, no meaningful
benefits will accrue to the residents of Pennsylvania that
offset the impact of the resulting decline in competition.
Thank you.
[The prepared statement of Mr. Miller appears as a
submission for the record.]
Senator Specter. Thank you very much, Mr. Miller.
Beginning with you, Mr. Laign, you testified that this
merger would enhance affordability. Would you amplify that? Do
you believe that this merger will make health insurance more
affordable?
Mr. Laign. I believe that this will give us an opportunity
to experiment and try sort of innovative solutions, just as I
mentioned with the Cardone organization.
Senator Specter. Experiment?
Mr. Laign. Or pilots, however you want to look at it, that
we will be able to, in fact, work collaboratively not only
within the Philadelphia market but across the State.
Senator Specter. Well, when you talk about experimentation,
it is speculative as to what the result will be. If you--
Mr. Laign. Well, I can tell you in a very--
Senator Specter. If you have a merger, you have got
scrambled eggs. If it does not work out, then what? But your
statement was that you concluded it would enhance
affordability.
Mr. Laign. I did in my testimony talk about a catastrophic
plan that I suggested that both health insurers may want to
look at that I think would be one potential way that we could
make health care affordable. What I was just alluding to,
though, was the relationship that we have developed with
Cardone, and I can tell you that is a partnership between IBC
and industry and a health care provider all geared to providing
excellent health care; also, by the way, reducing cost, and a
big part of that is through the reduction in utilization of
services and the more efficient utilization of services.
For example, we are now looking at ways together to make
sure that their employees and their dependents receive all the
pharmaceuticals that are prescribed for them. People do not
always take their prescriptions according to the way the doctor
has ordered. By working together, we think we can create,
again, innovative models to address those types of issues.
Improving care, reducing cost.
Senator Specter. Ms. Scanlan, you cite in your testimony
that in central Pennsylvania where Highmark competes with
Capital Blue Cross, reimbursement rates for doctors and
hospitals are higher. Could you amplify that? Does that
competition result in more compensation for doctors and
hospitals, as your statement specifies?
Ms. Scanlan. What I can adequately say--and we have some
charts attached to the testimony that we submitted--is that the
operating margins of the hospitals in the middle of the State
are higher than the operating margins in the rest of the State.
Because of the way these agreements are entered into between
the plans and the individual hospitals, I am not privy to the
absolute numbers of what those payments are. But when we look
at the financial stability or status of the hospitals in the
central part of the State--
Senator Specter. You say their operating margins are
higher, but that is not really responsive on the issue as you
state in your written testimony, that reimbursement rates for
hospitals are higher. Is that so?
Ms. Scanlan. I cannot, as I said before, speak to the
absolute amount of what those reimbursement rates are. The
assumption is that it is causative, that the rates are higher,
which leads to higher operating margins.
Senator Specter. I noted earlier that Temple University
Health System and the University of Pennsylvania Health System
have not taken stands on this proposed merger. Can you tell us
why?
Ms. Scanlan. I do not know why the individual systems have
not taken--or have spoken in a more neutral fashion. Both of
those entities are represented on the Hospital Association
Board. The process that we went through in the association was
to hold regional hearings amongst our members, have a special
task force, and then the board evaluated and deliberated about
this at numerous meetings. Both the CEO of Temple and the COO
of the University of Pennsylvania Health System sit on both the
HAP Board and the HAP Executive Committee, and I can tell you
that it was a unanimous decision on the part of the board to
oppose the merger as proposed.
Senator Specter. Did Temple or Penn oppose the merger in
your deliberations on the board?
Ms. Scanlan. No.
Senator Specter. They took no position?
Ms. Scanlan. They, along with the rest of the board,
unanimously took the position to oppose the merger as proposed.
Senator Specter. So they did oppose the merger.
Ms. Scanlan. Within the association.
Senator Specter. Mr. Harris, are you representing UPMC here
today?
Dr. Harris.
Mr. Harris. No. I have testified on behalf--
Senator Specter. Dr. Miller, you are representing UPMC?
Mr. Miller. Yes.
Senator Specter. Dr. Harris, you have testified that you
believe the merger would be beneficial to the health care
systems and ultimately helpful to the consumer?
Mr. Harris. I believe it will be, but let me just parse out
two different parts. I did not work on the calculation of cost
savings and efficiencies. I only look at the competitive
aspects, and my conclusion with regard to the competitive
aspects is there will be no harm to competition, no reduction
to competition. And the process of competition causes cost
savings ultimately to be passed on to consumers. So, in that
regard, yes, I do believe it will be beneficial to consumers.
Senator Specter. And that is the basis for your favoring
the merger?
Mr. Harris. Well, again, I do not want to parse words, but
I had a narrow assignment, and that was to look at the process
of competition. And I strongly believe that it will have no
impact on competition. If--
Senator Specter. Well, are you saying that you are not
taking a position on the desirability of the merger?
Mr. Harris. I mean, I have no specific position. I have
only done a competitive analysis. But the process of
competition does cause cost savings to be passed on to
consumers. So, to the extent these cost savings will be
realized, it will be a merger that is beneficial to consumers.
Senator Specter. Well, you are talking about cost savings
as a result of efficiencies, economy, and size?
Mr. Harris. Correct, as an example.
Senator Specter. I am just trying to figure out whether you
are for it or against it, Dr. Harris.
Mr. Harris. I mean, I am not sure how to be clearer. I
had--
Senator Specter. Well, yes or on.
Mr. Harris. My experience is that these kinds of mergers
are good for consumers, but I did not do the analysis with
regard to the cost savings.
Senator Specter. Your experience is they are good for
consumers, so you are for the merger.
Mr. Harris. Well, in that regard, yes.
Senator Specter. Well, is there some other regard?
[Laughter.]
Senator Specter. I am just trying to find out your
position. I am trying very hard not to lead you. I know how to
lead a witness, but I am trying very hard not to lead you.
[Laughter.]
Mr. Harris. My analysis of the merger focused on the
competitive process, and I see no reason to believe that this
competition will cause a competitive harm.
Accepting the calculations of cost savings, that is an
important part of the competitive process, so--
Senator Specter. No reason to believe that it would not,
with the possibility of an exception.
Mr. Harris. If you accept it, then I do believe it will be
a beneficial merger.
Senator Specter. OK. Dr. Miller, there had always been a
sense that UPMC, whom you represent, and Highmark had a very
close working relationship in the Pittsburgh area. Why is UPMC
opposed to this merger?
Mr. Miller. In my experience, in my experience as a
consultant to UPMC, I have not seen the evidence of that close
working relationship. What I have seen is that UPMC as a health
plan, not UPMC as a hospital provider but UPMC as a health
plan, vigorously competes with Highmark and is concerned about
the potential impact of Highmark growing larger and with
greater surpluses and having a greater sense of competitive
leverage as a result of this merger.
Senator Specter. Well, UPMC has some lines of insurance
coverage of its own, right?
Mr. Miller. Yes.
Senator Specter. Describe to what extent UPMC has those
lines which would put them in a possible competitive situation
with Highmark on providing insurance.
Mr. Miller. Very definitely competitive. UPMC offers
coverage in a number of different categories, including what we
would normally describe as health coverage, managed care
coverage, to about 330,000 people, all of whom are in western
Pennsylvania, which means that they are competing directly with
Highmark for business. UPMC has 6,000 employers who have
currently purchased coverage from UPMC Health Plan. In addition
to that, UPMC Health Plan provides behavioral health coverage
and other types of coverage as well. But the experience of UPMC
Health Plan, the health plan itself, which is a part of UPMC,
the experience of the health plan is that it vigorously
competes for business in western Pennsylvania with Highmark
right now.
Senator Specter. Mr. Allen, you have contended that
Highmark could easily re-enter the Philadelphia area market
because it already has a network of providers there. If
Highmark does not compete in southeastern Pennsylvania, what
does it mean that they have a network of providers there? Is
that activated, operative?
Mr. Allen. In prior years, they were the Blue Shield Plan,
and it continued to be operating as Blue Shield. And they,
therefore--they do have connections with physician groups
there. My understanding is that they have the network--I do not
know whether those physicians are actually actively contracted.
But the Blue Shield Plan is statewide plan, and they are Blue
Shield. They have, through Blue Shield, physicians everywhere
in Pennsylvania. They are under contract.
Senator Specter. So Highmark is operating under Blue Shield
in eastern Pennsylvania, southeastern Pennsylvania?
Mr. Allen. They had an agreement not to do that. That
covenant not to compete with IBC has expired, and with the
expiration of that covenant not to compete, they are ready and
able, by virtue of their physician relationships, to compete
there in southeastern Pennsylvania. That is my understanding.
Senator Specter. Mr. Marshall, in your testimony, you
contend that the proposed merger between Highmark and IBC would
reduce potential competition. Potential competition is
obviously a factor. What indicators are that, absent this
merger, Highmark would compete with IBC in eastern or
southeastern Pennsylvania?
Mr. Marshall. First, Senator, I would like to think that at
some point the regulatory oversight of the insurance industry
would ask that question and perhaps force some competition in
that end. I think if State Farm and Allstate were to say let's
divide up the State and not compete with one another, there
would probably be some pretty extensive regulatory review, and
that should happen there.
I think, second, the practice of Highmark itself, it has
gone into central Pennsylvania. There is no reason it cannot go
east, further east. I do appreciate that--and I guess, third,
they both have--Highmark and IBC must have been somewhat
tempted to compete or else they would not have felt a need to
have a 10-year covenant against it.
And I guess, fourth, I would like to think that businesses
generally want to expand and grow, and businesses generally
want to enter into new markets and new territories. Certainly
that is the hallmark of all of the companies we represent. And
so while current management at Highmark may not have any
intention of going east, I would think that there would be
future management that very well might.
Senator Specter. Mr. Frick, do you have any intentions of
going west?
Mr. Frick. No, Senator. The infrastructure that would be
required to build a statewide brand would prohibitive, and it
would divert resources and needed funds from serving our
customers in southeastern Pennsylvania in the way that they
require it. No, sir.
Senator Specter. Dr. Melani, do you have any intention of
going east?
Dr. Melani. No, Senator, we do not.
Senator Specter. Dr. Melani, how has it worked out in
central Pennsylvania where Highmark competes with Capital?
Dr. Melani. Senator, that is a great question. It has not
worked out well. We entered that marketplace in 2002, and the
reason we entered that marketplace was at that time we had a
substantial amount of business in that marketplace that we
shared with Capital Blue Cross. In addition, we had a large
number of employees housed in that marketplace. There were
4,000 employees. And we had relationships in that marketplace
that had been developed and sustained over 60 years.
At that time, Capital Blue Cross was threatening to talk
all the business that we shared into a downstream company owned
solely by them, and we were faced with the situation where we
were going to lose significant amounts of revenue profitability
if that would happen by being forced out the marketplace. So we
elected to compete. We went in that marketplace using our
brand, Pennsylvania Blue Shield, and established a hospital
network to match up with our physician network. Our experience
over the last 5 years, although each of the plans--Capital Blue
Cross and Pennsylvania Blue Shield--basically took what market
we had and split it 50/50, the financial experience has been
dismal. Over the 5 years on that book of business, we have a
minus 1-percent operating margin on that book of business.
In addition, I think Ms. Scanlan outlined exactly what the
problem is. As we have entered that market, the hospitals and
physicians have used their market power and the divisiveness
that is created by way of having more health plans to raise
costs. They have raised the cost of accessing physician
services and hospital services, and margins of the hospitals in
that region have gone up substantially.
Senator Specter. Well, is Highmark competing now with
Capital in that market?
Dr. Melani. We are, and our premiums in that market have
risen faster in that market than the other markets we operate
in. So it has been a disaster for customers and for us as a
corporation.
Senator Specter. Dr. Melani, why do you think the Hospital
Association is opposed to the merger?
Dr. Melani. Because they represent hospitals that would
like to get paid more money.
Senator Specter. And will they be paid less money if the
merger occurs?
Dr. Melani. No, because we will not gain any more market
share in the markets we operate in. We will have no more market
power in any single market today, so there is no more leverage
today than there will be after the merger, so we would be able
to--
Senator Specter. But you say they are opposed to the merger
because they would like to be paid more money.
Dr. Melani. Yes, they would like to decrease our market
position in the marketplace.
Senator Specter. Well, you said because they would--
Dr. Melani. I am sorry. They would oppose the merger-I am
not sure why they would oppose the merger, frankly, because it
does not change the market dynamics that exist today. We do not
compete. We are in different markets, and it does not change
the market dynamic between Highmark or IBC and its providers--
hospitals and physicians. It just gives us some additional
scale to lower our operating costs, get administrative
efficiencies, and leverage other kinds of services in the
health care cost equation, like pharmaceuticals, durable
medical equipment, laboratory services. It would have no impact
on physicians and hospitals.
Senator Specter. Mr. Marshall, it is my understanding
that--or let me just ask you the question. Have premiums gone
down due to competition in central Pennsylvania?
Mr. Marshall. Have premiums gone down over the last 6
years? No, Senator. Have they gone up by less of a margin than
they have gone up in the more concentrated markets? I believe
there they have. I also think the one thing that gets left out
of all of this, frankly, when an insurer faces competition and,
therefore, does not make as much money as it used to, I think
that is a good thing for consumers. I think that is a good
thing for the marketplace.
Senator Specter. Would you repeat what is a good thing for
consumers? That is what I have been looking for in this entire
hearing.
Mr. Marshall. I think if an insurer says that because it
faced competition it is not making as much money as it wishes
it were, I think that is a good thing for consumers. That is
what competition is meant to do for consumers. It I meant to
hold down just how much money--
Senator Specter. You say premiums have not gone down in
central Pennsylvania, but they have not gone up as much as they
did in areas where there was not the competition like between
Capital and Highmark?
Mr. Marshall. That is my understanding. That is my
understanding about a year ago, and I cannot speak for what
their rates have done in the past year. I also--
Senator Specter. Would you find out and let the
Subcommittee know?
Mr. Marshall. Yes, Senator. I also think the one point that
gets left out, it is not just what providers get paid or even
what the premiums are. It is also what the quality of the
service and the innovations of the service are. You look in the
health insurance marketplace in central Pennsylvania and
throughout, the innovations that have happened with health
savings accounts, transparency, and even a lot of the managed
care and utilization controls only came about from competition.
That is where the genesis was. It was actually not even among
our larger members. It was among some of the very small health
insurance members that those ideas came about. You lose that
when you do not have a competitive marketplace.
Senator Specter. Mr. Frick, I am advised that the
Independence Blue Cross reserves are $1.7 billion and the
Highmark reserves are $4 billion. Is Independence Blue Cross in
a position where you have insufficient reserves?
Mr. Frick. You are correct, Senator; our surplus is
approximately $1.7 billion. That represents only 63 days of
claims payments. And in Pennsylvania, the Insurance Department
did an exhaustive review in 2005 of the Blues' surplus and came
to the conclusion that none of the Blues had excessive surplus.
The legislature did a review and came to the same conclusion.
Senator Specter. What conclusion was that?
Mr. Frick. That none of the surplus amounts of the four
Blue Plans were excessive.
Senator Specter. Who concluded that?
Mr. Frick. The Pennsylvania Insurance Department, as well
as an independent study that was subsequently done by the
legislature. And, Senator, we use--the question about using the
surplus to benefit subscribers, we do that on an ongoing basis
when we do our financial planning, when we set rates, when we
plan for investment income. And it enables us to operate at
lower margins than our for-profit, publicly traded competitors.
Senator Specter. When you say that it is only 63 days of
claims payments, but during those 63 days you are also getting
more premiums.
Mr. Frick. Well, our surplus represents--we pay about $850
million a month in claims for services to hospitals and
physicians on behalf of our members.
Senator Specter. And how much do you get in premiums?
Mr. Frick. Our premium last year was in excess of $10
billion.
Senator Specter. So $850 million in--
Mr. Frick. $850 million in claims payments per month out of
a monthly premium of less than $1.5 billion.
Senator Specter. It looks like at $10 billion annual
premiums and 850 paid out--
Mr. Frick. Million a month. To put it another way, Senator,
as I said, about 88 cents of our revenue or premium dollars--
Senator Specter. Well, the figures you have just given me,
you have a deficit. Twelve times $850 million in payments comes
to $1.2 billion. So you are losing--are you losing money?
Mr. Frick. Eighty-eight cents of every--
Senator Specter. Do not go back to 88 cents. You told me
that you have payments of $850 million a month. Isn't that
right?
Mr. Frick. Did I say 850 or 650?
Senator Specter. Well, which is it? I believe you said 850.
Mr. Frick. Let me check my notes, Senator. I know--
Senator Specter. It is only $200 million, Mr. Frick. That
is not much among friends.
[Laughter.]
Mr. Frick. It is significant, Senator.
Senator Specter. How much?
Mr. Frick. It is significant, when you said
Senator Specter. Is it 850 or 650?
Mr. Frick. Let me check my notes.
Senator Specter. Take your time. Mr. Frick. Absolutely. It
is $850 million a month, yes.
Senator Specter. OK. Well, when I multiply 12 times 850, I
get $10.2 billion. If your premiums are $10 billion, which you
just said, you are losing money.
Did you know he was losing money, Dr. Melani, when you
agreed--
[Laughter.]
Dr. Melani. That is why we need to merge.
Senator Specter. That is why he needs to merge, but how
about you?
Mr. Frick. Our operating margin last year was 1 percent.
Our investment income was 0.6 percent. We operated.
Senator Specter. Now, come on, Mr. Frick, don't start
giving me figures--
Mr. Frick. We are not losing money.
Senator Specter. I want to deal with 12 times 850 million,
which is $10.2 billion, as composed with--well, take a look at
the transcript, Mr. Frick. Your figures, I think, do not add
up, and take a look at it and provide the Committee with the
information.
Mr. Frick. Absolutely, Senator.
Senator Specter. Dr. Melani, how can a company run as
efficiently as Independence Blue Cross with Mr. Frick, although
his math may not be too good, how could they get along with
only $1.7 billion in surplus whereas you have to have $4
billion in surplus?
Dr. Melani. Yes, it is a difference in the kind of risk
that we each bear. Each of our companies has a different make-
up of the book of business that we have in different types of
risk that we carry. Certain types of--
Senator Specter. Sufficient to have more than twice the
amount of reserves?
Dr. Melani. Yes, Senator.
Senator Specter. Why?
Dr. Melani. Our reserves are also--have also been deemed to
be below the excessive level, and although our reserves-
Senator Specter. Need to be below the excessive level?
Dr. Melani. Yes.
Senator Specter. What does that mean?
Dr. Melani. They are at a sufficient level. The Insurance
Department has determined that our reserves are in the
sufficient level.
Senator Specter. Would you repeat that?
Dr. Melani. They have determined that our reserves are
sufficient to cover the risk that we have and not excessive.
Senator Specter. Who made that determination?
Dr. Melani. The Insurance Department, the Pennsylvania
Insurance Department.
Senator Specter. Would they approve even higher reserves?
Dr. Melani. Yes, sir.
Senator Specter. Is there any limit to what they would
approve?
Dr. Melani. Yes, there is, sir.
Senator Specter. What is it?
Dr. Melani. What they do, Senator, is they look at the risk
that you have in your business, because all of us carry
different lines of business. Some of us are in Medicare. Some
of us are in Medicaid. Some are in commercial business. We have
other lines of business, too--workers' compensation, we have
vision insurance, dental insurance, all types of businesses
that we have. And each of those have different levels of risk.
So the NAIC, the National Association of Insurance
Carriers, has established a methodology to do an apples-to-
apples comparison, and they take your surplus and they look at
the relative risk you have, and they come up with an equation
and a number called risk-based capital, and it is a percentage
number. And that is how you can compare all of us to see how we
are in relative solvency. And then they set up guidelines with
that risk-based capital to determine whether or not your
organization is solvent or not based on that ratio.
In the State of Pennsylvania, they have capped that ratio
at 750 percent. Above that, they consider it excessive, and
they begin to do things to bring that level of surplus down.
Senator Specter. Let me ask everybody on the panel the same
question, starting with you, Dr. Miller. Is there any basis for
doctors and hospitals being concerned about this proposed
merger on the grounds that there may be too much power in a
combined entity which would give them undue power in
negotiating payments to doctors and hospitals?
Mr. Miller. I definitely believe that there is. One of the
points that you were just making was that, combined, the
surplus--I am familiar with somewhat different numbers, but in
the vicinity, a combined surplus of $6 to $7 billion, which is
not only high in itself but so much higher than any other
insurer would have in the State that it gives them the
capability to exert substantial leverage through a number of
different approaches. And one of the approaches would be in
terms of increased pressure on physicians.
Right now, they exert a considerable amount of pressure on
physicians and on hospitals, if for no other reason than
because of their size and what that represents of the
physician's or hospital's patients. In a typical situation,
either IBC or Highmark probably provides coverage to 25,
perhaps even 30 percent--about 25 percent of the patients of
any one particular hospital, and perhaps even more for some
physicians. And when you are in that kind of a position, and
now in a position of being even larger and being able to exert
greater pressure, then you can obtain substantial discounts.
And the evidence is there. One of the points I made in my
testimony was that I studied States where Blues Plans had very
substantial market shares of the type that the Highmark/IBC
consolidation would create. And in almost every instance, the
payment levels, the reimbursement levels to physicians and
hospitals are lower than they are in States where there is more
competition.
Senator Specter. Mr. Frick, do you think that hospitals and
doctors have any basis at all for concern about this proposed
merger in giving undue leverage and bargaining power to a
merged entity? The question Dr. Miller answers in the
affirmative, do you think--I know your answer is no, but tell
me why.
Mr. Frick. Well, as you highlighted, Senator--and I was
pleased that Temple and University of Pennsylvania and Holy
Redeemer and also Children's Hospital of Pennsylvania, Dr.
Steve Altschuler, testified in Philadelphia about the
importance of our relationship and our partnership. We are all
worried about health care costs--
Senator Specter. But did Penn and Temple think--did they
testify in favor of the merger?
Mr. Frick. They testified--
Senator Specter. They liked your relationship.
Mr. Frick.--about the relationship.
Senator Specter. But did they testify in favor of the
merger?
Mr. Frick. They testified about our partnership and its
importance to their institutions and its importance to their
patients and our customers.
Senator Specter. Mr. Frick, do you think there is any
concern that if they testify against you, you could retaliate
in some way?
Mr. Frick. Not at all, Senator. Our products are dependent
on access to high-quality hospital and physician networks.
Senator Specter. Well, why didn't Temple and Penn testify
in favor of the merger then? You are being coached by Dr.
Melani--
Mr. Frick. No, no--
Senator Specter.--and that is perfectly--that is perfectly
appropriate. You cannot hinder a witness, but you can coach him
a little. Go ahead, Dr. Melani. You answer the question. Or is
it outside your jurisdiction since--
Dr. Melani. You would have to ask them because we do not
have any idea why they would not testify pro or con.
Senator Specter. You do not know why? Do you adopt that
answer, Mr. Frick?
Mr. Frick. I want to explain that in Pennsylvania, I think
the hospitals, as well as we are, are concerned about health
care costs. But I think the institutions that we deal with in
southeastern Pennsylvania are proud of our working
relationships. And do I believe they are worried about
retaliation or leverage? The market dynamics in southeastern
Pennsylvania does not change after the merger, Senator. Our
relationships, our products and services, remain the same. We
are in two separate markets.
Senator Specter. Well, Mr. Frick, it is different as to
whether they like the relationship contrasted with whether they
favor the merger. That is different.
Mr. Frick. Yes.
Senator Specter. Are you a volunteer, Mr. Balto? Let the
record show someone raised his hand.
Mr. Balto. Yes, I want to reply on a couple things.
First, as a former Government antitrust official for 20
years, I would not rely too much on who complains and who does
not complain. I burnt a lot of shoe leather trying to get
people to complain about activities by firms that were
monopolist, and the problem is, before this merger or after
this merger, they are going to have to live with the monopolist
so they are going to be reluctant about complaining. Should
they--
Senator Specter. So you think there is a reluctance about
complaining?
Mr. Balto. Sure. I mean, my experience in mergers, you can
ask people at either antitrust agency, they will tell you that
that is very common.
Senator Specter. Do you think retaliation is not totally
out of the picture?
Mr. Balto. You are going to have to live with these
people--whether the merger occurs, you are going to live with a
firm with a 70-percent market share one way or another. But
what I wanted to do is try to reformulate the question a bit,
because what Mr. Harris is suggesting is that all you are doing
is changing the name tag on the firm you are dealing with. This
is not the operative question here. The operative question here
is not whether or not you will have less choices. It is, But
for this merger, wouldn't you possibly have more choices? You
would have Highmark on the edge of the market, either poised to
enter or perhaps entering, and that would improve choices for
consumers and for--
Senator Specter. Do you think there is a significant
likelihood that Highmark would enter Independence Blue Cross'
territory?
Mr. Balto. I think that consistent with the CEO's
statements, it is consistent with their past history, and work
now the-
Senator Specter. Highmark's?
Mr. Balto. Highmark's past history.
Senator Specter. Would anybody--now I have got a lot of
hands going up.
[Laughter.]
Senator Specter. We are going to have to conclude in a few
minutes, but go ahead, Mr. Laign.
Mr. Laign. I guess since I am the lone provider, I would
like to answer the question, too. I do not feel that this
merger will affect their leverage on rates whatsoever. I think
the reserves are important. A number of us in the health care
industry have been through the failures of insurance companies
and the impact that has had on us, negatively. We have ended up
getting 50 cents or less on the dollar from those failures.
As a health care provider, I believe cash reserves are
extremely important, too. We have 151 days in cash at Holy
Redeemer Health System, and I do not believe that is enough,
nor do the rating agencies believe that is enough.
I guess what I am hopeful is that the regulators--and I
believe they will; I have been extremely impressed with our new
insurance commissioner--will do their job and they will provide
the necessary oversight of both Highmark and IBC to assure that
providers are paid fairly. There are appropriate appeal
processes, and we do create--
Senator Specter. We have two more hands that are up. I will
hear two more responses. Dr. Harris, then Mr. Allen.
Mr. Harris. I have known Dave Balto for a long time. We
worked together, I guess, in the Government and in private
practice. But I have to disagree with him for two different
reasons.
One, reading newspaper articles and, in my mind,
misinterpreting what is said in those newspaper articles is not
how you do an entry analysis. You look at the specific reasons
open to that firm. You look at the specific market, and you
ask: Will that entry likely be profitable? Moreover--and I just
wrote a chapter in an ABA book on this topic. Sitting on the
edge of a market does not affect things in that market if entry
takes a long time and if a market is difficult to enter. All
the testimony here is that this is a difficult market to enter,
and he is basically confusing two things. He is confusing what
is called a market with no sunk costs, where it is easy to
enter, and one where it is more difficult. And in a market like
this, having someone at the edge does not have much of an
impact on competition. And, moreover, Highmark's analysis says
they are not going to enter.
Senator Specter. Mr. Allen, you can have--
Mr. Allen. Sure. Just to echo a bit on Mr. Balto's point,
in southeastern Pennsylvania where IBC now has a 70-percent
market share, that is overwhelmingly more than what is required
to force physicians to take fees that are anticompetitive,
below competitive levels, and compromise their practices. It
only takes about a 20-percent market share before physicians
basically are over a barrel in their negotiations. So it is a
sad day when here Highmark would be, we would say, entering the
market, giving physicians an opportunity to--giving physicians
an opportunity to have some competition for the contract.
And then, Senator, on the question that you asked me
earlier about the ability of Highmark to utilize the physician
network in southeast Pennsylvania, their ability to actually
come in and give some relief to the marketplace, including the
physician market, that information, the information that I have
on that came from Monica Noether's report. She has said that,
``Highmark already has an existing presence in southeastern
Pennsylvania through its professional provider network and its
participation in products jointly marketed with IBC in that
region. Since Highmark is a professional services plan with
providers in southeastern Pennsylvania, Highmark already has an
existing physician network under contract in southeastern
Pennsylvania.'' And that comes from a page of Monica Noether's
expert report.
Senator Specter. Dr. Melani, you have your hand up?
Dr. Melani. Yes, Senator, thank you. I think a lot of
discussion at the table has been about competition, and I think
we have clearly stated--and I think it is factual--that we do
not compete today and this merger will not change the market
dynamics that exist today. Most of the speculations are on
potential competition, and it is truly speculation. And a lot
of that has been based on statements that are attributed to me,
and those statements are correct. I have said that Highmark
does have a desire to be a statewide organization. What I also
did in those statements was to go on and say I believe there
should be one Blue Cross/Blue Shield in the State of
Pennsylvania. And at the time that those statements were made,
we were in discussion with IBC about the consolidation, and
that was our intended way to become a statewide organization.
We have never, ever stated that we intended to compete in
the Philadelphia marketplace, and we do not intend to compete
in the Philadelphia marketplace.
Senator Specter. Mr. Frick, would you like to have another
comment? You and Dr. Melani have the laboring oar here, so I
will give you another chance to comment, if you want to.
Mr. Frick. Well, I view Highmark as a partner. They are not
a competitor. We have jointly offered products throughout our
history. We have made shared investments for the benefit of our
communities. We are both Blue Plans. And we want to continue
this relationship in a new and different way, and the $1
billion in net economic benefit to the Commonwealth as a result
of this combination is a progressive step forward to address
the issues that you have articulated today: affordability,
access, and quality. It is what we work to achieve every day,
and this combination will certainly improve that for
Pennsylvania. And I think our history speaks to that in working
together.
Senator Specter. Mr. Frick and Dr. Melani, this
Subcommittee would be interested in a short statement as to how
the merger would impact compensation to physicians, to
hospitals--and having extended that request to you, I would
extend it to everyone--Ms. Scanlan, Mr. Marshall, Mr. Laign,
Mr. Balto, Mr. Allen, Dr. Harris, Dr. Miller--what would the
impact be likely on compensation to physicians, number 1;
compensation to hospitals, number 2, the impact on premiums
which are paid, significantly by employers but sometimes by the
individuals; and what impact would it have on the consumers in
terms of reducing the number of uninsured consumers and how it
would impact on the consumers.
This is going to be an ongoing matter, and I think it would
be useful. It has been a very good hearing, and I wanted to be
sure it was balanced and asked Highmark and Independence Blue
Cross for additional witnesses, and they suggested Dr. Harris
and Mr. Laign. We appreciate your coming in. We appreciate all
of your coming in. We do not often have nine witnesses at that
green-felt table.
That concludes the hearing. Thank you all very much.
[Whereupon, at 4:06 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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