The Patriot-News of Harrisburg, PA
September 20, 2008
Because of her starring role in Capital's commercials, Smith, 50, was the face of the Susquehanna Twp.-based health insurer and a local celebrity.
Whatever it was that caused her to leave, it came to a head quickly: Smith resigned Monday, and that's when the board of directors started looking for a replacement.
The people now guiding Capital insist it is strong and stable.
"I can't imagine a company going into a transition like this with more strengths than we have," William Lehr Jr., the board chairman, said Thursday.
Outside observers also said Capital appears healthy and has shown no signs of distress.
"I think there is no question they have been able to compete very effectively," said Paul McMillen, the president of the Pennsylvania Auto Association and a former Capital board member. "The facts speak for themselves."
Going it alone:
Still, the outside observers also said major changes might be in store for Capital, one of the region's major employers with 2,300 employees.
They wonder how long Capital can survive as a small health insurer in an industry increasingly dominated by giants. In recent years, national giants such as United Healthcare have made inroads in Pennsylvania.
Observers also said Pennsylvania is unusual in having four Blues plans. Most states have no more than one, and in states that do have more than one, the plans don't compete, as Capital and Highmark Inc. do.
In addition, Smith's resignation comes at a critical time. About half of all health insurance policies begin on Jan. 1. Now is a peak period for renewing contracts and winning new ones.
At the start of the decade, Capital nearly merged with Highmark, the state's largest health insurer. Instead, they became competitors, with two different strategies.
Capital operates within a 21-county region where it insures about 1 million people.
Highmark focused on getting bigger. It formed or expanded relationships with other insurers inside and outside Pennsylvania and landed government contracts.
Now, Highmark wants to merge with Independence Blue Cross, which serves the Philadelphia region. If the merger is approved by the state, the new company would control more than 50 percent of the Pennsylvania market and be one of the nation's largest health insurers.
Where does that leave Capital, which has about a 5 percent market share?
In an interview Thursday, the three board members running Capital -- Lehr, James M. Mead and Ronald J. Drnevich -- said they remain committed to the strategy the company has followed since the split with Highmark.
They said Capital is not looking for a partner. But they said the board closely monitors the changing landscape and would consider a merger or partnership if it seemed to be the right path.
"We are always open, and always have been open, to other ways of doing business," Lehr said.
Lehr said Capital is based in the center of the region where it operates and thoroughly understands its market. All decisions are made by people within the market, and everyone who works for Capital lives within the region.
McMillen, the auto association president, spent 17 years on the Capital board, leaving after the split with Highmark.
His association eventually chose Highmark over Capital.
Although McMillen favored a merger between the two companies, he remains an admirer of Capital.
He said the company has "extreme positives" such as brand recognition and loyalty in the region.
Still, he wonders if Capital can continue to stand alone.
McMillen, who also supports the Highmark-Independence merger, said "it makes no sense to me" that Pennsylvania has four Blues plans.
He expects the Capital board to eventually consider a partnership with another insurer.
Chris Lewis, an analyst with HealthLeaders-InterStudy, which studies health plans, also noted the trend of larger insurers tending to "gobble up" smaller ones.
Lewis said she knows of no Blues plan that exists within a smaller region than Capital.
She also questioned the need for more than one Blues plan in a state. Blues plans were founded on the idea that the best way to make health care affordable is to spread costs over the largest possible group.
"Things are changing to the point where someday you might see one big Blues plan," she said.
Lewis said health plan purchasers today are focused almost exclusively on getting the lowest possible price.
That's a driving force in the trend toward larger health plans. Larger plans can use their ability to deliver volume to obtain discounts from providers, she said. Their size also allows them to add services such as pharmacy management programs that can hold down their costs and help them undersell competitors.
Being restricted to 21 counties probably limits Capital's options in those areas, she said.
Still, Lewis said, there are ways Capital might offset those disadvantages.
It could pursue a partnership with another insurer. Or it could convert to for-profit status, enabling it to raise capital by selling stock.
No short-term change:
Tom Henschke, a director at SMC Small Business Councils, a trade association, predicted Capital will continue on its present course for the short term. His organization represents about 300 businesses that have coverage from Capital.
He expects the loss of Smith will pose no immediate problems for Capital's customers.
Henschke said he will be interested to see if competitors including Highmark and HealthAmerica "view it as a time to pounce" in terms of wrestling business away from Capital.
The Capital board members said they expect it will take several months to hire a new CEO.
They downplayed the impact of losing a CEO who also was the face of the company. They said the ability to be the face of the company is not among the most important qualifications they will seek in the next CEO.
"You have 2,300 faces that have done a great job in serving our customers and will continue to do that," Mead said.
DAVID WENNER: 255-8172 or firstname.lastname@example.org
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