With this week's announcement of the pending merger between Highmark and Blue Cross of Northeastern Pennsylvania, the next question may be whether Highmark revisits its attempted merger with Independence Blue Cross. The combination of Pittsburgh's Highmark with IBC of Philadelphia would have created one of the largest nonprofit health insurers in the nation, but the two Blues plans walked away from the deal in 2009 after the state imposed a seemingly innocuous condition: relinquish either the Blue Cross or Blue Shield brand.
Five years later, the overall environment is probably more conducive to a Highmark/BCNEPA/Independence merger, but are the incentives for the consolidation still there The pre-ACA paradigm for health insurers was to get more heads, to drive enrollment in order to get more leverage against health systems. But with the line between health systems and health insurers increasingly blurred, getting a critical mass of membership within one state's borders may not be as important as partnering with insurers with similar strategies.
Some observers contend that Highmark and IBC called off the deal in 2009 before the state had a chance to officially reject it and essentially codify the merger as antitrust akin to quitting before being fired, said the Pittsburgh Post-Gazette. Gov. Ed Rendell and Insurance Department Commissioner Joel Ario spoke out against consolidation, fearing a reduction in competition. In addition to the governor's office, Democrats had a majority in the state house.
The landscape has since changed, and not just in Harrisburg, where both chambers of the Pennsylvania General Assembly are now under GOP control and the governor is Republican. The national Affordable Care Act places an emphasis on efficiency, population health management and bearing risk which are arguably more ably handled by large corporations, hence the rash of healthcare related mergers and acquisitions, two of which directly affect this discussion.
For-profit insurer Aetna acquired Coventry last summer, a move that affected Pennsylvania more than other states. Aetna operated almost exclusively in eastern Pennsylvania, while Coventry's HealthAmerica was sold in the west. The Aetna/Coventry merger created the second largest MCO in the Keystone State, with total enrollment of 1.6 million as of July 2013 (HealthLeaders-InterStudy). Additionally, the new Aetna is a for-profit that spans the entire state.
The creation of one large Pennsylvania Blues could be sold as a nonprofit counterbalance to Aetna. The acquisition of BCNEPA will give Highmark a service area of 62 of the state's 67 counties (all but Philadelphia's five counties); the MCO already operates in West Virginia and Delaware. On paper, Independence and its five Philly counties are the last piece of the puzzle.
Unlike all but a handful of states, Pennsylvania has multiple Blues plans four. Each had its own territory: Highmark in the west, BCNEPA in the northeast, Independence in Philadelphia, and Capital Blue Cross in the south central region. Of these four, CapBlue became the odd man out after rebuffing Highmark's takeover bid back at the turn of the millennium. Now, Highmark also competes in CapBlue's territory, and over the past few years has been drawing more members than its former acquisition target.
But the three other Blues plans have been cooperating marvelously. Highmark already owns a portion of BCNEPA, and the two co-own the First Priority Health HMO. Both BCNEPA and IBC have migrated to Highmark's claims processing platform. One of the main reasons given for the Highmark/IBC merger was an expected $1 billion in savings from operational and pharmaceutical expenses; perhaps a significant amount of these savings can be realized by simply consolidating back room operations.
In many ways, Highmark and BCNEPA are a great match. They face similar threats on their home turfs in the coming year: a provider-owned health plan (UPMC and Geisinger, respectively) and the reinvigorated Aetna. The merger may be a way for both to alleviate anticipated membership losses in 2015.
So is the Highmark/BCNEPA merger an appetizer to the main course, IBC
Highmark and IBC had similar strategies going into the launch of the individual health insurance exchanges: offer narrow network products with premiums that are far lower than the competition. Highmark's Community Blue in Western Pennsylvania basically keeps the facilities of UPMC and Geisinger out of network, while IBC has a tiered hospital network that makes the large academic medical centers in Philadelphia cost more out-of-pocket. This strategy has helped Highmark take nearly 50 percent of the individual marketplace enrollment in the state, compared to about 30 percent of the overall commercial membership in the state (HealthLeaders-InterStudy and Highmark).
But this strategy also shows a fundamental difference in where the two Blues operate. Pittsburgh has been accustomed to narrow networks, thanks to UPMC Health and HealthAmerica before that. Groups and individuals in Pittsburgh, Scranton and Harrisburg are looking for regional health plans and have been receptive to integrated payer/provider networks. Perhaps Capital Blue will survive by building on its ACO with PinnacleHealth in Harrisburg and forming its own system.
Philadelphia is influenced by other cities on the eastern seaboard, which is why national health insurers have gotten a stronger toehold in the area. Independence demonstrated its leverage in the area by debuting a tiered hospital network on the HIX, not a strictly narrow network. Large national companies are not yet in the mood to limit the provider choice for their employees (or more specifically, their executives).
Is the integrated payer/provider strategy of Highmark compatible with the broader provider network of big-city Independence. It's not impossible, and Pennsylvania Blues has a nice ring to it. In August 2013, IBC requested permission from the state insurance department to restructure, which could make the insurer more flexible in corporate maneuvering.
Two other Blues plans have requested similar corporate restructurings in recent years: Blue Cross Blue Shield of Michigan and Florida Blue, both of which are affiliates of Independence Blue Cross through the AmeriHealth Caritas subsidiary, which is Medicaid-focused. Like IBC, the Blues plans of Florida and Michigan have been aggressive in crafting ACO-style contracts, and have to contend with sprawling population bases and fragmented health systems. These two Blues plans may be more compatible partners for IBC than Highmark and BCNEPA.
Follow Mark Cherry on Twitter @MarkCherryDRG.