October 1, 2008

The Honorable Joel Ario
Insurance Commissioner
Pennsylvania Insurance Department
1326 Strawberry Square
Harrisburg, PA 17120

Dear Commissioner Ario:

On behalf of Pennsylvania’s more than 225 hospitals and health systems, The Hospital & Healthsystem Association of Pennsylvania (HAP) is submitting its final public comments to the Pennsylvania Insurance Department regarding the proposed merger of Highmark, Inc. and Independence Blue Cross. We have appreciated the Insurance Department’s efforts to provide information to the public to engender public review and comment on this important proposal and urge you to give serious consideration to our comments.

HAP opposes the merger, as proposed, of Highmark, Inc. and Independence Blue Cross. Pennsylvania hospitals and health systems have significant concerns regarding the proposed merger and its impact on market competition, provider contracting, social and community mission, and transparency and accountability. HAP has previously expressed these concerns in public testimony before the Pennsylvania Insurance Department.

HAP recognizes that under Act 62 of 2008, the Pennsylvania Insurance Department will be evaluating the proposed merger consistent with the seven standards enumerated in the act, which are very similar to the standards under the state’s Insurance Holding Companies Act. HAP’s final public comments and recommendations to the Insurance Department will center on standards (ii), (iv), and (vi) as found in Act 62 of 2008.

Comments and Recommendations

Standard (ii): The effect of the merger, consolidation or other acquisition of control would be to substantially lessen competition in insurance in this Commonwealth or tend to create a monopoly therein.

HAP Comment: The insurance marketplace in Pennsylvania is already skewed toward Highmark, Inc. and Independence Blue Cross. The merger of these two plans—which have commercial, Medicare managed care, and Medicaid managed care products—and the contractual relationship between Highmark, Inc. and Blue Cross of Northeastern Pennsylvania will result in a plan through which the majority of Pennsylvanians receive health care coverage. Pennsylvania hospitals and health systems are greatly concerned about the market power the merged plan will have and the potential for the plan to engage in anticompetitive actions. Therefore, should government approval occur, there needs to be appropriate parameters—e.g., checks and balances—so that there isn’t unchecked use of market power in contract negotiations with providers. Failure to establish effective parameters could unduly drive down provider reimbursement to inadequate levels, thus jeopardizing access to quality health care and the long-term financial sustainability of essential community health care services.

HAP Recommendations: It is imperative that should government approve the merger that oversight properly addresses the provider community’s concerns regarding monopsony power and that necessary actions are taken. Thus, to enable a balance in the important partnership that exists between health insurers and the providers serving patients in communities across the commonwealth and to ensure Pennsylvanians continued access to quality health care, government must include the following parameters in any approval:

• Explicit prohibition of use of unilaterally imposed contract terms that raise anticompetitive concerns by the merged plan, including use of most-favored nation, prudent purchaser, or any similar types of clauses that require the largest volume plan to be given the lowest rate by a provider, and/or “all products clauses” in contracts that require acceptance of all product lines sold by the merged plan. These prohibitions must extend to both commercial and public sector (Medicare and/or Medicaid) product lines of these plans.
• Allowance for a provider-initiated, binding, mandatory independent alternative dispute resolution process (such as arbitration) between health care facilities and/or provider practices and the merged plan to resolve contract disputes. Such an approach should specify the basic criteria that would be used and include confidential review by the third-party of data regarding payments to comparable providers (by size, service area, and/or nature of service of services provided) during the relevant time period during which the contract is in dispute, and the structure and process of the dispute resolution process. In addition, certain key financial indicators (such as margins, burden of indigent and uncompensated care, dependence on public payors—such as Medicare and Medicaid, capital investment support, quality and patient safety initiative support, etc.) must be considered during the dispute resolution process. Financial indicators used should be based on valid and reliable sources, such as data collected by state agencies.
• Enabling clinically and financially integrated organizations (either currently in existence or in the future as consistent with federal law) to negotiate as a unit with the merged plan. Federal authorities (Department of Justice and Federal Trade Commission) have long recognized the ability of financially integrated organizations to jointly negotiate contracts with health plans provided that the financial integration provided strong incentives for the providers involved to control costs and improve quality. More recently, federal authorities through the 1996 Statements of Antitrust Enforcement Policy in Health Care have been evaluating clinical integration in matters related to antitrust policy. Clinical integration involves providers working together in an interdependent fashion so that they can pool infrastructure and resources, and develop, implement, and monitor protocols, “best practices,” and various other organized processes that can enable them to furnish higher quality care in a more efficient manner than they likely could achieve working independently.

Criteria for clinical integration can include:

• Selectively choosing program physicians who are likely to further the program’s efficiency objectives;
• Establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; and
• Significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies.

• Review the existing agreement between Highmark, Inc. and Blue Cross of Northeastern Pennsylvania to limit control by the merged plan.

Rationale: Market competition in health insurance is important in achieving competitive premiums for employed groups and competitive payments to health care providers. Both Highmark, Inc. and Independence Blue Cross already enjoy a dominant position in their respective service areas. According to The Blackstone Group, the merged plan “would become the seventh largest national insurer in terms of medical enrollment” and when compared to the other large insurers, the merged plan “would maintain the highest market share in its top state (51.4%) and have the smallest closest competitor.” (p. 123) In addition, given the relationship between Highmark, Inc. and Blue Cross of Northeastern Pennsylvania, the merged plan would account for a majority of commercial premiums in the commonwealth, providing the merged plan with even greater market power.

Further, LEGC Inc. clearly identifies that the merger will have an anticompetitive impact in Medicaid managed care, “There is a very substantial competitive overlap in the Lehigh/Capital region with respect to the Health Choices Medicaid program, which does not offer a ‘fee-for-service” option. Thus, the effect of the proposed consolidation would be to substantially lessen competition in this area and to eliminate the substantial existing direct competition in this area.” (p.9)

Such market power has already made it difficult for insurance companies to enter Pennsylvania and this merger could make it even harder for existing health insurance competitors to expand their market share or for new competitors to enter Pennsylvania’s health insurance market. According to The Blackstone Group, “Based on a qualitative review of the proposed consolidation’s impact on potential barriers to entry in the Pennsylvania health insurance market, future competitors may have a harder time entering the market after the proposed consolidation.” (p.130)

The stimulation of health insurance market competition should be the top priority for state government, particularly regulatory approaches that enable small group market reform to foster growth of affordable health insurance options for smaller employed groups.

Because the merged plan will account for a majority of the commercial revenues of most hospitals and physicians in the state, the resulting market power of the plan could drive provider reimbursement levels below competitive levels needed to sustain the provision of quality health care to the citizens of the commonwealth.

Based on publicly available data, experience has shown that in the regions of the state—the south central and Lehigh Valley areas—that have more robust health insurer competition (multiple Blue and commercial health insurer plans) there has been a more stable hospital financial picture over time. According to LEGC, Inc., “If this competition also results in higher provider fees, an increase in the supply of health care providers, improved access to health care and/or increased quality of service, then both consumers and providers would benefit from this type of competition.” (p. 85)

Certainly, health care providers recognize the inadequacies of governmental financing through Medicare and Medicaid, but in certain regions of the state the financial stability of hospitals also has been impacted by a less robust commercial health insurance market. A dominant plan can also cause payments to providers to be suppressed below an appropriate level, and particularly for hospitals, this suppression can impact payment by Medicare, particularly through Medicare’s calculation of what is called an area wage index. Data that was recently released by the U.S. Labor Department showed that among similar sized metropolitan areas, salaries for nurses in the Pittsburgh area were generally much lower. This type of factor impacts calculations for Medicare and creates a difficult cycle for providers seeking to recruit and retain qualified health care professionals.

Thus, a key policy question for the Insurance Department is how much of health care providers’ (either facilities or practitioners) revenue should be controlled by one plan either directly or through such agreements that exist with Blue Cross of Northeastern Pennsylvania. Hospitals and health systems do not believe that this policy question was addressed in the plans’ filings regarding the Statement on Competitive Standards.

The plans have stated that the change of control of the domestic insurer subsidiaries “will not substantially lessen competition or tend to create a monopoly in the lines of insurance in which those entities engage.” However, this statement failed to address the potential for the Highmark, Inc. /Independence Blue Cross merger to create monopsony power in the market for the purchase of health care services, particularly hospital and physician services. This purchasing power could pose a risk that could adversely affect health care practitioners, hospitals—which in addition to providing needed care also significantly contribute to the economic vitality of community—and ultimately consumers seeking access to quality health care across the commonwealth.

Monopsony power is the ability to decrease prices paid to producers of goods to be sold who have little opportunity to sell other than to the monopsonist. Most hospitals are confined to supplying services, as specified under their license, within a geographical area, and cannot do something else in response to reduced reimbursement other than to close services or close the hospital. Hospitals cannot move to more favorable markets. Similarly, physicians are confined to supplying services within their training and scope of practice (licensure) laws and cannot do something else in response to reduced reimbursement other than relocating their practice.

This proposed merger raises serious competitive concerns—that is, whether the new company has a greater potential to eliminate rivals or competitors and/or whether through its new more dominant position it gains a greater ability to influence prices. Suppose the new plan reduces reimbursements to hospitals and/or physicians. Given the new plan’s market share, do providers have the ability to terminate or even credibly to threaten to terminate the contractual relationship? That ability depends upon the provider’s ability to replace the potential business/revenue that would be lost from contract termination and the time it might take to replace that loss. For physicians and hospitals this obviously would be quite difficult.

Monopsony power can harm consumers. If physicians, due to anticompetitive pressures, relocate to other markets outside of Pennsylvania, then access to physician care, which is already strained in many communities across the commonwealth, will be jeopardized. Further, physicians and hospitals that receive inordinately lower reimbursement may be forced to do more with less. This can result in longer waiting times, reduced staffing, or other cost reductions that could ultimately impact quality of care.

The concerns hospitals and physicians raise regarding monopsony power were not addressed in the plans’ responses to public testimony. These concerns serve as the center of HAP’s concerns regarding the impact this merger will have on health care providers across the commonwealth.

The purpose of governmental oversight is to prevent the abuse of market power. HAP shares the concern that was expressed by The Blackstone Group that “there may be merit to the argument that Newco (i.e., the merged plan) would have the ability to exercise significant incremental political clout within Pennsylvania as a result of the consolidation.” (p. 136)

Hospitals and health systems, as well as groups and/or individual practitioners, negotiate contracts with health insurers. These contracts cover many provisions affecting the purchase of health care, including quality, payment, credentialing, etc. Given the market power and vast footprint that the merged plan will have, it is unlikely that hospitals or physicians who serve patients could “walk away” from the terms dictated by the plan.

A dominant plan can deploy a “take it or leave it” approach with little or no opportunity for meaningful negotiations between individual providers—either facilities or practitioners. This concern is reflected in the report by LEGC, Inc., “We find evidence that the consolidated firm would appear to be in a position to engage in potentially anticompetitive acts.” (p.14) Further, LEGC, Inc. states, “We cannot rule out the prospect that the proposed consolidation could potentially exacerbate Highmark’s and IBC’s dominant positions in the west and southeast, respectively. For example, if the proposed consolidation would lead to the use of ‘most favored nations (MFNs) or all products clauses for either customers or providers, ..., then the proposed consolidation could have the potential for adversely affecting competition.” (p. 15)

Standard (iv): The plans or proposals which the acquiring party has to liquidate the insurer, sell its assets or consolidate or merge it with any person, or to make any other material change in its business or corporate structure or management, are unfair and unreasonable and fail to confer benefit on policyholders of the insurer and are not in the public interest.

HAP’s Comment: Existing Pennsylvania statutes governing professional health services plan corporations and hospital plan corporations require social and community missions. Should government approval of the merger occur, it is imperative that these statutorily required obligations be clearly defined in any agreement reached between the plans and the Pennsylvania Insurance Department. These obligations should include supporting health insurance programs for the uninsured and community reinvestment that is focused on improving the quality, safety, and affordability of health care.

HAP Recommendation: It is imperative that the continuation of the social and community mission obligations be clearly specified in any agreement that permits the merger of these two plans. These specifications should address:

• Maintenance of not-for-profit status for a mandated period of time—at least 20 years—to assure continued social and community mission and opportunity for plan/provider relationships/partnerships that are focused on improving the quality, safety, and affordability of care.
• The continuation of financial support for health insurance programs for the uninsured for the same period of time.
• Clarification that community mission includes reinvesting in the community through use of accumulated reserves to assure that assets stay in the region in which they are created and that community reinvestment includes partnerships with hospitals and practitioners in improving quality, safety, effectiveness, and health information technology.

Rationale: Pennsylvania’s hospital plan and professional health service plan corporations were created by statute in the late 1930s, for the purposes of enabling all Pennsylvanians to have access to coverage for hospital care and physician and other related services. Hospital plan corporations (e.g., Blue Cross plans) in Pennsylvania are statutorily mandated to be “benevolent and charitable” organizations and the professional health service plan corporation (e.g., Blue Shield plan) is statutorily mandated to have a “social mission,” including meeting requirements for open enrollment, continuity of coverage, and low-income programs.

Continued fulfillment of the social mission and community obligation by the merged plan remains as important to Pennsylvanians today in assuring access to health coverage as it was when the plans were established in the late 1930s.

Standard (vi): The merger, consolidation or other acquisition of control is likely to be hazardous or prejudicial to the insurance buying public.

HAP’s Comment: The Pennsylvania Insurance Department is responsible for oversight of Pennsylvania-domiciled insurers and must maintain the confidence and trust of Pennsylvania citizens that such oversight assures access to affordable health care coverage, as well as assuring that health insurers engage in appropriate and fair insurance practices in contracting with health care providers. Given the magnitude of the merged plan, and its dominance in the commercial, Medicare managed care, and Medicaid managed care markets, it is imperative that any agreement reached by government to allow the merger clearly specify ongoing accountability and transparency requirements.

HAP Recommendation: Should governmental approval of the proposed merger occur, there needs to be:

• Requirement of uniform application of consumer protections, timely claims processing, and utilization review requirements under Act 68 across all product lines.
• Clear reporting requirements to enable ongoing review of the merged plan, including performance by product lines and evaluation of surplus and reserves.
• Clear criteria and/or methodologies for ongoing monitoring and evaluation of the merged plan’s compliance with commitments stipulated in any agreement reached with the Pennsylvania Insurance Department and/or the state Attorney General. This would include clear requirements for the plans in documenting that the savings attributed to the proposed merger were achieved and validating such documentation through an audit under state agency control.

Rationale: Hospitals and health systems recognize that having health care coverage assures better access to care for individuals. Hospitals and health systems believe that fair competition in health insurance:

• Enables consumers to have choice.
• Fosters affordability and innovation of employment-based insurance at reasonable premium prices.
• Enables fair and appropriate payments to providers delivering cost-effective, quality health care.

Hospitals and health systems believe that there is compelling public policy interest for the state, through the Insurance Department, to assure that:

• There is a competitive insurance market that enables broad access to coverage.
• Health insurance practices foster efficient utilization and stewardship of limited resources.
• Health insurance practices enable access to high quality health care.
• There can be innovation in health insurance to respond to purchaser and subscriber needs.

At the same time, as previously stated, The Blackstone Group noted, “there may be merit to the argument that Newco (i.e., the merged plan) would have the ability to exercise significant incremental political clout within Pennsylvania as a result of the consolidation.” (p. 136) Therefore, the requirements for ongoing accountability and transparency must be clearly articulated in any agreement, should the merger be approved, to preclude the potential abuse by a dominant health plan of political clout regarding laws and regulations impacting health care insurance.

Health insurer accountability, like delivery system accountability, requires greater openness, including public reporting of data that enables better information for consumers, purchasers, government, and health care providers. Reporting by health insurers needs to be consistent across plans and provide a complete picture of the financial and enrollment performance of all plans. It should be noted that in HAP’s efforts to evaluate the proposed merger, it was quite difficult to evaluate data that is publicly available regarding health insurers. There is not necessarily consistent or complete information across all types of health insurers or across the various product lines (commercial, Medicare, and Medicaid) that is available publicly for independent analysis of a consolidated entity’s financial performance, enrollment, and utilization.

Therefore, the merged plan, and all other health insurers, should be required to report in a consistent and complete manner to the Pennsylvania Insurance Department as part of accountability and transparency. In addition, average provider payments should be reported to the state’s central health care data repository (hopefully a reauthorized Pennsylvania Health Care Cost Containment Council). Clear reporting requirements that are adhered to will support improved information for employers, consumers, labor, and others seeking to improve purchasing of coverage.

In addition, accountability should exist across all types of health insurers and all product lines. The state’s Quality Health Care and Protection and Accountability Act (Act 68 of 1998) defines payment policies across managed care plans (e.g., HMOs) regardless of ownership, which use primary care gatekeepers. Importantly for providers, this act established timely claims payment and utilization review standards. However, this type of managed care plan is not how most Pennsylvanians access health care and these accountabilities are not necessarily required across the other types of insurance products used in our state.

Hospitals believe these accountabilities need to exist across all types of health insurers, including the proposed merged plan, to ensure timely payment to providers and that there are fair standards for utilization review of claims.

Conclusion

The current health insurance marketplace in Pennsylvania is skewed toward Highmark’s and Independence Blue Cross’s advantage in the health insurance marketplace and in provider-insurer contracts. Therefore, as government considers action in regard to this merger, it is imperative that strong conditions and parameters and ongoing oversight and accountability be established to address market competition, fair and appropriate contracting processes, continued community and social obligations, and accountability and transparency.

Please feel free to contact me or Paula A. Bussard, HAP’s senior vice president, policy & regulatory services, at pbussard@haponline.org, or (717) 561-5344, should you need further information regarding our comments.

Sincerely,

CAROLYN F. SCANLAN
President and Chief Executive Officer