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Robert B. Sklaroff, M.D.
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Bill Would Expand State’s Oversight of Blues merger By Chris Lewis
By virtue of their non-profit status, Blue Cross and Blue Shield plans historically have been exempt the strict regulatory oversight facing other insurance companies that seek to merge or consolidate. Two leading Democratic lawmakers are out to change that before the state’s two largest Blues plans have a chance to join forces. Reps. Todd Eachus and Phyllis Mundy, both of Luzerne, are co-sponsoring legislation, HB 112, to bring the Blues under the state’s Insurance Companies Holding Act, which would give state regulators broader authority to evaluate the implications of any type of acquisition on the competitive marketplace. The Insurance Department is seeking to plug a hole in its authority that, it says, only allows it to regulate the change in control of the Blues’ for-profit and HMO subsidiaries. This is the subject of a lingering legal battle over the consolidation that created Highmark Inc. over a decade ago. The legislation’s chances look better than ever before. The bill’s sponsors—who have been vocally critical of the Blues’ handling of their multi-billion-dollar surpluses—are now in leadership positions in the House of Representatives, which changed to a Democratic majority this year. Mundy was elected as caucus secretary of the House Democratic leadership and Eachus is chairman of the Majority Policy Committee. The Fast Track. In the first day of the Legislative session in February, the House Insurance Committee unanimously passed HB112 and sent it to the floor, where it awaits action when lawmakers return March 12. Late last year, the same proposal was amended into another bill that died when the session ended. “We’ve known about this hole in our regulatory authority for more than 10 years and this has been a priority of ours for that long, if not before,” said Amy Daubert, legal counsel for the Insurance Department. “We are thrilled and delighted that this bill is moving now and will apply to any filing that comes in our door.” The next filing could very well be the merger of Highmark Inc., based in Pittsburgh, and Independence Blue Cross, based in Philadelphia. Last summer, some of their board members stated publicly that a merger proposal could be on the table by last September, although no agreements have been publicly announced. “We’re in the same position we were a year ago,” said Highmark spokesman Michael Weinstein. “The two parties have had discussions on how to have a closer business alliance or relationship because we work with IBC on a number of issues.” If it happens, a merger would give the two Blues plans a combined market share of 39 percent of the state’s commercial HMO business, according to HealthLeaders-InterStudy data as of July 2006. Under the law, the Insurance Department can approve the merger, approve it with conditions, and can dis-approve a merger if the Commissioner finds any of seven harmful consequences to be a likely result of the merger. Among the seven listed reasons justifying dis-approval are that a merger would substantially lessen competition or would be “hazardous or prejudicial to the insurance buying public.” “When one company buys up all the competition and creates a monopoly, there’s no competition to give consumers options when it comes to services and price, and that’s not good for the public,” Eachus stated in a recent news release about HB112. He didn’t return phone calls seeking comment. The last time the state’s authority was tested was during the creation of Highmark Inc. in 1996 through the merger of Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania. Lingering Legal Battle. Dr. Robert Sklaroff, a physician in Elkins Park, has kept alive a lawsuit challenging the merger, often acting as his own attorney. He alleges that Linda Kaiser, who was Insurance Commissioner in 1996, illegally approved the Highmark consolidation and didn’t properly apply existing state laws to evaluate competition and other impacts. Dr. Sklaroff also alleges that there was no enabling legislation in 1996 that permitted the creation of Highmark, that Highmark never applied for a Certificate of Authority, and that the approval processes followed by both Blue Shield and the Insurance Department were flawed. Also, he alleges that the antitrust analysis performed by the Insurance Department was flawed because it failed to take into account the market-impact of Keystone Health Plan West (a Blue Cross subsidiary), it failed to study only the health insurance marketplace, and it failed to limit the scope of its geographic review to the 29 Pennsylvania counties serviced by consolidating companies. Subsequent Commissioner Diane Koken, who recently resigned, upheld the legality of the merger in May 2006, touching off appeals from Sklaroff as well as Capital BlueCross. The Central Pennsylvania Blues plan also contends the commissioner misapplied the strict mandatory market impact tests of the holding company law, thereby minimizing the “the patently anticompetitive effect of the combination of the two largest health plans in Pennsylvania,” according a court brief. Oral arguments in the case are scheduled before the Commonwealth Court in April. Department officials have long maintained that because the Holding Company Act specifically exempts the Blues plans, their hands are tied when looking at the market impact of the Blues’ parent companies as a whole; meaning they can only base approvals on the change in control of their for-profit subsidiaries. Dr. Sklaroff and Capital BlueCross dispute this claim. Exerting jurisdiction over the subsidiaries’ filings, Commissioner Kaiser in 1996 conditioned approval on Highmark’s contributing 1.25 percent of its annual premium revenues to social mission programs. A Welcomed Bill. Sklaroff—who contends the consolidating Blues plans are using their market muscle to extract unreasonable demands from physicians, as he had predicted—said he had not known that the department had sought the legislation. “Of course, it [any type of Blues transaction] has to be regulated. As far as I’m concerned, it should have been regulated all along,” he said. Neither Highmark nor IBC are opposing the legislation. “In general, we understand what the public policy objective of the proposed legislation is, and so we’ll be working with those parties who are involved in this to meet this public policy objective of clarifying the role of the commissioner,” Weinstein of Highmark said. In fact, IBC supports the legislation, said its vice president of legislative policy, Mary Ellen McMillan. “Practically speaking, there isn’t a big change, but it’s important to the department and therefore we support it,” she said. After he read the legislation, Dr. Sklaroff understands why the Blues like this bill. The proposal contains clauses that would impede public criticism of any Highmark/IBC deal. For example, if enacted, it would prevent non-parties to mandate that full adjudicatory adverse-party hearings be held prior to the Department’s being able to grant its imprimatur. He notes that it was this central issue that was the basis of the 1997 Commonwealth Court ruling that ultimately forced the Department to hold the 2002 hearings that he had sought. Right after HB112 was introduced, Koken convened a conference call of the four Blues plans for their input, McMillen said. The conversation resulted in a couple of amendments to the bill, passed in committee. One change precludes the state’s regulatory authority over the Blues from retroactively affecting approved mergers. Sklaroff said the amendment obviously takes aim at his case, but he maintains that the legal issues in his case will have to be resolved before another Blues merger proposal goes forward—regardless of the passage of HB112. He is not surprised that the Blues are seeking retroactive legislative support for their view that they did not have to withstand the very scrutiny they now aver they would accept. He maintains that the relatively separate catchment-areas of Highmark and IBC contrasts with the overlapping ones that existed when Western Blue Cross and Pennsylvania Blue Shield consolidated. Thus, this bill would have the effect of closing the barnyard gate after the cows had escaped. It would not reverse the “lynch-pin event” of a decade ago, when the initial consolidation transpired. “As of right now, they would be subject to challenge because Highmark’s existence is subject to challenge right now,” he said. Sklaroff also explained that Capital BlueCross had entered the case because Highmark had already used its tremendous market-power to engulf the Allentown market. Until and unless the legislature holds hearings on this proposal, Dr. Sklaroff asserts that it should not be railroaded through the legislature. That is why, he insists, Koken excluded all input other than that from the Blues when generating proposed amendments to HB112.
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To contact me--Robert B. Sklaroff, M.D.--just send an e-mail (rsklaroff@comcast.net).
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