[Senate Hearing 110-90]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 110-90
 
             EXAMINING HEALTH CARE MERGERS IN PENNSYLVANIA

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 9, 2007

                               __________

                       PHILADELPHIA, PENNSYLVANIA

                               __________

                          Serial No. J-110-26

                               __________

         Printed for the use of the Committee on the Judiciary



                                 ______

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                       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
      Michael O'Neill, Republican Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                     STATEMENT OF COMMITTEE MEMBER

                                                                   Page

Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Buckley, James R., President, Delaware Valley Health Care 
  Coalition, Inc., Philadelphia, Pennsylvania....................    16
Burns, Lawton R., James Joo-Jin Kim Professor, Professor of 
  Health Care Systems and Management, and Director, Wharton 
  Center for Health Management and Economics, Wharton School, 
  University of Pennsylvania, Philadelphia, Pennsylvania.........    11
Casey, Hon. Robert P., a U.S. Senator from the State of 
  Pennsylvania...................................................     3
Frick, Joseph A., President and Chief Executive Officer, 
  Independence Blue Cross, Philadelphia, Pennsylvania............     4
Marshall, Joseph W. ``Chip'', III, Chairman and Chief Executive 
  Officer, Temple University Health System, Philadelphia, 
  Pennsylvania...................................................    19
Melani, Kenneth R., M.D., President and Chief Executive Officer, 
  Highmark, Inc., Pittsburgh, Pennsylvania.......................     7
Rendell, Hon. Edward G., Governor, State of Pennsylvania.........     2
Rodriguez, Pedro, Executive Director, Action Alliance of Senior 
  Citizens, Philadelphia, Pennsylvania...........................    17
Schott, C. Richard, M.D., Vice Chair, Board of Trustees, 
  Pennsylvania Medical Society, Harrisburg, Pennsylvania.........    14
White, Hon. Don, State Senator, 41st District, Pennsylvania, 
  Indiana, Pennsylvania..........................................     9

                         QUESTIONS AND ANSWERS

Responses of Joseph Frick to questions submitted by Senator 
  Specter........................................................    32
Responses of Kenneth Melani to questions submitted by Senator 
  Specter........................................................    43

                       SUBMISSIONS FOR THE RECORD

American Medical Association, Washington, D.C., statement........    56
Buckley, James R., President, Delaware Valley Health Care 
  Coalition, Inc., Philadelphia, Pennsylvania, statement.........    59
Burns, Lawton R., James Joo-Jin Kim Professor, Professor of 
  Health Care Systems and Management, and Director, Wharton 
  Center for Health Management and Economics, Wharton School, 
  University of Pennsylvania, Philadelphia, Pennsylvania, 
  statement......................................................    62
Frick, Joseph A., President and Chief Executive Officer, 
  Independence Blue Cross, Philadelphia, Pennsylvania, statement.    68
Marshall, Joseph W. ``Chip'', III, Chairman and Chief Executive 
  Officer, Temple University Health System, Philadelphia, 
  Pennsylvania, statement........................................    75
Melani, Kenneth R., M.D., President and Chief Executive Officer, 
  Highmark, Inc., Pittsburgh, Pennsylvania, statement............    83
Rodriguez, Pedro, Executive Director, Action Alliance of Senior 
  Citizens, Philadelphia, Pennsylvania...........................    90
Schott, C. Richard, M.D., Vice Chair, Board of Trustees, 
  Pennsylvania Medical Society, Harrisburg, Pennsylvania, 
  statement......................................................    93
White, Hon. Don, State Senator, 41st District, Pennsylvania, 
  Indiana, Pennsylvania, statement...............................    97


THE HIGHMARK/INDEPENDENCE BLUE CROSS MERGER: EXAMINING COMPETITION AND 
           CHOICE IN PENNSYLVANIA'S HEALTH INSURANCE MARKETS

                              ----------                              


                         MONDAY, APRIL 9, 2007

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, Pursuant to notice, at 9:30 a.m., in the 
Kirby Auditorium, The Constitution Center, Philadelphia, 
Pennsylvania, Hon. Arlen Specter, presiding.
    Present: Senators Specter and Casey.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Senator Specter. Good morning, ladies and gentlemen. The 
hearing of the Senate Judiciary Committee will now convene. We 
will be considering today the proposed merger of Independence 
Blue Cross and Highmark, two very large companies which provide 
health care insurance for Pennsylvania--Independence Blue Cross 
in the eastern part of the State and Highmark in the west.
    We all know the importance of health care. Health is our 
No. 1 capital asset. Without good health, there is nothing any 
of us can do. And I am Exhibit A on that proposition and 
thankfully enjoying good health because of excellent medical 
care. But we need to provide that medical care for all 
Americans, and this proposed merger has very major implications 
for people in the Commonwealth of Pennsylvania.
    These two companies are enormous in their importance in the 
State. Independence Blue Cross has 64,000 employees, serves 
about 3.4 million Pennsylvanians, has arrangements with more 
than 16,000 physicians and more than 70 hospitals. Highmark, 
similarly, had a dominant share of the market in western 
Pennsylvania, covering 4.6 million Pennsylvanians, 30,000 
physicians, and takes care of approximately--or has 
arrangements with approximately 100 hospitals.
    There are real concerns, which have been expressed from 
time to time, about the financial undertakings of these two 
companies, especially with respect to the surpluses. Highmark 
has a surplus of some $2.6 billion, Independence Blue Cross a 
surplus of $1.2 billion. There is a recognition that surpluses 
are necessary for unanticipated costs, but there is a real 
question as to whether that is excessive.
    When you take a look at executive compensation--and all of 
this on the public table--compensation for the CEO of Highmark 
is $896,000, $2 million in bonuses, and another $315,000. And 
when you are looking at nonprofits, candidly, there is a 
question as to whether it really is nonprofit.
    There is a projection that there will be a saving of some 
$1 billion in consolidation and efficiencies. Well, that raises 
the question as to where that $1 billion is going to go. And to 
move the hearings along, I wrote to the CEOs of these two 
companies asking them for the specifics as to where the $1 
billion would go. They talk about covering the uninsured. If 
that were to be the case, that would be very salutary. We have 
many Pennsylvanians, in accordance with the national picture, 
who do not have health insurance.
    We have a real concern about the bargaining power and 
dealing with the hospitals and dealing with doctors. Last year 
I presided at a hearing in the Judiciary Committee where the 
doctors are looking for an antitrust exemption so that they 
have more bargaining power in dealing with Independence Blue 
Cross and Highmark. So these are all major, major issues.
    We are joined today by the distinguished Governor of 
Pennsylvania, Edward Rendell, and the distinguished Senator--
maybe both Senators are distinguished, but I will certainly say 
Senator Casey is distinguished. Senator Casey has been in the 
Senate only a short time, but he is already on the Judiciary 
Committee, at least on occasion.
    We have eight witnesses. Many people wanted to testify. We 
do not expect to be able to answer all of the questions today, 
but today is a start. To give the key players a chance to 
express themselves, we are going to ask everybody to observe 
the time limits very closely. I am at 4\1/2\ minutes on an 
opening and will close in less than 30 seconds. We have 
allocated an hour and a half, and we are going to have to move 
right along and focus on the issues to stay within the time 
limits.
    All prepared statements will be made a part of the record, 
and now I am pleased to yield to my distinguished colleague and 
friend, Governor Rendell.

    STATEMENT OF HON. EDWARD G. RENDELL, GOVERNOR, STATE OF 
                          PENNSYLVANIA

    Governor Rendell. Well, thank you, Senator, and I will be 
very brief. As most of you know, Senate bill 550, sponsored by 
Senator White, who is with us today, passed the Senate and is 
in the House, and it will give the Insurance Commissioner the 
broad power to approve or disapprove mergers for nonprofits, a 
power that the Insurance Commissioner has for for-profits at 
this time. You never can predict what happens in the 
legislature, but whether that bill passes or not, the Insurance 
Commissioner has the power to conduct hearings around the 
State, and we will conduct hearings in four or five different 
locations, fairly exhaustive hearings, over the next several 
months.
    Of course, the law allows for and requires public comment 
to go on the record, and there will be ample opportunity for 
that as well. So both through the public comment process and 
through the hearing process, we hope to get exhaustive input 
before any final decisions are made on this issue.
    However, I do want to compliment Senator Specter and 
Senator Casey for taking the lead here and bringing some of 
these issues to light early, because I think it is important 
that the public understand what is at stake and what the intent 
of the parties is in this merger.
    I, too, share--and I am sure Senator Casey does as well--
two great concerns: what this merger will do to competitiveness 
in terms of the consumer, the businesses who buy and provide 
health care for their employees, the employees who pay 
premiums, those who are self-insured as well. That is of great 
concern to me. Pennsylvania presently does not have enough 
competition, and the question of a price point, we have tried 
to do things to engender that competition. But our competition 
is limited, and we want to determine what, if any, effect this 
has on the competitive process from that angle.
    But, second, as the Senator said, we very much care about 
our physicians and our hospitals. Physicians have been squeezed 
on pricing because in many areas there is a dominant carrier 
and that carrier sets the price for a procedure, and it is 
essentially take it or leave it for that physician. We want 
there to be greater flexibility and greater competition from 
that standpoint as well.
    Having said that, I would be remiss if I did not also say, 
however, that the two companies who come before us today are, 
in my judgment, superb corporate citizens of the State of 
Pennsylvania. They contribute in so many different ways, and 
when we sought 2 years ago, Senator, to expand our adult basic 
care program, which is the existing program for working 
Pennsylvanians, these companies took the lead in reaching an 
agreement with the head of the Office of Health Care Reform, 
Rosemarie Greco, to put significant dollars--significant 
dollars--into the very significant expansion of the ABC 
program. When we outlined this year our prescription for 
Pennsylvania, which will cover over the course of the next 5 
years, the remaining 757,000 Pennsylvanians that do not have 
health care, these companies stood forthright and supported 
those efforts.
    When we pushed a bill to cover all of our children in 
Pennsylvania, a bill that I signed in October of 2006, both 
companies were very supportive of those efforts. We appreciate 
that, and they are good corporate citizens. They are excellent 
employers. So they start off with, in my book, a solid 
presumption. However, the issues that Senator Specter has 
raised and the issues that I have highlighted are very 
significant and must be resolved in a satisfactory way.
    Senator Specter. Thank you, Governor Rendell.
    Senator Casey?

  STATEMENT OF HON. ROBERT P. CASEY, A U.S. SENATOR FROM THE 
                     STATE OF PENNSYLVANIA

    Senator Casey. Senator, thank you very much.
    I first of all want to thank Senator Specter for bringing 
us together today for a lot of reasons. One is because of the 
nature of this question for the people of Pennsylvania, but 
also I want to commend his leadership on so many aspects of 
health care, which is such a critical issue for the State and 
for the country. And we are honored by the presence of the 
Governor and his work to expand health insurance in 
Pennsylvania.
    We face, I think, in the country a real challenge on 
obviously a lot of aspects of health care--cost being principal 
among them--but I think there is an opportunity this year in 
the Congress. Senator Specter and I have worked very hard to 
make sure that at the Federal level the Children's Health 
Insurance Program is expanded, so-called SCHIP. Governor 
Rendell is an example of someone who is trying to expand health 
care coverage in Pennsylvania by a significant number. At the 
same time, the Federal Government, at least the Bush 
administration, wants to go in the opposite direction if their 
budget proposal is any indication--which it is.
    So it is a critical issue for the State, and I think when 
it comes to this question of Independence Blue Cross and 
Highmark, obviously we have some real concerns about the 
potential anti-competitive nature of this arrangement. We are 
concerned about, as Senator Specter said, the level of surplus 
that both companies have right now. And we are also concerned 
in a broader way about the impact that this merger would have 
on health care and jobs in Pennsylvania.
    We will not reach conclusions today necessarily. We will 
not be able to ask and answer every question. But it is a very 
good start, and I think this hearing and others like it, in 
conjunction with the State, the hearings that Governor Rendell 
referred to at the State level, I think will inform and 
enlighten the people of Pennsylvania about this. And I join 
Governor Rendell in commending a lot of the work that has 
already been done by these two firms to expand the number of 
Pennsylvanians who are covered and to provide quality health 
care for the people of the State.
    But I think we have real opportunities this year in terms 
of the Federal budget and legislation, and also we want to make 
sure that we get this right when it comes to the impact of this 
merger on the people of Pennsylvania.
    Senator, thank you again.
    Senator Specter. Thank you very much, Senator Casey.
    We turn now to our first witness, Mr. Joe Frick, President 
and CEO of Independence Blue Cross. Thank you very much for 
joining us today, Mr. Frick, and we look forward to your 
testimony. I might just say that each witness will be allowed 5 
minutes, and then there will be rounds of questioning at 5 
minutes each.

  STATEMENT OF JOSEPH A. FRICK, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, INDEPENDENCE BLUE CROSS, PHILADELPHIA, PENNSYLVANIA

    Mr. Frick. Well, thank you again, Senator Specter and 
Senator Casey and Governor Rendell, for the opportunity to 
speak to you today about why the combination of Highmark and 
Independence Blue Cross into a new company is good for 
Pennsylvania and how it will create value for our customers, 
for health care providers, the communities we serve, and, most 
of all, for the people of our great Commonwealth.
    I am very pleased to be here today on a panel with 
recognized leaders in our community and hear their perspectives 
on this important matter.
    The unanimous vote 10 days ago by the boards of Highmark 
and IBC to combine our two companies begins an extensive review 
process. We look forward to working cooperatively with State 
and Federal regulatory agencies and with public officials who 
want to understand the impact of this combination on the people 
of Pennsylvania. Today we will continue the open dialogue we 
have already begun with key stakeholders in health care about 
how this combination will enable us to better serve their 
needs. We welcome your participation.
    You know, every major national and local survey in the last 
year has shown that the No. 1 issue on people's minds is the 
availability of affordable health care coverage. It is no 
wonder. Every year employees shoulder more of the cost of 
health insurance, fewer employers offer health coverage, and 
there are more uninsured. Our mission at Independence Blue 
Cross and at Highmark is to provide access to quality, 
affordable health care.
    We strongly believe this combination is mission driven and 
will not reduce competition or choice in the health insurance 
marketplace in the Commonwealth. First and foremost, the 
combined companies will generate more than $1 billion in 
additional resources over 6 years for health care in 
Pennsylvania. This is new money, and it goes beyond any 
commitments we have today. These additional resources will come 
largely through savings from business efficiencies that the two 
companies cannot produce individually. The savings will enable 
us to invest in new market-leading capabilities that are 
increasingly important to consumers and providers.
    The combined company will avoid duplicating future 
investments in costly technology and administrative 
requirements. These savings will fund and allow us to more 
quickly take advantage of cutting-edge technology to improve 
the quality of care, such providing electronic personal health 
records or e-prescribing tools.
    We will also achieve significant savings by consolidating 
computer systems used for claims processing, enrollment, 
medical management, and provider transactions. One new 
capability this will allow us to pursue is real-time claims 
adjudication, a major benefit for both patient and physician.
    By using the best practices of Highmark and IBC to perform 
more efficiently, the combined company will have the resources 
to expand wellness initiatives that keep people healthy and 
disease management programs that help the chronically ill lead 
healthier lives.
    We also listened to our customers' concern about ever-
increasing pharmacy costs. The combined company will reduce 
prescription drug costs by launching initiatives that capture 
higher rebates, pharmacy discounts, and lower the cost of 
administration--economies possible only with a larger 
membership base--and these savings of approximately $285 
million will go directly to our customers.
    Since we do not have shareholders or investors like our 
publicly traded competitors, the combined company will be able 
to reinvest this $1 billion in savings into the health care 
needs of our customers and community. Our first priority is to 
direct more than $650 million to expand access to health 
insurance for Pennsylvania's uninsured and underinsured--$650 
million over and above our current commitments. The increasing 
number of uninsured in the Commonwealth drives up health care 
costs for all of us. We will spend roughly $350 million to 
extend for 3 years the Community Health Reinvestment agreement 
we have with the Commonwealth. Another $300 million will fund 
other programs or newly developed products to expand health 
care coverage in Pennsylvania.
    Most of our customers' premium dollar, more than 85 cents 
of every dollar, pays for the medical care our members receive. 
Less than 10 cents of each premium dollar goes to 
administrative fees. The combined company will not increase 
administrative fees for 2 years--direct savings to our 
customers' premiums of almost $300 million that would not be 
possible without an IBC/Highmark combination.
    There has been much speculation about what our ultimate 
plans are. I assure you both our boards and executive teams are 
committed to our Pennsylvania-based, not-for-profit status as 
one of the key factors that differentiates us. In 2006, 
Highmark and IBC contributed over $200 million to support 
community health and education programs, such as those focused 
on fighting hospital-acquired infections, providing clinics for 
the uninsured, increasing the supply of nurses through 
scholarships, and preventing childhood obesity. These efforts 
are increasingly important and will continue.
    The proposed combination will not reduce competition. 
First, Highmark and IBC do not compete and never have--
    Senator Specter. Mr. Frick, how much more time will you 
need?
    Mr. Frick. Less than a minute, Senator.
    Senator Specter. Proceed.
    Mr. Frick. Thank you. We are both licensees of the Blue 
Cross Blue Shield Association, a brand that is second to none 
and proudly insures one out of every three Americans. We have 
worked closely together for more than 50 years. However, we 
have virtually no geographic or customer overlap. So, by 
combining, we are not reducing competition. It is worth noting 
that today Pennsylvania is one of only five States in America 
with more than one Blue plan. With the Federal Government 
developing regions for Medicare PPOs and the Commonwealth 
exploring statewide risk pools, it is important for us to offer 
seamless statewide products, networks, and services.
    Highmark and IBC have major competition: national, publicly 
traded, highly capitalized companies--Aetna, Cigna, Coventry, 
United. All have access to capital to buy companies and add 
capabilities. Sierra Health Plan was recently purchased for 
$2.6 billion by United, one of our top competitors, with more 
than 33 million members and $71.5 billion in annual revenue. In 
2005, Aetna spent $400 million to acquire ActiveHealth, a 
clinical data analytics company.
    When we began talking with Highmark almost 2 years ago 
about the possibility of working together, we had one goal in 
mind: access to quality, affordable health care. Today we are 
very energized by the possibilities we see ahead.
    Thank you.
    [The prepared statement of Mr. Frick appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Frick.
    We turn now to the President and CEO of Highmark, Dr. 
Kenneth Melani. Prior to joining Highmark, he was President of 
West Penn Cares, certified in internal medicine, summa cum 
laude from Washington and Jefferson, and medical degree from 
Wake Forest.
    Thank you for being with us today, Dr. Melani, and the 
floor is yours.

   STATEMENT OF KENNETH R. MELANI, M.D., PRESIDENT AND CHIEF 
  EXECUTIVE OFFICER, HIGHMARK, INC., PITTSBURGH, PENNSYLVANIA

    Dr. Melani. Thank you, Senator Specter, Senator Casey, and 
Governor Rendell, 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.
    We recognize that this hearing is the start of what may be 
an extended review process involving State and Federal 
regulatory agencies with input from the Pennsylvania General 
Assembly and the U.S. Congress, and we welcome the opportunity 
to discuss the proposed combination of Highmark and 
Independence Blue Cross and are committed to working 
cooperatively to help ensure that this process is open.
    Before the announcement of this agreement to combine the 
two companies, we had been regularly briefing key stakeholders 
in Pennsylvania on the status of the discussions between the 
two companies, and we will continue this open dialogue as we 
move forward.
    We expect some individuals and organizations may have some 
apprehension and some pointed questions about the potential 
impact of this agreement. Because there are still many details 
that have to be decided about how to integrate the two 
companies, we may not be able to answer all of your questions 
today. I assure you that we will provide you with updates about 
the new company as important business issues are decided.
    We ask that members of this Committee, other people here 
today, and all Pennsylvanians keep an open mind and look at the 
big picture in weighing the merits of this agreement. The 
boards of directors of the two companies took this approach 
during their thorough review of this transaction and concluded 
that the combination of the two companies is good for 
Pennsylvania. In fact, both the Highmark and Independence Blue 
Cross boards unanimously approved the agreement to combine the 
two companies.
    Why will this new company be good for Pennsylvania? Joe 
Frick addressed many of the reasons in his remarks, but in 
addition to helping improve access to affordable, high-quality 
health care, the new company will serve as an engine for the 
Pennsylvania economy for years to come. Currently the two 
companies have a total annual business impact of $4.2 billion 
on the State's economy, representing monies generated in 
Pennsylvania because of Highmark and Independence Blue Cross. 
We employ more than 18,000 Pennsylvanians, and we help produce 
jobs for another 54,000 people in businesses that provides 
goods and services to the two companies.
    Although we are both nonprofit corporations, we provide 
substantial tax revenue for the State with our subsidiaries 
paying $113.6 million in State taxes in 2006.
    In the future, the new company has the potential to become 
an even larger contributor to the State's economy. I believe we 
will be able to grow our business to meet the shifting needs of 
our current customers and new customers, not only in the area 
of health insurance but also in our dental and vision 
businesses and other related services through partnerships with 
other Blue Cross Blue Shield companies throughout the country. 
The additional revenues generated through the business growth 
means we can bring back more money to Pennsylvania, create more 
jobs in the State, and stimulate additional business 
opportunities for Pennsylvania-based companies.
    Equally important, while we anticipate gaining operating 
efficiencies as a result of the combination, we expect that any 
potential impact on employment will be managed through 
attrition and business growth. In other words, we plan to use 
our collective workforces to meet the changing needs of our 
customers and provide employees with opportunities for 
professional growth.
    Now, as Joe has discussed, the new company will generate $1 
billion in economic benefits that will be used to achieve 
savings for our customers and to expand access to health 
insurance for Pennsylvania's uninsured population. What I would 
like to talk about is why this combination is a plus for health 
care providers, including physicians.
    As a physician, I, too, am concerned about the changes 
taking place in the financing and delivery of health care and 
how they may be affecting the physician-patient relationship 
and the quality of patient care. For a number of reasons, 
however, I believe the new company will have a positive effect 
on physicians, primarily because it will allow them to spend 
more time with patient care versus administrative tasks of a 
medical practice. The new company will work to identify best 
practices to help simplify administrative transactions with 
physicians and hospitals, using the most effective means of 
electronic connectivity, and at the same time, we will continue 
to approach health care on a region-by-region basis. Because 
the delivery of health services is a local issue, we will 
concentrate on maintaining our well-established relationships 
with physicians to address unique medical needs of our 
customers--their patients--in each region.
    The new company's commitment of $650 million to expand 
access to health insurance for Pennsylvania's uninsured will 
also benefit hospitals, physicians, and other health care 
professionals by providing more revenue for the medical 
services they provide. Physicians have been a valued partner in 
both Highmark's and IBC's longstanding missions, and we want to 
continue that spirit of collaboration, especially with the 
development of an electronic personal health record to help 
address quality, patient safety, and cost issues.
    I would also like to take a moment to address a question in 
your recent letter relating to concerns raised by physicians, 
hospitals, and other health care providers about reimbursements 
to health care providers.
    Physicians and hospitals will be important to the new 
company's success as they have been for decades to the success 
and longstanding missions of Highmark and Independence Blue 
Cross. One of the principal ways that we have met our 
customers' expectations in the marketplace is by offering 
health benefit programs that include access to the broadest 
networks of physicians, hospitals, and other providers. To help 
achieve broad provider networks, we have strived to fairly 
reimburse providers for medical care provided to our customers.
    I want to be very clear on one other point. The new company 
will continue to maintain fair and reasonable provider payment 
levels. The $1 billion in economic benefits that Joe has 
discussed and I have been discussing today will not result from 
changes in physician and hospital reimbursement levels.
    All of us must recognize that the rising cost of health 
care is straining the country's system of employer-sponsored 
health insurance. For this reason, the new company will strive 
to balance fair and reasonable provider payment levels--
    Senator Specter. Dr. Melani, how much more time will you 
need?
    Dr. Melani. Ten seconds.--with the need to maintain 
comprehensive and affordable health benefit programs for 
consumers.
    In closing, the two companies are coming together to be 
better able to serve the people of Pennsylvania with a focus on 
providing access to affordable, high-quality health care 
coverage. The new company will achieve operating efficiencies, 
freeing resources to invest in programs and services that will 
benefit our group customers, individual customers, physicians, 
hospitals, and the communities in which we operate.
    For these reasons, Highmark and Independence Blue Cross 
have agreed to combine to build a better company for 
Pennsylvania, and I welcome the opportunity to respond to any 
questions you may have.
    [The prepared statement of Dr. Melani appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Dr. Melani.
    Our next witness is Senator Don White. We very much 
appreciate his joining us here. He represents the 41st District 
of Pennsylvania and has since 2000. He serves as Chairman of 
the Senate Committee on Banking and Insurance. Bachelor's 
degree from Juniata College in 1972 and a real leader in this 
field.
    Thank you for being with us today, Senator, and the floor 
is yours.

  STATEMENT OF HON. DON WHITE, STATE SENATOR, 41ST DISTRICT, 
                     INDIANA, PENNSYLVANIA

    Senator White. Thank you, Senator Specter. Senator Casey, 
always a pleasure. Governor, good to see you here. It is an 
honor to be invited by Senator Specter to testify at this 
important public hearing, and I want to applaud him for 
scheduling this event.
    I appreciate the opportunity to provide the Judiciary 
Committee with a perspective of the Highmark/Independence Blue 
Cross merger from the State government level and discuss the 
concerns I--and others--have regarding this proposal. The 
potential effect on the availability and quality of health care 
coverage in Pennsylvania could be profound.
    You have already heard from the principal players in the 
merger, as well as from officials from the health care 
industry, and are fully aware of the magnitude of this 
proposal. The questions Senator Specter posed to Highmark and 
IBC prior to this hearing are most appropriate and accurately 
summarize the concerns we all should have.
    The State legislature is moving rapidly to ensure maximum 
review and oversight over this proposed merger when it occurs. 
Currently, under the Commonwealth's GAA Amendments Act and the 
Insurance Holding Companies Act, the Pennsylvania Department of 
Insurance is empowered to review proposed mergers of for-profit 
health care providers. Such review is intended to protect the 
interest of both policyholders in the marketplace by directing 
the Department of Insurance to protect the integrity of the 
insurance market through a review of corporate transactions for 
anticompetitive effect.
    Unfortunately, under current law the Highmark IBC deal, 
because it involves two Blues organizations, is not subject to 
the same scrutiny.
    In response, I introduced Senate bill 550, which as the 
Governor mentioned has passed the Senate, and it would provide 
the Pennsylvania Insurance Department with oversight power over 
mergers involving nonprofit health care insurers, such as Blue 
Cross Blue Shield. Senate bill 550 will ensure this proposal 
comes under the same scrutiny as if they were for-profit 
corporate transactions.
    If the existing gap in the department's regulatory 
authority is allowed to persist, the department will remain 
unable to protect the interest of the Blue plans' policyholders 
in ruling on corporate transactions or a review of any pending 
transaction involving the parent Blue plans for anticompetitive 
effect. However, I am confident we will correct this gap in a 
very timely manner. The State Attorney General must have 
authority necessary to review this proposed merger, and I am 
working with his office to ensure that is the case.
    I am encouraged by this Committee's concern about the 
quality and availability of health care coverage in 
Pennsylvania. From what I understand, there is a potential for 
a review of this merger at the Federal level under the Hart-
Scott-Rodino Antitrust Improvements Act. I would assume 
Highmark and IBC will file an advanced notice of this merger 
with both the FTC and the Department of Justice since its value 
greatly exceeds the thresholds that trigger this Federal 
requirement.
    I strongly urge this Committee to recommend to those 
Federal agencies that they scrutinize this merger for its 
impact on competition in the health insurance market and share 
their work with the State legislature, the Insurance 
Department, and our Attorney General. While Pennsylvania does 
not have a State antitrust law, our Attorney General can take 
action under the Federal law. Therefore, coordination between 
State and Federal review is essential.
    While economies of scale and efficiencies might be achieved 
by this merger and result in positive short-term benefits, 
there must be some concern over its long-term effects. Creating 
the third larger insurer in the Nation with specifically 
defined geographic territory is not, I believe, in the best 
interest of competition, and the reality is competition is in 
the best interest of the consumers. There is no better 
regulator than a competitive marketplace in terms of bringing 
better service, better products, and better prices to consumers 
and in terms of giving consumers and providers real and fair 
choices.
    In my own district, I have seen the problems providers and 
consumers face from a lack of competition in health insurance. 
I spent 27 years in the industry. It can lead to some real 
predatory practices. We need to make sure practices are not 
spread across the Commonwealth through this merger.
    Highmark and IBC contend the merger should be approved 
based on the premise that it will result in savings. If so, 
then there needs to be ironclad assurances that those savings 
will occur not only in the short term, but also in the long 
term. Further, any savings should not be used to support 
growing operations in other States or in lines of business 
outside of insurance. Moreover, we need to make sure those 
savings do not come at the cost of consumers' accessibility to 
needed health care and to the doctors, hospitals, pharmacists, 
and others who provide that care. Finally, this merger must not 
undercut the social mission obligation that Highmark and IBC 
have--an obligation that is part of their being excused from 
premium taxes and affords them other statutory advantages under 
Pennsylvania law.
    Again, thank you, Senator Specter, Governor Rendell, and 
Senator Casey, for your interest in this critical issue, and I 
look forward to working with you on this matter in the months 
ahead.
    [The prepared statement of Mr. White appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Senator White.
    Our next witness is Professor Lawton Burns, Professor of 
Health Care Systems at the University of Pennsylvania Wharton 
School, a graduate of Haverford, a doctorate and MBA from the 
University of Chicago.
    We appreciate your coming in today, Professor Burns, and we 
look forward to your testimony.

  STATEMENT OF LAWTON R. BURNS, JAMES JOO-JIN KIM PROFESSOR, 
PROFESSOR OF HEALTH CARE SYSTEMS AND MANAGEMENT, AND DIRECTOR, 
  WHARTON CENTER FOR HEALTH MANAGEMENT AND ECONOMICS, WHARTON 
 SCHOOL, UNIVERSITY OF PENNSYLVANIA, PHILADELPHIA, PENNSYLVANIA

    Mr. Burns. Thank you, Senator. In the interest of 
transparency, I should say that I have been a happy enrollee of 
Independence Blue Cross for the last 12 years. However, last 
week they sent me an Explanation of Benefits form that 
overcharged me $100 in deductibles, so I think I can present a 
balanced viewpoint here today.
    I have reviewed the statement issued by Highmark and 
Independence Blue Cross about the benefits of the merger. I 
think what is missing is any sort of explication or a road map 
as to how those benefits are to be achieved. And, frankly, as I 
look at it, most of these benefits may not be attainable for 
the following sets of reasons:
    First, the merger is characterized as a ``combination,'' 
and there is nothing in the statement that talks about the 
actual integration or consolidation of the infrastructure of 
these two health plans. And as a result, it is hard to envision 
where any savings or efficiencies are going to spring from, 
from this combination and, in fact, there may be duplication. 
Most mergers achieve savings, at least in the short run, by 
combining administrative functions or reducing administrative 
head counts. That does not seem to be the case here because one 
of the goals of the mergers is to create jobs.
    Second, the most efficiencies and synergies that result 
from corporate mergers result from defined pre- and post-merger 
integration efforts, and there is no detail here in the 
statement regarding how these efforts are going to be 
conducted, both pre- and post-merger integration. Also, to the 
extent that these benefits and synergies exist at all, they may 
already be attainable by two very large-size independent 
corporations right now.
    Third, even in the presence of such efforts and defined 
post-integration strategies, scale economies and merger 
efficiencies are difficult to achieve. The econometric 
literature shows that scale economies among health plans are 
reached at a much smaller size than these two plans currently 
exist at. As a result, there may be minimal economies of scale 
for these two plans to reap. In addition, the econometric 
evidence also shows that there is very little economies of 
scope in health plans. And so combining operations to serve a 
diverse population may not result in any additional savings 
either.
    Another reason why these benefits may not be attainable is 
that the recent historical experience with mergers of managed 
health care plans and other types of enterprises does not 
reveal any long-term efficiencies. Indeed, a recent Wall Street 
analysis of the mergers of investor-owned health plans in the 
last few years shows that the majority of these mergers 
underperform the market within 2 years after the merger. More 
broadly, the literature and corporate strategy shows that the 
majority of corporate mergers, 60 to 70 percent of them, fail. 
What explains the low success rate for corporate mergers? One 
major problem is the failure to deliver on the sources of 
value, which is extremely difficult to do. And, in fact, the 
literature shows that mergers of two evenly sized larger firms 
are perhaps the most difficult to pull off altogether.
    So, if all of this is true, why then do mergers continue to 
occur? Well, there are a number of reasons, but I think the one 
reason that we ought to consider here is the fact that a merger 
reduces the number of competitors or potential competitors in 
the market by at least one. What is so important about the 
sheer number of competitors? Well, econometric evidence shows 
that in the managed care field, an increase in the number of 
competitors is associated with both lower costs and lower 
premiums. Conversely, a decrease in the number of competitors 
is associated with an increase in costs and an increase in 
premiums.
    The evidence also shows that the sheer number of 
competitors exerts a stronger influence on these outcomes than 
does the penetration levels of managed care in a local market. 
The most significant effect of the Highmark/IBC proposed merger 
is the removal of one potential competitor from the 
Pennsylvania health plan landscape. One might then wonder what 
this landscape looks like statewide, and, in fact, the 
Commonwealth has four Blue Cross plans. If you look at the 
respective market shares of these four Blue Cross plans, 
Highmark dominates the western part of the State, Independence 
Blue Cross dominates the southeastern part of the State, and 
Highmark has a significant presence in terms of joint operating 
agreements with the Northeast Pennsylvania Blue Cross plan up 
in the northeast sector of the State.
    In effect, Highmark controls not only the western portion 
of the State, but also a solid piece of the northeast, and with 
the pending merger with Independence Blue Cross, Highmark would 
control not only the western portion but most of the eastern 
portion as well.
    Now, as noted, this would not lead to any further 
concentration in any of the specific regions within the State, 
and one reason is because they have historically operated in 
their own separate territories. Another reason why is that most 
of these regions are already concentrated. It is already not 
very competitive in each of these regions.
    So the net effect of a Highmark/Independence Blue Cross 
merger might then be a nearly statewide confederation of Blue 
Cross plans controlled by Highmark with strong domination in 
each region. What has changed is not so much the local market-
level concentration but, rather, the common ownership and 
control of the plans that enjoy this concentrated market power.
    Is this a cause for concern? Well, one would think that 
this might have a potentially deleterious effect on the health 
care plans in the center of the State that would--
    Senator Specter. Professor Burns, how much more time will 
you need?
    Mr. Burns. I will be done in 30 seconds, Senator.
    Senator Specter. Thank you.
    Mr. Burns. This might have a deleterious effect on the 
plans that operate in the central part of the State. It might 
also have a deleterious effect on potential entry into the 
State by investor-owned health care plans from outside of the 
State. And it is widely believed that the Blue Cross plans fear 
entry into the Pennsylvania market by these States because of 
their access to capital, as has been mentioned here.
    At present, there is little econometric evidence to support 
the presumed benefits and synergies of the merger. To date, the 
two firms have failed to provide a convincing rationale and 
game plan for extracting the value from this combination.
    Thank you, Senator.
    [The prepared statement of Mr. Burns appears as a 
submission for the record.]
    Senator Specter. Thank you, Professor Burns.
    Our next witness is the Vice Chairman of the Pennsylvania 
Medical Society, Dr. C. Richard Schott. Board-certified in 
cardiovascular disease, Clinical Assistant Professor of 
Medicine at both Hahnemann and Temple, medical degree from 
Hahnemann.
    We appreciate your being here, and the floor is yours, Dr. 
Schott.

  STATEMENT OF C. RICHARD SCHOTT, M.D., VICE CHAIR, BOARD OF 
      TRUSTEES, PENNSYLVANIA MEDICAL SOCIETY, HARRISBURG, 
                          PENNSYLVANIA

    Dr. Schott. Good morning. I am C. Richard Schott, Vice 
Chair of the Pennsylvania Medical Society Board of Trustees. 
Let me begin by thanking Senator Specter, Senator Casey, and 
Governor Rendell for inviting the Pennsylvania Medical Society 
to speak at today's hearing on the proposed merger of IBC and 
Highmark.
    As you already know from the news reports, the proposed 
IBC/Highmark merger is a mega-merger. It would form the third 
largest health insurance company in the country. The new 
company would control 53 percent of the Pennsylvania health 
delivery market. Based on the enrollee figures, the combined 
IBC/Highmark company is estimated to have 8 million enrollees. 
The majority would be Pennsylvanians. This new company would 
ensure the majority of our State's residents. Prior to 
announcing their intentions, the Pennsylvania Medical Society 
was able to meet with the CEOs of both companies, and we 
continue our dialogue with them.
    Historically, the Pennsylvania Medical Society has 
expressed concerns when mergers are announced. We are not 
rushing to judgment until we have all the questions answered. 
Similarly, we hope that regulators and others will not push 
this marriage down the aisle until we can ensure it does no 
harm to the public.
    Some believe the growing trend at consolidation within the 
health insurance market has the potential to imperil 
competition, which threatens both health care quality and 
patients' access to care. Highmark and IBC currently do not 
compete in the same areas of the State, but that does not mean 
that their proposed merger could not do harm. There are 
patients, employers, and physicians who live along those non-
compete Blue lines that define their territories, who presently 
do have some choice and do, to some extent, drive pricing. A 
merger of this size could deter new competition in these 
markets.
    Will the size of this merger stop other health insurers 
from entering the Pennsylvania market? In theory, the new IBC/
Highmark company should gain economies of scale. Will those 
economies of scale benefit the public? And after those 
economies of scale are initially realized, then what happens?
    Highmark and IBC stated that the new combined company will 
have the resources to hold administrative fees flat for 2 
years. Then what? Published studies show that health insurers 
exhaust their economies of scale at 100,000 to 150,000 
enrollees. Insurers with 1 million, 2 million, 5 million, or 8 
million enrollees are not any more efficient and may, in fact, 
lose efficiency as they become larger.
    After 2 years, can we expect a big jump in the merged 
companies' operating costs? Will any competition still exist in 
Pennsylvania to keep their costs in check, or will competition 
in Pennsylvania be stifled?
    Competition generally improves pricing, consumer choice, 
clinical quality, and service quality. Reduction in competition 
could negatively impact everyone--patients, hospitals, health 
care professionals, and the Government. With an expanded 
insurance monopoly, the new company could exclusively control 
the insurance market that now allows for premium competition. 
Similarly, this could create a huge monopsony in which there is 
only one buyer of health care goods and services in the market. 
This would negatively impact health care professionals and 
hospitals, giving them little opportunity to play on a level 
playing field.
    Let me say that again: A level playing field.
    This concern leads us to our most important question. If 
this merger goes there, will there ever be a level playing 
field between health insurers and health care professionals who 
already are not able to collectively negotiate the terms of 
their contracts? Will we be able to select insurance products 
we accept, or will the single mega-company dictate that 
providers participate in all their products? The all-products 
clause. Will there be fair contracts, or will the current 
standard of ``take it or leave it'' become ``take it or 
leave''?
    All this comes at a time when we are already not 
competitive in the national market to attract and retain high-
quality young physicians here in Pennsylvania. Will insurers 
focus even more on cost-cutting mechanisms with less regard to 
patients' needs? Who will be here to speak for their needs?
    The lack of competition among health insurers, as well as 
the consolidation of health insurers across the Nation, raises 
very serious concerns for the provision of quality patient 
care. As a patient advocate, physicians are often undermined by 
dominant insurers who prevent them from ordering necessary or 
the most appropriate testing. We feel we have already a 
dysfunctional market with annual double-digit health insurance 
premiums, unilateral decisions about hospital payments, below-
market hospital fees, below-market physician fees schedules 
that are unilaterally imposed, and yet substantial profit 
levels for insurers.
    Based on the 1997 Federal Trade Commission/Department of 
Justice Horizontal Merger Guidelines, Pennsylvania would 
already be categorized as ``concentrated.''
    Senator Specter. Dr. Schott, how much more time do you 
need?
    Dr. Schott. Thirty seconds, please.
    Senator Specter. Thank you.
    Dr. Schott. Under the guidelines, a merger of markets that 
raises the HHI index, which is what the Government uses to 
measure the effects of competition, Pennsylvania already has an 
HHI that is over 1,500, which is concentrated. We feel this 
number is even distorted because of the regionalization at the 
present time, that it looks at Pennsylvania as if the 
competition were uniform across the State. We feel strongly 
that this will exceed the FTC guidelines, and we would 
emphasize that, quoting from the guidelines, ``As the HHI 
market concentration increases, competition and efficiency 
decreases. The chances of collusion and monopoly increases.''
    In conclusion, I ask: Will the proposed IBC/Highmark merger 
be good for Pennsylvania? At first glance, maybe. But below the 
surface, there are some serious questions that need to be 
investigated. That is why something this immense needs the 
attention of the Federal Government through the Department of 
Justice and the Federal Trade Commission.
    Thank you for your concerns.
    [The prepared statement of Dr. Schott appears as a 
submission for the record.]
    Senator Specter. Thank you, Dr. Schott.
    We now turn to Mr. James Buckley, President of the Delaware 
Valley Health Care Coalition. A graduate of St. Joseph's 
University, previously served in various positions as managing 
the pension and health and welfare fund for Plumbers Local 690.
    Thank you for being with us, Mr. Buckley, and we look 
forward to your testimony.

   STATEMENT OF JAMES R. BUCKLEY, PRESIDENT, DELAWARE VALLEY 
    HEALTH CARE COALITION, INC., PHILADELPHIA, PENNSYLVANIA

    Mr. Buckley. Senator Specter, Senator Casey, Governor 
Rendell, thank you very much for allowing us to be here. The 
Delaware Valley Health Care Coalition is a group of
    union health and welfare funds that have joined together to 
take advantage of discount pricing. Currently, we represent 91 
funds in the Commonwealth of Pennsylvania, 190,000 members, and 
over 400,000 lives. In 2006, a very conservative estimate of 
our total spent was $1.5 billion.
    At this point in time, the Delaware Valley Health Care 
Coalition has no position regarding the planned merger between 
Highmark Blue Cross--Highmark--and Independence Blue Cross--
IBC. This is simply due to the fact that there is very little 
information concerning the potential effects of this merger 
available to health care consumers and providers.
    We have learned some information from the various press 
organizations and speaking to representatives of the Blues, and 
what we understand is this merger is going to take from 3 to 5 
years to complete. There will be an infusion or an allocation 
of $650 million to the State government, bringing the total 
amount given to the State government of $1.1 billion. There 
will be a 2-year cap on the administrative fees by both 
Highmark and IBC. There is going to be a $285,000 infusion of 
cash into the Blue Cross prescription drug program in fee 
reductions and drug cost reductions.
    The new corporation will be nonprofit. It will be 
headquartered in Camp Hill, Pennsylvania, and there will be no 
layoffs. All employee reductions will be achieved through 
attrition. Also, there will be no buyouts or golden parachutes.
    Although at this time the DVHCC has no official position, I 
am here on behalf of our directors to express our profound 
concern and hope that certain questions regarding this merger 
will be answered through the Committee's review process. Our 
concerns and questions focus on whether the resulting entity 
will foster greater competition in the Commonwealth to the 
benefit of health care consumers, payers, and providers, or 
stifle competition to the detriment of these groups.
    Both organizations have a tremendous amount of money in 
reserves, both being owed in part to their nonprofit status, to 
be used for the uninsured in our Commonwealth. In 2005, it was 
reported that the reserves of Highmark Blue Cross and 
Independence Blue Cross were $2.8 billion and $1.43 billion, 
respectively.
    By combining the Blues organizations and the hopeful 
efficiencies created, our directors are concerned with how 
excess reserves will be utilized. Will these reserves be used 
to create better and more affordable health care systems for 
the citizens of our Commonwealth? Or will they be used to 
finance predatory pricing practices of the new merged company? 
Will the excess reserves and economies of scale created by the 
unified insurer be used to smooth rates from year to year? Will 
there be guidelines that control what reserves may be used for? 
And if so, who will be charged with the oversight of these 
reserves? Will the anticipated reduction of 9,000 jobs through 
attrition eventually resulting in approximately $450 million 
per year upon completion of the workforce reductions pay for 
runouts for employees' health care whose employer becomes 
insolvent or disease management for all insured? Further, will 
the reductions in the workforce affect service provided and, 
consequently, the quality of care provided in the Commonwealth?
    Of great concern to our member directors is whether or not 
the new entity, with its integrated systems, will provide a 
greater flow of information concerning quality of care 
providing by hospitals and physicians in the Commonwealth and 
payment information? It is our sincere hope that there will be 
a mandate for transparency with regard to information on 
hospitals and physicians and, further, and more importantly, 
that this information will be shared with the Pennsylvania 
Health Care Cost Containment Council, an organization that has 
compiled an invaluable knowledge base on health care quality in 
the Commonwealth, and who, I might add, without renewed 
enabling legislation will cease to exist in 2008.
    It is our sincere hope that these questions will be 
answered and the issues be addressed when this merger is 
scrutinized by the Committee and the Department of Justice, as 
well as the Insurance Department of the Commonwealth of 
Pennsylvania.
    Thank you again for allowing me to be here. I will take any 
questions when the time comes.
    [The prepared statement of Mr. Buckley appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Buckley.
    We now have our next witness the Executive Director of the 
Action Alliance of Senior Citizens of Greater Philadelphia, Mr. 
Pedro Rodriguez. He had been Legislative Director for 
Philadelphia City Council. Bachelor's degree from the State 
University of New York in Economics.
    We appreciate your being here, Mr. Rodriguez, and we look 
forward to your testimony.

   STATEMENT OF PEDRO RODRIGUEZ, EXECUTIVE DIRECTOR, ACTION 
    ALLIANCE OF SENIOR CITIZENS, PHILADELPHIA, PENNSYLVANIA

    Mr. Rodriguez. Thank you, Senator Specter. Good morning, 
Senator Casey, Governor Rendell. Thank you for this opportunity 
to add a consumer perspective to the pending merger of 
Independence Blue Cross of Southeastern Pennsylvania and 
Highmark of Western PA.
    The planned Blue Cross merger in Pennsylvania is a 
potential disaster for Pennsylvania consumers. It is a mega-
corporate reshuffling of the deck chairs on our sinking Titanic 
health care system. It demonstrates once and for why all 
Americans need a program like Medicare or a single-payer health 
care insurance system.
    This proposed merger poses more questions than answers. It 
also, in a very tragic way, points to the failure in 
Pennsylvania for government and consumers to have a place to 
ask those questions and try to get some answers and clarity, 
questions such as: Is this the first step toward a for-profit 
conversion? According to a report by Community Catalyst of 
Boston, the Blues' charitable commitment, such as the provision 
of coverage to children and other low-income individuals, has 
been decreasing since 2000. Will the merger reverse the trend 
or make it worse?
    Already, Independence Blue Cross is a de facto for-profit 
corporation, having transferred most of its assets to its for-
profit subsidiaries. IBC admitted that 90 percent of its 
revenues come from the for-profit companies it owns.
    There are no clear and substantial benefits to the public 
from this merger. The Blues will not commit to premium 
reductions or pledge to put a ceiling on premiums. Rising Blue 
Cross premiums will contribute significantly to the increasing 
rate of those without insurance, particularly older people who 
are not yet eligible for Medicare. There are no guarantees that 
individuals with flat incomes, who are dropping coverage, or 
``buying down'' to coverage with reduced benefits or increased 
deductibles will realize a better deal with this merger.
    The Blues' statutorily mandated charitable obligations will 
not be expanded under this merger. The Blues have cleverly 
misrepresented in their press release that $650 million will go 
to expanded coverage for the uninsured. This is a bald-faced 
misrepresentation to the public because they did not clarify 
that most of this money had already been obligated under a 
binding agreement with Governor Rendell signed in the fall of 
2004 requiring annual charitable payments beginning in 2005 
under the Annual Community Health Reinvestment (ACHR) program. 
There appears to be no substantial expansion of charitable 
payments coming from this proposed merger.
    In addition, no one can say the proposed merger is in the 
public interest unless there are guarantees that the new 
entities pay fairly for services. It is not in consumers' 
interests if as result of the merger the Blues are able to low-
ball payments to doctors and hospitals, causing them to end up 
closing their medical practices or hospital doors. No matter 
how low the cost of health insurance, if services are 
unavailable, the savings are worthless.
    To determine whether the proposed merger is in the public 
interest, we need to know how it will lower health care costs, 
and whether it will allow more people to afford health care and 
make it easier for the State to grow jobs and eliminate 
unnecessary bureaucracies. The merger is not in the public 
interest if all it does is free up more money for the Blues to 
start more for-profit subsidiaries. I don't think anyone can 
say it is in the public interest unless we see how much savings 
are being projected and to whom the savings flow. Will those 
savings go to huge salaries for top executives or to provide 
increased access to health care for working people in 
Pennsylvania?
    What is also of grave concern is the appalling absence of 
any decent consumer protection law or enforcement within the 
State and Federal Governments. The catch-up bills of Senator 
Don White and Representatives Todd Eachus and Phyllis Mundy 
would finally amend the State's Insurance Holding Company Act 
to include the Blues with other insurance companies so that a 
planned merger would now need Insurance Department approval. 
The Department for the first time would be able to determine if 
the Blues merger would ``substantially lessen competition,'' 
but this, again, is grossly inadequate.
    We should have a body of laws that require the Blues, and 
other insurance companies, to first demonstrate a substantial 
benefit to the public before any merger is approved--a standard 
that has been effectively used for utility companies in 
Pennsylvania for a long time.
    Because the Pennsylvania Insurance Department has always 
been a paper tiger or a captive of the insurance and Blues 
industry, consumers need much more in protections. Consumers 
need a right to have standing to intervene in Insurance 
Department proceedings, have rights to discovery, and have 
their fees and costs paid by the insurance company if they make 
a ``substantial contribution'' to the result--as provided for 
in California law.
    To conclude, Pennsylvania has 2.8 million people without 
health insurance or underinsured. That is a whopping 27 percent 
of the non-elderly population. The proposed merger does not 
promise to solve this crisis. We appeal to Washington to lend 
the consumers of Pennsylvania a hand and to come and ask the 
tough questions about this proposed merger.
    Thank you.
    [The prepared statement of Mr. Rodriguez appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Rodriguez.
    Our final witness is Joseph ``Chip'' Marshall, Chairman and 
CEO of Temple University Health System. Bachelor's degree and 
law degree from Temple University.
    Thank you for coming in today, Mr. Marshall, and the floor 
is yours.

  STATEMENT OF JOSEPH W. ``CHIP'' MARSHALL III, CHAIRMAN AND 
   CHIEF EXECUTIVE OFFICER, TEMPLE UNIVERSITY HEALTH SYSTEM, 
                   PHILADELPHIA, PENNSYLVANIA

    Mr. Marshall. Thank you. Good morning, Senator Specter, 
Senator Casey, and Governor Rendell. I am Chip Marshall, 
Chairman and CEO of the Temple University Health System. On 
behalf of all of our employees, physicians, and patients, thank 
you for the opportunity to testify today on the Highmark/
Independence Blue Cross Merger--a matter of significance to the 
Temple University Health System, the southeast Pennsylvania 
region, and the entire Commonwealth.
    At the outset, let me share with you some background on the 
Temple University Health System, whose hospitals have 
steadfastly provided their communities with compassionate, 
high-quality care for more than 150 years. The Temple 
University Health System is comprised of five hospitals, 
including Temple University Hospital, Temple University 
Children's Medical Center, the Temple-Episcopal Campus, Jeanes 
Hospital, and Northeastern Hospital.
    Last year, we handled a quarter-million emergency 
department visits, admitted approximately 60,000 inpatients, 
provided over a half-million outpatient visits, and delivered 
more than 6,000 babies.
    Temple University Hospital and Temple Children's serve as 
the chief clinical training sites for the Temple University 
School of Medicine. Together, these hospitals are the region's 
only Level I Trauma Center for adults, children, and burn 
victims.
    Our Health System family also includes the Temple Transport 
Team, our state-of-the-art ground transport unit that provides 
rapid transport from central Pennsylvania to the New Jersey 
coast. Temple Physicians, Inc., our network of community-based 
doctors' offices, serves Philadelphia, Bucks, and Montgomery 
counties.
    When I joined the Health System as CEO, I established a 
goal for the health system to become a high-quality, regional 
health care provider. We are entirely committed to excellence, 
as evidenced by our continued investment in our professional 
workforce, facility improvements, and advanced medical 
technologies.
    It is with this background that I offer my views on the 
proposed merger of Highmark and Independence Blue Cross. As 
both an IBC network provider and as a purchaser of its 
insurance product for an 8,000-employee health system, thank 
you for bringing national focus to this important matter 
affecting competition and choice in the Pennsylvania insurance 
market.
    I realize that at this early stage, we do not have 
sufficient information to make firm declarations or 
recommendations. Over the next several months, however, 
hospitals, physicians, consumers, employers, and other 
stakeholders will closely monitor merger developments. As they 
do, it will become clear that the benefits promised by Highmark 
and IBC will not be self-executing simply as a result of this 
merger. Benefits of a consolidated plan will be achieved only 
with strong efforts of all stakeholders in the health care 
industry. Only if done right could the combination of Highmark 
and IBC offer opportunities for efficiencies in the insurance 
market and a deeper commitment to the social missions of these 
plans.
    Ultimately, the issue is whether stakeholders in the health 
care delivery system will benefit from or be disadvantaged by 
the combination of Highmark and IBC. To help resolve this, I 
believe it is imperative that several questions be explored.
    First and foremost, how would a consolidation of Highmark 
and IBC affect access to care? If hospitals and physicians are 
not compensated fairly for their services, or they are closed 
out of provider networks, then the supply of vital services 
will be restricted at the expense of those who need care.
    Second, would a consolidation of Highmark and IBC damage or 
destroy the social missions of these plans? In eastern 
Pennsylvania, IBC is an important part of the community and is 
highly valued for its corporate leadership and financial 
support of many worthy causes. Temple Health System, for 
example, has collaborate with IBC in our joint roles with the 
Philadelphia Chamber of Commerce, Select Greater Philadelphia, 
and the CEO Council for Growth, as well as many outreach 
activities designed to improve the health status of our 
communities. We hope this civic partnership will be preserved. 
In western Pennsylvania, stakeholders will have their own 
questions as to how a merger would be managed with high 
expectations from a strong Philadelphia area market.
    Third, how do we balance the benefits of price competition 
with the financial and social burdens imposed on hospitals, 
which are required to provide 24-hour access to all who present 
to their emergency rooms?
    Fourth, how will financial benefits that accrue to a 
combined Highmark/IBC plan be shared with patients, hospitals, 
physicians, and the communities they serve? Will employers and 
consumers benefit from lower premium costs and improved 
products that might be offered by a stronger, more efficient, 
and effective company?
    Finally, what impact would a consolidation have on an 
already fragile health care system? As we consider this issue, 
we must be vigilant in balancing the competing interests of 
hospitals, physicians, insurers, employers, consumers, and 
patients. A market change of this magnitude must fortify, not 
weaken, Pennsylvania's health care delivery system. A 
consolidated company must be steadfastly dedicated to working 
with providers to ensure their continued ability to offer 
quality care to our patients, for it is the patients around 
whom we are all centered.
    In closing, let me emphasize that the standard economic 
competitive analysis might not be entirely sufficient in 
considering the impact of a consolidated Highmark and IBC. The 
dominant IBC market share in the region, the overall complexity 
of the health care market, including the virtual inability of 
providers to sell their services directly to consumers, thus 
necessitating that insurers be an efficient and effective 
component of the delivery system are all factors that have to 
be carefully considered in evaluating a possible consolidation.
    On that note, we must keep in mind that with time, 
Pennsylvania's health care system requirements will change. 
What is efficient and effective today did not exist 10 years 
ago and will change over the next 10 years. Pennsylvania--
    Senator Specter. Mr. Marshall, how much more time will you 
need?
    Mr. Marshall. Just 30 seconds, Senator. Again, it is too 
early to take a position for or against the proposed 
consolidation. We would not want to oppose a merger simply 
because of possible downsides. If carefully executed, with 
constructive involvement from hospitals, physicians, employers, 
consumers, and other stakeholders, a consolidation could 
provide an opportunity to stabilize Pennsylvania's health care 
system, preserve the economic stability of its businesses, and 
ensure access to care for all its citizens. We at Temple Health 
System are committed to working with all stakeholders on this 
important issue.
    Again, thank you, Senators and Governor Rendell, for your 
leadership on this issue and for allowing me to testify today.
    [The prepared statement of Mr. Marshall appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Marshall, and thank you 
all.
    We now turn to 5-minute rounds from the panel, and I would 
begin with you, Dr. Melani. When we talk about nonprofits, 
there is a real question as to exactly what that means. Right 
now Congress is wrestling with a pay increase for Federal 
judges, who earn $165,000 a year. When we look at executive 
compensation at Highmark in excess of $3 million, and when we 
look at a surplus of $2.6 million, would there be savings 
potentially to premium payers if that surplus was not 
maintained or the level of executive compensation if nonprofit 
really has to have some significance in terms of not being for-
profit?
    Dr. Melani. Yes, Senator, let me address your question. The 
number of lives that Highmark covers across the Nation is 
actually 28 million, not 4.6 million. It is 4.6 million in the 
State of Pennsylvania who have health insurance. We service 28 
million individuals around the United States. So if you were to 
charge our customers for my compensation, it is about 50 cents 
per customer per year--I should say 10 cents per customer per 
year, is what it comes out to be. So that would be the savings 
to the customer. I guess that was part of your question, what 
would the savings be if I received zero income. It would be 
about 10 cents per customer per year.
    Senator Specter. Well, Dr. Melani, whatever the saving 
would be, there would be a saving. But what I am sort of 
groping for is really what does ``nonprofit'' mean. We have had 
some concerns expressed that this might be a precursor to 
having Highmark and go profit, as WellPoint did, the second 
biggest health carrier in the United States. And I am not sure 
that being for-profit would necessarily be more profitable than 
nonprofit. But can you assure us that that is not in the offing 
to go for-profit?
    Dr. Melani. We have no intent to go for-profit. Not-for-
profit for us is two things: One is a corporate structure, and 
it is a corporate structure that exists for purposes of taxing 
and other things. And, frankly, our not-for-profit status is a 
bit of a misnomer because we pay just about every corporate tax 
there is--property taxes, all of those things. So we get very 
little in the way of tax forgiveness as a not-for-profit in the 
State of Pennsylvania.
    What it really means for us is a philosophy in the way we 
manage. It is the corporate mission. It is a community-focused 
mission. It is the ability to actually look at the community as 
a whole and work on initiatives for the community for the long 
term, without concern about shareholders, without returning 
value to shareholders other than the people of the Commonwealth 
of Pennsylvania. Our shareholders are the people we serve in 
Pennsylvania, the people in Pennsylvania. So everything we do 
as a not-for-profit is geared around trying to make health care 
more affordable, more accessible for the people of 
Pennsylvania, and that is our not-for-profit mission. That is 
our not-for-profit status.
    We do not intend to veer from that. Corporately, we enjoy 
that structure. We enjoy the purpose for which we exist. Our 
employees are engaged. I as the chief executive am engaged in 
that. We do not have any intent to convert to a for-profit 
organization.
    Senator Specter. I am going to have to move on to Mr. 
Frick. We do not have a whole lot of time here.
    Mr. Frick, Dr. Melani testifies about you have fair and 
reasonable premiums, but is it better to rely upon competition 
to hold down premium costs? And would you favor an antitrust 
exemption for doctors and hospitals to negotiate with 
Independence Blue Cross?
    Mr. Frick. Well, the first question about our provider 
reimbursements and competition, as I mentioned in our 
testimony, over 85 cents of every dollar that we take in in 
revenue from our customer goes directly out the door to pay for 
health care services to the hospital community and the 
physician community on behalf of our members. We are proud of 
that. That is a number that is much higher than the publicly 
traded competitors that we referenced earlier.
    Senator Specter. Well, if you have this kind of a merger, 
would you say that it would be fair to give a little more 
bargaining power to doctors and hospitals not to be restrained 
by antitrust in negotiating with Independence Blue Cross and 
Highmark? That is my last question. I only have a few seconds 
left.
    Mr. Frick. Well, Senator Specter, I think the leverage is 
joint today. We need quality providers to render care, and we 
look every year at fair and reasonable compensation. We had a 
30-percent increase in the last 5 years in our payments to 
providers, and actually, the number of participating providers 
in our network has increased 11 percent. So I think all of us 
are aligned more today than ever in terms of fair and 
reasonable compensation, and also to make sure that the fees we 
pay reflect quality and performance and the health status of 
all of our members. I think that is the priority.
    Senator Specter. Thank you, Mr. Frick.
    Senator--Governor Rendell? I almost demoted you.
    Governor Rendell. That is all right. I am sorry to the 
other panelists to address these questions almost exclusively 
to Mr. Frick and Dr. Melani, but it is the nature of where we 
are, and I did have one question for Senator White, which I 
cannot resist since I have got him here.
    To Dr. Melani or Mr. Frick, there has been a lot of talk 
about what the increases in level, the $1 billion increase, but 
I think it is very important that we start from understanding 
what the baseline is. And I know we do not have a lot of time, 
but can you give us an understanding of the baseline of the 
charitable commitments that IBC and Highmark make right now? 
And it is my understanding--Mr. Rodriguez said that this would 
just be money going to fulfill the commitment you made to us on 
the adult basic care program. It is my clear understanding that 
that is not the case; this is above and beyond the existing 
commitment. But can you both give us an idea of your baseline?
    Mr. Frick. Well, our obligation in 2006, Governor, was a 
total of $52.4 million, and $29 million of that was directed 
specifically to adult basic. And as you know as the architect 
of that agreement, the Community Health Reinvestment Agreement 
is scheduled to expire in 2010. So the $350 million that I 
alluded to is to extend that agreement for an additional 3 
years, but through operational and technology savings, we 
believe we can also generate an additional $300 million in 
savings that we believe is most appropriate to direct to access 
and reducing the uninsured, because every stakeholder we talk 
to, that is the single most important issue in Pennsylvania, 
although Pennsylvania, I think, because of the historic 
partnerships between our government and the Blues, the rate of 
uninsured in Pennsylvania is much lower than the national 
average. And while I do feel good about that, because I believe 
it reflects the history of the Blues and our progressive 
leadership, I think with the additional commitent we would make 
as part of the consolidation, we can do better.
    Governor Rendell. We are the seventh lowest in the Nation 
in terms of percentage of uninsured. That is correct.
    Dr. Melani, do you want to comment on that? Give us an idea 
of your baseline.
    Dr. Melani. I agree with what Joe says, that the Community 
Health Reinvestment initiative sunsets in 2010, so a portion of 
this is the extension of the Community Health Reinvestment 
initiative. But there is $300 million of additional funds over 
6 years that will be applied to the uninsured. That is in 
addition to continuing our community commitments. Last year, 
combined, we committed over $250 million back to the community. 
Without the merger, those funds will not be available.
    Governor Rendell. And just so I am clear, as you know, the 
Commonwealth, at least the administration, is asking the 
legislature to adopt something called ``Prescription for 
Pennsylvania'' that would ensure health care for all the 
uninsured. Adult basic care would phase out under that, and the 
money that is currently programmed for adult basic care would 
go into the pot that would pay for the increase in covering all 
the uninsured. It goes without saying that those payments would 
go to that program as well, the ABC payments.
    Mr. Frick. And the additional funding that I spoke about, 
$300 million, would go to whatever new programs or products we 
jointly believe the administration, the legislature, and us as 
Blues would best provide increased access to small employers 
and reduce the uninsured rate. Absolutely.
    Governor Rendell. And I have one question for Senator 
White. Senator White deserves a great deal of credit for taking 
this issue head on and Senate bill 550 would remedy, I think, 
something that needed to be remedied by giving the Insurance 
Commissioner the right to approve or reject mergers between 
nonprofits.
    But as you know, Senator, we also have a proposal in 
Prescription for Pennsylvania to allow the Insurance 
Commissioner to rate-set for health care, both for-profits and 
nonprofits. I hope you would be supportive of that because one 
of the things that has been expressed here is the concern by 
Senator Specter, Mr. Rodriguez, and others is what is going to 
happen to premiums and rates. Certainly we will be in a better 
position if the Insurance Commissioner has the ability to 
reject rate increases.
    Senator White. Governor, you are absolutely right, and I 
think everybody--you are to be commended and lauded for 
Prescription for Pennsylvania, and you are getting a lot of 
support in the legislature for all parts of it. But I am 
sitting between these two giants here, and I feel a little 
squeezed.
    [Laughter.]
    Senator White. But, you know, the community mission part of 
this is wonderful, and it is a great concept. And while it is 
helping the Commonwealth with the uninsured, which is, you 
know, a pretty staggering figure, 800,000 people, let's not 
forget that we have 11.2 million people that do have insurance, 
and they want to know where the benefits are coming from, too.
    Also, sometimes I have a problem--the reserve part of this 
I guess is something that I need to be better educated on 
because, Governor, as far as I am concerned, in my own mind I 
classify these as basically excess premiums. And we all pay 
into that.
    Governor Rendell. Well, just to follow up, the legislature 
should understand the reserve issue as it is ruled on by 
Pennsylvania, and other States as well, and I agree. And we 
should do that as part of this process.
    But don't you agree that in terms of protecting those 11.2 
million who do have health care, it is important to give the 
Insurance Commissioner the ability to set rates?
    Senator White. Absolutely, Governor.
    Governor Rendell. Thank you.
    Senator Specter. Senator Casey?
    Senator Casey. Thank you, Senator.
    I think my first question is directed to both Mr. Frick and 
Dr. Melani, and it is a question, I think, that a number of 
speakers today, a number of people in their testimony, as well 
as in the questions, spoke to either directly or indirectly, 
and that is the standard, the basic standard, which may not be 
required of both companies in this merger situation, but I 
think is a good standard for us to follow here in the State. So 
whether it is the mandatory legal standard or not, I think it 
is important to answer this question. And it is the basic 
overarching question of the so-called affirmative showing of 
substantial public benefits from this merger.
    I would ask both of you to answer that as best you can in 
the short period of time we have today, but also to supplement 
or amplify your answer in writing as part of the record of this 
Committee, and I would ask Senator Specter's permission to do 
that, because I think that is one of the overarching questions: 
What are the substantial public benefits of this merger? If you 
could both answer, maybe Mr. Frick first.
    Mr. Frick. Senator Casey, sure. I guess one of the reasons 
for the 2-year process between IBC and Highmark to come to this 
day today is because we both recognize our standing and 
importance--not just in health care in Pennsylvania, but for 
the local communities. Our local communities want to make sure 
we preserve jobs. Our employer communities want to make sure 
that we keep rates affordable. Our partners in Government want 
to make sure we can continue to insure as many people as 
possible. Our provider partners want to make sure that 
reimbursement is aligned and fair and reasonable.
    So we have multiple stakeholders, and what Highmark and IBC 
believe is that by avoiding duplicative investments, cutting 
down on unnecessary administrative spending, every dollar that 
we can achieve from this consolidation, Senator, will go 
directly to make health care work better in Pennsylvania. That 
is our primary objective. We are not out-of-State companies. We 
are looking to be more efficient so we can reinvest whatever 
dollars we can accrue to make health care work better for all 
of our stakeholders--employers, the uninsured, our provider 
partners. That is our objective, and I believe that we do have 
to prove that to you or this combination should not happen. But 
that is how committed we are.
    Senator Casey. Doctor?
    Dr. Melani. Yes, Senator Casey, I think Joe articulated the 
answer quite well, but I will just restate that there are 
definitely economic benefits that will be derived, both direct 
and indirect. Direct benefits we talked about, which is the $1 
billion that we will get back to the community over the first 6 
years of operations, and those will continue in perpetuity from 
that point forward. But in the first 6 years, that is $1 
billion of economic benefit that otherwise would not have been 
received, about half of which will go back directly to 
customers in savings through health care cost or administrative 
cost savings, and the other half will go toward the uninsured 
to help get them access to health care services that they need.
    The indirect is really the benefit we talked about which 
our companies bring to Pennsylvania every day. It is the 
employment that we have, the 18,000 employees we have located 
here in Pennsylvania. Unlike other companies that compete in 
Pennsylvania, you know, our employees are based here servicing 
the people of Pennsylvania and those nationwide, and we intend 
to continue that.
    In addition, the way we operate, we purchase in 
Pennsylvania. Over 85 percent of all of our services are 
purchased here in Pennsylvania from Pennsylvania-based 
companies who employ people here, another 54,000 jobs created 
by way of that.
    Also, our surplus, the way we use our surplus to generate 
economic benefit to the Commonwealth through procurement of 
services and companies that we have put in place servicing 
others across the Nation, those jobs are back here in 
Pennsylvania. Again, no cost to the Commonwealth, done by us. A 
great benefit to the Commonwealth.
    I do not want to also understate, though, the quality 
value, working with the providers in the community. We have 
historically had a 70-year relationship with providers in the 
community. We were started by providers, started by the 
Hospital Association, started by the Pennsylvania Medical 
Society. We have a rich tradition of working closely with the 
provider community in our markets.
    Yes, today things are tough. There is a tension because of 
health care costs. But we will continue that rich tradition of 
working face to face to improve quality of care and to try to 
make health care more affordable by advancing technologies, the 
personal health record, by looking at ways to increase our 
passthrough in our claims, by doing real-time claims 
adjudication, improving cash flow for physicians and hospitals. 
We will continue to look at initiatives on transparency, pay 
for performance--all those things that are critically 
important, that we will not be duplicating and confusing to the 
provider community or customers. One time, one place.
    Senator Casey. I would just urge you in the future, as you 
did today but I think we need more detail, to be very specific 
about the benefits and remember that part of that standard has 
the word ``substantial,'' and that means something that is 
going to have a phenomenal effect, a substantial effect on 
everyone's life, and that means both health care coverage and I 
think it also means the question of cost.
    So I think when you are making your list and you are 
submitting for the record, not just for this hearing but for 
any filing, that you think about it in very specific and in 
broad terms what the word ``substantial'' actually means. I 
think that is what people are looking for.
    We are out of time.
    Senator Specter. Thank you, Senator Casey. We have time for 
one more round of 4 minutes and still make our 11 o'clock 
termination time.
    Senator White, there have been some rumors that if this 
merger goes through, some current competitors will withdraw 
from the State; other potential competitors will not enter the 
State. How would you evaluate that? Would there be a 
significant impact on competition for similar competitors?
    Senator White. The best way I can answer that, Senator, is 
to say that, you know, there are so many--whether this merger 
goes through or not, we are still in a state where, when you 
combine all the Blues coverage in Pennsylvania, they have--this 
did not happen overnight. This happened and developed over a 
20-, 25-year period. And a lot of it had to do with broken 
unions and the fact that the unions always wanted the Blues. 
The Blues were always the No. 1 choice, and that has helped to 
generate this growth.
    I think right now what you have is the entry barriers for 
commercial businesses coming into Pennsylvania with the 
environment that we have today is not real positive. There are 
just so many barriers. They are going to continue to dominate 
the market, and I think this is something--this is a good step. 
I think something should have been done maybe along these lines 
in 1996, which we sort of just let it slip under our nose.
    But the point is that from a commercial end, when I was in 
the business, a lot of the times in the rural parts of 
Pennsylvania, Senator, you had--if I had my little companies 
that I represented, I actually did not want to handle health 
care. I handled the property/casualty or life or disability or 
annuities and pensions. I did not want to handle health care 
because if my client was unhappy and then the next year I came 
back with a 20-percent increase in his premium, and I could not 
explain it to him, I had to go back to the same company, 
Highmark, and just get a cheaper plan. And that is the extent. 
There is no network in the area that I represent in 
Pennsylvania for--
    Senator Specter. Dr. Schott, if this merger goes through, 
what impact will there be on the bargaining power of doctors 
and hospitals? How does this affect your interest in having an 
antitrust exemption for doctors and hospitals to join together 
to negotiate with Independence Blue Cross and Highmark?
    Dr. Schott. Physicians find themselves at this point 
clearly at the bottom of the economic power structure in 
dealing with third-party payers and even at times in dealing 
with hospital systems. The reimbursement market for physicians 
is an important issue, not so much that I can take home 
salaries that some of our CEOs enjoy, but to retain and attract 
people to this market. And we have been progressively unable to 
do that because of both the economic and to a large extent the 
tort climate that we face in Pennsylvania, especially in 
southeastern Pennsylvania.
    The national average for third-party payer reimbursement 
for evaluation and management services, which is what most 
internists spend their life doing, is substantially above 
Medicare, while in southeastern Pennsylvania we have expected 
our doctors to work here at substantially below Medicare.
    Senator Specter. I am going to ask for a show of hands, 
with only 20 seconds left, of those on the panel who think 
there should be an antitrust exemption for doctors and 
hospitals to negotiate. You do not have to be yes or no if you 
have not had time to think about it. I would understand an 
abstention. But everybody on the panel who thinks that if this 
merger goes through, it would be appropriate to have an 
antitrust exemption for doctors and hospitals. If you favor 
that, raise your hand. Opposed?
    [Four in favor.]
    Governor Rendell. Can I ask one question? Basically a yes 
or no answer.
    Senator Specter. No, no. You can ask several.
    Governor Rendell. I thought we were out of time.
    Senator Specter. You have got 4 minutes.
    Governor Rendell. Doctor, I hear what you say. Mr. Frick 
just told us that the increase in physician reimbursement has 
been 30 percent over the last 5 years. Correct or incorrect?
    Dr. Schott. I do not know that that number is absolutely 
true. I cannot substantiate that number. There are different 
issues that play into that number, and I know we are time-
limited, but the ability of any given physician to be able to 
survive in this environment has been very marginal.
    The fact that southeastern Pennsylvania has high demands on 
service is an issue that we share the concern with IBC. When we 
are taking care of a patient, they frequently are probably 
sicker than the average and require a lot more services, and 
the system, as it has evolved, including the system where 
primary care physicians now are not given any advantage to go 
to the hospital to see their patients because their only 
revenue comes from what they do in their office.
    So there are a lot of factors here. I realize time is very 
limited, and I would be happy to spend as much time as any of 
you want to spend at any time to further discuss this.
    Governor Rendell. Could the objective that Senator Specter 
is trying to reach with antitrust, would that not have been 
reached had the legislature approved the legislation on 
provider groups? Maybe you want to explain that to the Senator, 
the legislation that failed.
    Dr. Schott. Well, the Senator is well aware of the Campbell 
bill, which was the national bill after which both the Texas 
bill and the Pennsylvania bill were patterned. That would have 
the ability for physicians to collectively bargain under the 
oversight of the Department of Health or the Insurance 
Commissioner or some State-based agency.
    It is cumbersome. The process for doing that we would 
certainly like to address and tweak, but we would certainly be 
in favor of moving forward with that as a trade-off for the 
bargaining power that we are not going to have when we have one 
monopsonistic corporation.
    Governor Rendell. And there were efforts in the 
Pennsylvania legislature to achieve that, and they failed.
    Dr. Schott. Absolutely.
    Governor Rendell. I will not say ``miserably,'' but they 
failed.
    Senator Specter. Senator Casey?
    Senator Casey. I have one question for Professor Burns with 
regard to duplication. You were making assertions about what 
may happen to both economies of scale and efficiency and 
duplication. I was curious to have you explain at least the 
duplication assertion as to how this merger would, in fact, 
lessen the possibility that we could reduce duplication.
    Mr. Burns. Well, Senator, the insurance business is a 
labor-intensive industry. It is not a capital-intensive 
industry. And so when you put together two firms that are 
located 300 miles apart, you are not going to really be 
generating job savings or efficiencies by combining those two 
companies because you will still have the same number of people 
doing the same number of things in both locations.
    I think we have some historical experience we can draw on 
here, and I do not mean to bring up some unpleasant memories, 
but 10 years ago we tried to pull together a huge hospital 
system here in Pennsylvania that had one part of it in 
Pittsburgh and the other part of it here in Philadelphia, and 
that was the Allegheny system. And they made many of the same 
claims here, and they had the same difficulties that I have 
outlined in my report on trying to achieve these kinds of 
efficiencies.
    You have two labor-intensive markets--hospitals and health 
plans--operating 300 miles apart. It is hard to pull those 
together and automate them.
    Senator Casey. One last question. As the Governor 
apologized, I will, too, to direct these to the two principals 
for today, but it is important. Children's health insurance, we 
have 9 million kids in the country with no health insurance at 
all. This State does a much better job than most States. The 
Governor is trying to expand it. But how do you see this merger 
impacting the question of children's health insurance, meaning 
how many are covered? And do you see it as having a positive 
impact on the number of children who are covered?
    Mr. Frick. I do not think there is any greater priority 
than health insurance for children, and Highmark and IBC were 
pioneers with the administration in the CHIP program that has 
now become a national model. And I think why we are allocating 
a large percentage of the savings is for two things: one, no 
one in America should be without health insurance; and, No. 2, 
those who are are increasing costs for everyone else.
    So no matter what stakeholder we talk to, creating more 
access to health insurance is good for everyone, and there is 
no single greater priority for us.
    Senator Casey. Thank you, Senator.
    Senator Specter. Well, thank you all for the testimony 
today. The record will be held open for 1 week in accordance 
with Judiciary Committee rules for the submission of written 
questions. I think the hearing has been very fruitful in 
exploring quite a number of issues--oh, Mr. Rodriguez, you had 
your hand up a few moments ago and wanted to say something in 
addition?
    Mr. Rodriguez. Thank you, Senator. I just want to emphasize 
some of the comments made by some of the principals of the 
Blues about the commitment that they were not going to turn 
into for-profit corporations in the near future. I think if 
that is the case--and they are very nice people, and I think we 
can take them at their word--they will have no problem in 
signing some binding agreement that they would not do so for 10 
years.
    In addition to that, I believe that it would be in the best 
interest of consumers in Pennsylvania if part of the surplus is 
used to up the ante in terms of the $650 million that we have 
on the table, to increase that to about $1.2 or $1.5 billion to 
provide health insurance for Pennsylvanians.
    Senator Specter. Thank you very much, Mr. Rodriguez, and I 
thank--I see a hand in the audience. We would like to take 
questions, but we are at 10:59.
    Governor Rendell. Fifteen seconds.
    Senator Specter. Go ahead.
    Audience Member. Mental health coverage, separate, not 
equal. Magellan in Georgia, bean counters handling Blue Cross' 
covering of--
    Senator Specter. And your question is?
    Audience Member. My question is, if we are going to have 
more Magellans with this big thing, or are we going to take a 
look at what--
    Senator Specter. Okay. We have your question.
    Mr. Frick?
    Mr. Frick. Well, as she alluded to, Magellan is our third-
party provider for mental health and behavioral health services 
for Independence Blue Cross. Highmark does not use them now.
    Our comprehensive integration plan over the next 12 months 
will look at every aspect of our company to understand what is 
the best practice in that particular care area administration, 
and what we will deliver to the marketplace is what we believe 
is the best.
    Senator Specter. If anybody else has any questions, see 
Mike Oster, my executive director in Philadelphia, and we will 
be glad to ask them for the record. And if you have any 
questions generally, just communicate with my office, and I am 
sure Senator Casey would say the same, as would Governor 
Rendell.
    Governor Rendell. Can I just say one thing on that?
    On that quick question, Prescription for Pennsylvania does 
require, unlike ABC, Adult Basic Care, mental health coverage, 
behavioral health coverage, and substance abuse coverage. So it 
is an improvement. The product in Prescription for Pennsylvania 
is a step up because it includes generic brand prescription 
coverage, which ABC does not, and it includes behavioral 
health, which ABC does not.
    Senator Specter. Gentlemen, thank you all very much for 
coming in today. As I said, this is just the beginning. There 
will be more questions.
    I want to thank the National Constitution Center for 
opening up this beautiful auditorium, and thank especially Joe 
Torsella, the President.
    That concludes our hearing.
    [Whereupon, at 11:01 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.] 

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