[Senate Hearing 110-582]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-582
 
CONSOLIDATION IN THE PENNSYLVANIA HEALTH INSURANCE INDUSTRY: THE RIGHT 
                             PRESCRIPTION?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 31, 2008

                               __________

                          Serial No. J-110-115

                               __________

         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
           Stephanie A. Middleton, Republican Staff Director
              Nicholas A. Rossi, Republican Chief Counsel
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                     Jeffrey Miller, Chief Counsel
                William Castle, Republican Chief Counsel

















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
    prepared statement...........................................   139
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     2

                               WITNESSES

Allen, Henry S., Jr., Counsel, Private Sector Advcacy Department, 
  American Medical Association, Chicago, Illinois................    17
Balto, David, Senior Fellow, Center for American Progress, 
  Washington, D.C................................................    15
Frick, Joseph A., President and Chief Executive Officer, 
  Independence Blue Cross, Philadelphia, Pennsylvania............     8
Harris, Barry D., Board Chairman, Economists, Inc., Washington, 
  D.C............................................................    19
Laign, Michael B., President and Chief Executive Officer, Holy 
  Redeemer Health System, Huntington Valley, Pennsylvania........    14
Marshall, Samuel, President, Insurance Federation of 
  Pennsylvania, Inc., Philadelphia, Pennsylvania.................    12
Melani, Kenneth R., M.D., President and Chief Executive Officer, 
  Highmark Inc., Pittsburgh, Pennsylvania........................     4
Miller, Henry, Managing Director, Navigant Consulting, Inc., 
  Washington, D.C., on behalf of UPMC Health Plan................    20
Scanlan, Carolyn F., President and Chief Executive Officer, the 
  Hospital and Healthsystem Association of Pennsylvania, 
  Harrisburg, Pennsylvania.......................................    10

                         QUESTIONS AND ANSWERS

Responses of Henry S. Allen to questions submitted by Senator 
  Specter........................................................    35
Responses of David Balto to questions submitted by Senator 
  Specter........................................................    51
Responses of Joseph Frick to questions submitted by Senator 
  Specter........................................................    53
Responses of Barry C. Harris to questions submitted by Senator 
  Specter........................................................    58
Responses of Samuel R. Marshall to questions submitted by Senator 
  Specter........................................................    69
Responses of Kenneth R. Melani, M.D., to questions submitted by 
  Senator Specter................................................    72
Responses of Carolyn F. Scanlan to questions submitted by Senator 
  Specter........................................................    79

                       SUBMISSIONS FOR THE RECORD

Allen, Henry S., Jr., Counsel, Private Sector Advcacy Department, 
  American Medical Association, Chicago, Illinois, statement and 
  attachments....................................................    86
Balto, David, Senior Fellow, Center for American Progress, 
  Washington, D.C, statement.....................................   109
Frick, Joseph A., President and Chief Executive Officer, 
  Independence Blue Cross, Philadelphia, Pennsylvania, statement.   122
Harris, Barry D., Board Chairman, Economists, Inc., Washington, 
  D.C., statement................................................   130
Holder, Diane, President and CEO, UPMC Health Plan and Insurance 
  Services Division, Pittsburgh, Pennsylvania, statement.........   140
Laign, Michael B., President and Chief Executive Officer, Holy 
  Redeemer Health System, Huntington Valley, Pennsylvania, 
  statement......................................................   152
Marshall, Samuel, President, Insurance Federation of 
  Pennsylvania, Inc., Philadelphia, Pennsylvania, statement and 
  attachment.....................................................   157
Melani, Kenneth R., M.D., President and Chief Executive Officer, 
  Highmark Inc., Pittsburgh, Pennsylvania, statement.............   181
Miller, Henry, Managing Director, Navigant Consulting, Inc., 
  Washington, D.C., statement....................................   189
Scanlan, Carolyn F., President and Chief Executive Officer, the 
  Hospital and Healthsystem Association of Pennsylvania, 
  Harrisburg, Pennsylvania, statement and attachment.............   194
WellNet Healthcare, Harry Kovar, CEO, Southampton, Pennsylvania, 
  statement......................................................   210


CONSOLIDATION IN THE PENNSYLVANIA HEALTH INSURANCE INDUSTRY: THE RIGHT 
                             PRESCRIPTION?

                              ----------                              


                        THURSDAY, JULY 31, 2008

                                       U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                                                    Rights,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 2:17 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl and Specter.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good afternoon to one and all. Today we will 
be examining the consolidation in the health insurance market 
with the proposed merger of the two largest health insurers in 
Pennsylvania--Highmark and Independence Blue Cross. We are 
holding this hearing at the specific request of my colleague 
for whom I have the very highest regard, Senator Arlen Specter. 
As this merger most directly impacts Pennsylvania residents, I 
have asked him to preside over today's hearing, and he will.
    After the merger, these two insurers' combined market share 
in Pennsylvania is estimated to be more than 70 percent. 
Allowing a single health insurer to gain such a high market 
share in Pennsylvania obviously raises significant competition 
concerns for the citizens of that Commonwealth, especially 
since these two companies apparently agreed not to compete a 
year ago.
    But it is also important that we consider competition in 
health insurance across the country. As health insurance costs 
continue to rise, consumers face ever increasing premiums. At 
the same time, we hear complaints from physicians and hospitals 
of declining reimbursements and take-it-or-leave-it contracts 
that negatively affect patient care. New competitors face high 
barriers to entry, so allowing high levels of concentration can 
have serious and lasting effects for many years to come as the 
stats point to substantial evidence of rising consolidation in 
an already high concentrated health insurance market.
    In 299 of the 313 metropolitan areas studied by the 
American Medical Association last year, health insurance was a 
highly concentrated insurance under Justice Department 
guidelines. The number of health insurers nationwide has fallen 
by 20 percent since the year 2000, and this has clearly 
contributed to rising insurance rates. The AMA study found 
insurance rates were 12 percent lower in States with more 
competitive choices.
    The burden of ever rising insurance rates is borne 
particularly heavily by small businesses who find it 
increasingly difficult to offer health insurance for their own 
employees. And the problem of increasing concentration is 
compounded by the failure of the Justice Department to enforce 
the antitrust law in this insurance.
    According to the 2007 AMA study, in the last 12 years, out 
of 400 health insurance mergers, the Justice Department 
challenged only two. Vigorous competition in health insurance 
is essential to lowering health insurance premiums for 
consumers, for businesses, and to assuring adequate payments to 
health care providers.
    We on the Antitrust Subcommittee will pay close attention 
to competition in health insurance markets in the months ahead. 
We will consider holding hearings on health insurance 
competition at the national level. We plan to ask the GAO to 
study the impact of consolidation on rising health insurance 
prices.
    For all these reasons, today's hearing is a particularly 
relevant one for our Subcommittee, and I thank Senator Specter 
for his work on this very important issue. And so we now turn 
the gavel over to Senator Arlen Specter to preside at this 
hearing.
    Senator Specter.

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

    Senator Specter. [Presiding.] Well, thank you very much, 
Mr. Chairman. I appreciate the outstanding work you have done 
on the Antitrust Subcommittee of Judiciary and the outstanding 
work you have done as the senior Senator from Wisconsin now for 
20 years. It has been quite a responsibility, and you and I 
have worked together generally and on the Judiciary Committee, 
and this is a very important hearing, and I very much 
appreciate your authorizing it and turning the gavel over to 
me.
    Last year, I was Chairman of the Committee. I was about to 
say I ``owned the gavel,'' but you do not own anything in the 
U.S. Senate. It is all leased, 6 years at a time. And now I 
have it for part of the afternoon. So it is nice to have, and I 
will use it sparingly, and I hope effectively.
    As Senator Kohl has outlined, this is a very important 
hearing. The issue of health care in America is a dominant 
factor. Estimates nationally run as high as $1.7 trillion in 
health care expenses, and we have a situation where it is 
estimated that some 47 million Americans do not have health 
insurance. And no one knows better than I about the importance 
of good health.
    As you can tell, a Pennsylvania cable network is carrying 
this. People within the room can see it better, how pale and 
bald and thin I am compared to the way I used to be. I am just 
finished a bout of chemotherapy for Hodgkin's, and my slogan 
is: ``It is tough, but tolerable.'' But it is a rugged process. 
And I have had more comments about my hair style than I have 
about my positions on public policy. I have had some 
suggestions that I should wear a toupee, and I have rejected 
that. Some people say I should shave my head and become a sex 
symbol like Joe Frick or Henry Miller.
    [Laughter.]
    Senator Specter. And I have rejected that also on the 
ground that--two grounds: number 1, my wife is opposed to it; 
and, number 2, I am not qualified. So I will let nature take 
its course. I was very deferential to Senator Kohl in not 
bringing him into Mr. Frick and Dr. Miller's categories here.
    But in a very, very serious vein, it is a major matter. I 
note that the Department of Justice has given approval to the 
merger. I know that it is under consideration by the Insurance 
Department in Pennsylvania. And Congress has a keen interest 
with the Judiciary Committee and the Antitrust Subcommittee.
    We are aware of the considerations of economies which have 
been represented about what can be saved if there is a merger 
of Highmark and Independence Blue Cross. We are concerned at 
the same time about the market share. The projection has been 
made that Independence Blue Cross has about 30 percent of the 
market in the East, principally, and the estimate as to 
Highmark ranges from 27 to 42 percent of the market, so that 
competitors have a hill to climb, and perhaps a steep hill, and 
we will talk about that.
    Some of the competitors in the West have thought that the 
combination between UPMC and Highmark made it difficult for 
entry, and UPMC has taken a position in opposition. I have been 
interested to see that Temple University Medical System and the 
University of Pennsylvania have not taken a position. The 
Hospital Association has and the doctors' associations have. So 
there are a lot of competing interests.
    We had a hearing on this matter in Philadelphia last year, 
and we thought it would be a good idea to convene another 
hearing and to explore these very important issues.
    Senator Casey could not make the hearing today. He has been 
invited to attend, and I know he will be following it very 
closely because it is a big, big matter for Pennsylvania.
    You see the lights we have here. Green means you are within 
the first 4 minutes, and yellow means you are within the last 
minute; and when the red sign goes on, it means you are 
supposed to stop talking. We have a big panel today, and we had 
started with six witnesses, and I wanted to add two more 
besides Dr. Melani and Mr. Frick, who were in favor of the 
merger, to have a balanced presentation.
    So with my red light about to go on, 5 seconds left, I 
would ask all of you to stand and raise your right hands. Do 
you affirm or swear that the testimony you are about to give 
before this Committee, this Subcommittee, will be the truth, 
the whole truth, and nothing but the truth, so help you God?
    Dr. Melani. I do.
    Mr. Frick. I do.
    Ms. Scanlan. I do.
    Mr. Marshall. I do.
    Mr. Laign. I do.
    Mr. Balto. I do.
    Mr. Allen. I do.
    Mr. Harris. I do.
    Senator Specter. May the record show that each of the 
witnesses has answers in the affirmative.
    Our first witness today is Dr. Kenneth Melani, who is the 
Chief Executive Officer of Highmark. He began his career with 
the company in 1989 as a corporate medical director in the 
Medical Affairs Department, graduated summa cum laude from 
Washington and Jefferson College with a bachelor's degree in 
chemistry and biology, and received his M.D. from Wake Forest 
University.
    Thank you for joining us today, Dr. Melani, and we look 
forward to your testimony.

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

    Dr. Melani. Thank you, Senator, and good afternoon. My name 
is Dr. Ken Melani, and I am the President and Chief Executive 
Officer of Highmark. With me is Joe Frick, the President and 
Chief Executive Officer of Independence Blue Cross. We want to 
thank the Committee 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.
    Since we spoke to the Senate Judiciary Committee in April 
2007, we have been engaged in an extensive review process 
involving State and Federal regulatory agencies, with input 
from State and Federal public officials. This is an important, 
cooperative, and open process. Today, we continue this open 
dialog about how this combination will better serve the needs 
of the people of Pennsylvania.
    Our companies have a proud tradition of serving 
Pennsylvania as not-for-profit companies. For 70 years, IBC and 
Highmark have had a common mission: to help ensure that health 
care is available, affordable, and of high quality for all 
Pennsylvanians.
    Throughout our history, we have made health insurance 
programs available to everyone, regardless of age, gender, and 
health status. We have provided assistance to people in 
financial need, by subsidizing health insurance programs for 
children, lower-income individuals and families, and older 
adults. Moreover, we have provided financial support for health 
education and community health programs.
    At the same time, according to a study performed by a 
market research firm, Tripp-Umbach, Highmark and IBC have had a 
significant, positive impact on Pennsylvania, with a total 
annual economic impact of $4.2 billion on the State's economy. 
The companies employ approximately 18,000 people in high-
quality jobs in the State and purchase a significant amount of 
goods and services from Pennsylvania-based companies.
    This transaction, however, is not about the past or the 
present. It is about the future and about preserving our 
nonprofit status. And it is about laying the foundation for 
positive change in the way health care is delivered and paid 
for in Pennsylvania. Coming together, our two companies can 
remain a financially vibrant Pennsylvania-based company and 
achieve tangible savings and growth opportunities of more than 
$1 billion that will be used to address health care costs, 
quality, and access to medical care in Pennsylvania.
    This combination will also allow us to strengthen our 
contribution to the Pennsylvania economy--by the way we employ 
people, by creating new businesses opportunities for 
Pennsylvania-based businesses, and by supporting the community 
through programs and services that we have historically 
embraced.
    The proposed combination is important given the challenging 
health environment that exists today. Health care costs are 
rising dramatically. We know that the cost of health care is 
making health insurance less affordable for businesses today. 
As a result, fewer businesses are able to maintain health care 
coverage, and more people are going to the ranks of the 
uninsured. We are also seeing more people moving to public 
health insurance programs, which means more health care 
coverage is being financed through Federal and State government 
programs.
    The demographics of Pennsylvania also present challenges. 
The State has an aging population that is creating more demand 
for health care services. We also have an aging workforce in 
many industries, including health care. This places an added 
strain on the health care system as the aging population uses 
more medical services. Questions are also being raised about 
the quality of health care today and the variation in medical 
care from community to community for people with the same 
medical conditions.
    With these critical issues facing us across Pennsylvania 
and nationally, rapid change is occurring in health care. 
Consumers are taking a greater responsibility for their 
personal health care decisions and their costs. This change is 
creating the need for investments in technology so people can 
access their own personal health information and have programs 
available to better manage their own health.
    As these forces shape health care, two points have become 
very critical to business success. First, scale has become 
increasingly important to achieve greater efficiency and lower 
administrative costs. The scale of competition has shifted from 
a local to a regional and now a national basis. We have a 
growing need to be a multi-product, multi-market company to 
compete in the future, to spread our risks, and to better serve 
our customers. Second, there is a growing need for capital for 
investments to meet the marketplace demands that I outlined 
earlier.
    The health insurance industry is responding by 
consolidating. In the past 15 years, the top 20 insurers have 
substantially increased their share of subscribers in the 
commercial health insurance market. Even more significant, 
during the same period, large, well-capitalized for-profit 
insurers have gained a much larger share of commercial health 
insurance subscribers compared to not-for-profit health 
insurance companies.
    The largest players in health care today are WellPoint, 
United HealthCare, Aetna, and CIGNA, and anywhere from 13 
million up to 35 million subscribers reside in each of these 
companies. They have the scale, the product diversity, and the 
geographic diversity to spread their operating costs over more 
subscribers. They also can leverage their large subscriber base 
to obtain better pricing from national suppliers of laboratory 
services, durable medical equipment, radiology services, and 
pharmaceuticals--in contrast to Highmark and IBC who have, 
combined, 8 million members.
    Consolidation is not unique to the for-profit health 
insurance companies. It is happening in the Blue Cross/Blue 
Shield system in the United States as well.
    Today, there are 39 independent Blue Cross and Blue Shield 
companies. That is a third the number since 1980, when there 
were 115 such companies. In fact, Blue Cross/Blue Shield 
companies operate in multiple States. These companies have 
gained operating efficiencies and can better serve their 
customers.
    And Pennsylvania stands alone in that we have four 
independent Blue Cross/Blue Shield companies. It is problematic 
because we are operating less efficiently than we could be by 
investing in redundant technologies and capabilities that add 
more cost to the health care system.
    As the two companies have looked at the changing health 
care environment and the need for greater scale and more 
capital, it has become clear that the combination of IBC and 
Highmark is a natural fit that would bring significant benefits 
to the people of Pennsylvania. The two companies have almost 
identical missions and have worked together for over 50 years 
to better serve the community, through programs like the Caring 
Foundation. We also have complementary products. Highmark's 
vision, dental, and stop loss lines of business complement 
IBC's pharmacy benefit management--
    Senator Specter. Dr. Melani, how much longer will you 
require?
    Dr. Melani. About 30 seconds.
    Senator Specter. Go ahead.
    Dr. Melani. Complement IBC's pharmacy benefit management, 
third-party administration, and workers' compensation programs. 
Together, our two companies can offer a core blend of products 
to better serve our customers on a common platform.
    What is most important is that bringing our companies 
together will not lessen competition in the commercial health 
insurance market or reduce choice in any market in Pennsylvania 
in the future. Our subscribers will continue to have the same 
wide variety of choice from a competitive health insurance 
market as they have today.
    Although over 100 witnesses appeared at the recent 
Pennsylvania Insurance Department hearings--and many others 
have filed comments with the Insurance Department--we are not 
aware that any of our over 50,000 commercial customers have 
complained that they will have less choice for insurance the 
day after the transaction than they have today.
    And, last, as you both well know and have articulated, the 
United States Department of Justice has twice reviewed this 
transaction for consolidation of the two companies and both 
times cleared the transaction under the Federal antitrust laws.
    I thank you very much. I am going to turn it over to Joe to 
talk about the benefits of the consolidation.
    [The prepared statement of Dr. Melani appears as a 
submission for the record.]
    Senator Specter. I am going to ask everybody who testifies 
to stay within the time limit. Nine witnesses and a question-
and-answer session, which is very important, is going to run us 
very late. So please stay within the time limit.
    Dr. Melani, I do not intend to pursue questions after each 
witness, but I have listened to your testimony, and some of the 
generalizations you have made might be relevant to a concern on 
my mind. But I do not hear you addressing the fundamental 
question as to whether this merger, which purports to have 
economies of scale, has the potential to lower the premiums for 
health insurance, it will cost less for people to buy health 
insurance. How about that? That is what the consumers are 
interested in. How much is it going to cost them? Did you 
address that in your opening statement?
    Dr. Melani. Senator, I did not get into the detail, but Joe 
has some of that in his comments.
    Senator Specter. Never mind the detail. Is it going to 
result in lower cost to the consumer?
    Dr. Melani. It will result in lower administrative cost to 
the consumer. We are guaranteeing that we will fix our 
administrative fees flat for 2 years. The difficulty with the 
remaining part of health care costs is the variables; 90 
percent of the health care costs are really in the provider 
side of the equation in units used and units paid, and it is 
very difficult to put a cap on what happens in the cost of 
health care on that side of the equation with so many unknown 
variables in that side. But the part we do control, which is 
administrative cost, we absolutely will guarantee a benefit in 
lower premium from that perspective.
    Other things that we will do we hope will help with the 
other part of the health care cost equation, like investments 
in new technology, disease management, and other capabilities.
    Senator Specter. Dr. Melani, candidly, I do not understand 
much of what you just said. Talking about variables, talking 
about administrative costs, I heard you say the administrative 
costs will be reduced and that will have an impact on premiums. 
Well, administrative costs are only one aspect of a very, very 
big picture. I would like to see you tell this Subcommittee--if 
not this afternoon, later--what is the impact going to be to 
the consumer. I am going to come to--I do not consider that a 
detail. But we will listen to what Mr. Frick has to say about 
it. But I think we need something a lot more specific on that 
point because that is the whole issue. The generalization of 
administrative costs being reduced and that being passed on to 
the consumer is not the big-ticket item.
    We turn now to Mr. Joseph Frick, elected President and CEO 
of Independence Blue Cross in January of 2005, previously was 
Senior Vice President. Prior to joining IBC, he was Vice 
President of Human Resources at Philadelphia Newspapers, Inc.; 
received his undergraduate degree from the University of Notre 
Dame and an MBA from Loyola College.
    The floor is yours, Mr. Frick, for 5 minutes.

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

    Mr. Frick. Thank you, Senator, and I appreciate the 
opportunity to be before the Committee as well. As Ken said, 
our two organization have a proud tradition of serving our 
subscribers and our local communities as Blue plans, and we 
know we have a responsibility to promote the value and enhance 
the trust of the Blue brand, which serves more than one in 
three Americans.
    So while coming together is a logical extension of our 
historical partnership, we believe that the growth 
opportunities, the efficiencies, and the savings will enable us 
to achieve several real and important goals. And as you just 
articulated, first and foremost, we are committed to help make 
health insurance more affordable. It is the number 1 issue with 
our subscribers; we have a responsibility to do better on that 
issue.
    At the same time that our subscribers are demanding that we 
control costs, they also want us to invest in products and in 
services to help improve quality and health and health care 
outcomes and expand our efforts in promotion and wellness 
programs.
    Physicians, hospitals, and health care providers, who we 
pay 88 cents back for every dollar of premium that we take in 
from our customers, they are valued partners in our companies' 
mission of assuring access to high-quality networks of 
providers. And we are committed to maintaining these well-
established relationships and enhancing incentives to ensure 
the delivery of high-quality care and keeping costs manageable.
    We will continue to be a viable and successful leader in 
our communities, and we expect to generate new business, which 
can bring more jobs to Pennsylvania and stimulate additional 
business opportunities for Pennsylvania-based business.
    Finally, we need to be more effective and use technology, 
and this combination will enable us to be a company that is 
easier for our subscribers and providers to do business with.
    And by combining our two companies--and only by combining 
our two companies--will we be able to generate over $1 billion 
in additional economic benefits over 6 years. And this is new 
money beyond any commitments that our two companies have today.
    These dollars will be generated by business efficiencies 
and growth opportunities that our companies could not produce 
individually. And unlike with consolidations of for-profit, 
publicly held companies, we pledge that every dollar of these 
economic benefits will go back to improving health care in 
Pennsylvania.
    In addition to this $1 billion, we voluntarily agreed to 
extend the Community Health Reinvestment Agreement with the 
Commonwealth for an additional 3 years, an estimated $350 
million that can be used to help more Pennsylvanians obtain 
health care coverage.
    So for our subscribers, as Ken said, we pledge to freeze 
the administrative fees for 2 years. This represents $295 
million in tangible savings.
    With our new pharmacy business, we believe we can save 
another $285 million on prescription drug costs which goes 
directly back to our customers.
    We expect that an estimated $100 million of the 
efficiencies will be used to fund expanded health care quality 
programs--ePrescribing, personal health records, electronic 
medical records. Use of these tools leads to higher-quality 
care, fewer medication errors, and that does result in greater 
savings to subscribers in the long run.
    We will expand the best of the health promotion and 
wellness programs offered by our two companies, which will 
enable a healthier workforce to be more productive, consume 
fewer health services.
    We are proud of our longstanding relationships with 
physicians, hospitals, and providers. The value of our brand is 
based on the fact that we offer our customers high-quality 
provider networks, and they will remain important partners with 
us in the future.
    In the past few years, IBC and Highmark have invested in 
technology and pioneered a tool called NaviNet to simplify 
administrative transactions with physicians and hospitals. We 
will build on this capability so that physician offices and 
hospitals can spend more time to improve patient outcomes, 
patient safety, the health and wellness of their patients, and 
worry less about administrative tasks.
    And here is one very important point about providers. Not 
one dollar of the $1 billion in net economic benefits will 
result in any reductions in provider reimbursements.
    Over the past few years, Highmark and IBC have developed 
close working relationships with hospitals and physicians, 
partnerships focused on improving safety and reducing 
prescribing errors. The new company will expand these 
partnerships.
    Last, let me talk about how the consolidation will benefit 
our local communities. Last year, our two companies committed 
over $200 million in programs in the community, funding clinics 
and nurse scholarships, programs to reduce childhood obesity. 
And the new company intends to take all of these initiatives 
statewide. So together these commitments total $1 billion in 
new money, plus $350 million, in the Community Health 
Reinvestment Agreement.
    The consolidation is important for us to remain a viable, 
not-for-profit company to strengthen our commitment to the 
community and the economy of Pennsylvania. Do we expect to grow 
our business? Absolutely. And this business growth will be 
beneficial to Pennsylvania.
    No one company can solve the health care problems of this 
country alone, but we believe together this consolidation does 
lead to a pathway for positive change for 10 Pennsylvania and 
all of our Pennsylvania communities.
    Thank you both very much for your time and attention.
    [The prepared statement of Mr. Frick appears as a 
submission for the record.]
    Senator Specter. Well, thank you, Mr. Frick.
    You list a large number of innovations which you propose, 
and you say that they will be savings to subscribers in the 
long run. But I am still looking for something specific on 
savings now in the short run or within a year or two.
    You talk about $1 million in economic benefits over a 6-
year period. But the question in my mind is: Where is that 
going to go? When we talk in the question-and-answer session 
later, we will get into the $4 billion in reserves which 
Highmark has and the $2 billion in reserves which Independence 
Blue Cross has. And the question on my mind is: How much of 
this $1 billion that you are going to save over 6 years is 
going to go into reserves and how much is going to go to reduce 
premiums? I think if you talk about reduced premiums, you have 
a much more attractive proposition. When you have savings, 
economies of scale, that is really the money that comes out of 
the pocket of people, and reduced premiums allow more people to 
be covered. And you have a great many programs where you decide 
on the allocations of money, and you give the Commonwealth of 
Pennsylvania some money. But the Commonwealth of Pennsylvania 
has many sources of funds.
    You talk about people who pay your premiums. This 
Subcommittee is interested to know what savings there would be 
for them and what lower premiums would enable more people to 
have health insurance, would not have to go looking for it 
someplace else.
    Well, those are matters which I would like you to address, 
Mr. Frick, and we will come back to it in the question-and-
answer session. Our next witness is Ms. Carolyn Scanlan, the 
President and CEO of The Hospital and Healthsystem Association 
of Pennsylvania since 1995; undergraduate degree from Skidmore 
College and a master's degree in health services administration 
from Russell Sage College. Thank you for joining us, Ms. 
Scanlan, and we look forward to your testimony within 5 
minutes.

STATEMENT OF CAROLYN F. SCANLAN, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, THE HOSPITAL AND HEALTHSYSTEM ASSOCIATION OF 
             PENNSYLVANIA, HARRISBURG, PENNSYLVANIA

    Ms. Scanlan. Thank you, Senator Specter, and thank you, 
Chairman Kohl, for allowing us the opportunity to speak today. 
As you know, Senator, the association represents and advocates 
for the more than 250 hospitals in Pennsylvania, and we 
appreciate the opportunity to present our views in regard to 
the proposed merger.
    Over the past year, the association has raised questions 
and concerns with both Federal and State officials regarding 
the proposed merger of these two plans and has called for a 
thorough review by Government. Most recently, in hearings 
before the Pennsylvania Commissioner of Insurance, we have 
taken the position of opposition as this merger is currently 
proposed. We think it is important for the regulators to review 
the current health insurance marketplace in Pennsylvania, which 
we believe is already skewed toward Highmark and Independence 
Blue Cross' advantage, and a merger would create a health plan 
with an overwhelming presence or ``footprint'' across the 
Commonwealth.
    We have expressed four areas of concern, two of which are 
germane to this hearing. The four areas are the issues around 
competition, provider contracting, social and community 
mission, and health insurer accountability.
    The first two--competition and provider contracting-would 
fall under the auspices of the Federal agencies, and we were 
disappointed that another early termination of review was 
granted to the plans by the Department of Justice.
    With the amount of penetration of already insured people 
contained within these two plans--and Chairman Kohl and you 
both referenced those numbers--we have continued concern about 
the consolidation.
    Market competition in health insurance is important, we 
believe, in achieving competitive premiums--I think as you have 
pointed out, Senator Specter--for employed groups and, from the 
perspective of hospitals, competitive payments to health care 
providers. Both Highmark and Independence Blue Cross already 
enjoy dominant positions, which make it difficult for that kind 
of competitive payment.
    I am going to leave it to others on this panel to discuss 
the underlying legal issues of competition, monopoly, and 
monopsony, which I know that their testimonies will cover. But 
it is the concern of hospitals and physicians regarding the 
monopsony power that it has not been properly analyzed and 
evaluated and serve as a center of HAP's concerns regarding the 
impact this merger will have. And so at the State level--and we 
would have, before the Department of Justice, also asked for 
very specific issues in regard to provider contracting, most-
favored-nation issues, all product clauses. We are asking for 
the ability for providers to jointly negotiate, concerns about 
the development of an arbitration process, and, last, issues 
around allowing clinically and financially integrated 
organizations to negotiate as a unit with the merged plan.
    There are three things that we think that this 
Subcommittee, that you, Senator, could address in the near 
future.
    The first is that we would request a briefing from the 
Antitrust Division as to why the Division failed to thoroughly 
investigate the merger. As you know, they do not have to issue 
any kind of detail on their review, and that would be helpful.
    Second, the line of case law that permits the type of 
market allocation the Blues are involved in is still an 
unsettled law of antitrust law. And we would ask, in addition 
to Chairman Kohl's request of the GAO to look at rising health 
insurance prices, that the GAO also do a study looking at the 
state of the law in this area and whether Congress needs to 
ensure that joint ventures that undermine competition, such as 
the Blues' process of licensure, would be also reviewed from 
the perspective of competition in the marketplace.
    And then, third, as you, along with Chairman Kohl, your 
colleague on the Subcommittee Senator Grassley, as well as 
other colleagues in the Senate, Senator Durbin and Senator 
Whitehouse, said to the FTC, we would ask that both the 
Department of Justice and the FTC take immediate action to 
approve the hospitals' request for more guidance on clinical 
integration by approving in some manner the working paper that 
was recently developed by a group of antitrust luminaries on 
behalf of the AHA.
    The rest is clearly contained in my testimony, and so I 
thank you for the opportunity to ask for these three items 
today.
    [The prepared statement of Ms. Scanlan appears as a 
submission for the record.]
    Senator Specter. Ms. Scanlan, I note that neither the 
Hospital of the University of Pennsylvania nor Temple has taken 
a position here, and when the times comes for Q&A, I would like 
you to comment on the solidity of the Hospital Association and 
the opposition which you have articulated.
    Our next witness is Mr. Samuel Marshall, President and CEO 
of the Insurance Federation of Pennsylvania. He has served as 
counsel to the Insurance Commissioner, previously chief counsel 
to the Medical Catastrophic Loss Trust Fund; bachelor's degree 
from Haverford and law degree from Villanova.
    Thank you for coming in today, Mr. Marshall, and we look 
forward to your testimony, 5 minutes.

 STATEMENT OF SAMUEL MARSHALL, PRESIDENT, INSURANCE FEDERATION 
       OF PENNSYLVANIA, INC., PHILADELPHIA, PENNSYLVANIA

    Mr. Marshall. Thank you. Sam Marshall with the Insurance 
Federation of Pennsylvania. We represent the commercial 
carriers that we have been talking about obliquely. We 
represent them in all lines of coverage.
    I do not think consolidations are inherently good or bad, 
whether for competition or consumers. I do think that this one, 
absent the conditions that we and others have recommended, will 
be bad on both counts.
    The underlying question is whether competition, even more 
so than consolidation, is good or bad. And I do think that this 
consolidation will impact competition First off, it gets rid of 
the potential for Highmark and IBC to compete with each other. 
They may not intend to do that now under current management, 
but managements change.
    Second, it is going to make it more difficult for other 
insurers to compete. There is a lot of talk about the ability 
of other carriers to raise capital. Capital only goes into 
markets that are open and viable. As you have a dominant, an 
increasingly dominant market in Pennsylvania, that does not 
attract capital for the smaller players.
    But going to the question of is competition good or bad, it 
is a legitimate question in the world of health reform. I think 
that competition is a hallmark of any viable insurance 
marketplace. I think it makes sure that consumers have choices. 
I also think it makes sure that insurers, no matter how big or 
small, face both the opportunities and the penalties that come 
from either answering or failing to answer consumer demands.
    I am a Pennsylvania-centric person, so I will talk about it 
in terms of examples that we have seen in Pennsylvania over the 
last 20 years.
    In our Commonwealth, veritably every line of insurance has 
faced the same problems that you see in health insurance now, 
namely, consumers not getting the coverage they want at a price 
they can afford. The only answer that has worked in all other 
lines has been to foster competition. The most prominent 
example, especially for those from Philadelphia, is our auto 
marketplace. Back in the 1980s, it was a very limited and 
expensive market. A number of reforms were tried. The only one 
that worked was a law in 1990 that was spearheaded by the late 
Governor Robert Casey, hardly an ally of the insurance 
industry. But he recognized the need to encourage and reward 
new carriers, new ideas, and more competition.
    As a result, over the past 18 years, the rates have been 
flat, and there has been broad availability of coverage for all 
drivers. Would that we had the same result in health insurance.
    It has worked in other lines, too. The second more 
prominent example in Pennsylvania would be workers' 
compensation insurance. Again, it faced many of the same 
problems you see in health insurance now. They enacted reforms 
that brought in new carriers, new ideas and more competition. 
And that has worked well in that market.
    What we have not seen in Pennsylvania are reforms that have 
encouraged competition in health insurance, and I think that is 
one of the main reasons we have not seen anywhere near the 
progress that consumers need.
    I do recognize that competition alone is not the only 
answer, but I would say that if you do not have a strongly 
competitive health insurance market, all the best intentions, 
whether they come from Highmark and Independence Blue Cross or 
from smaller carriers, you simply do not have the cattle prod 
of the consumers choice making sure that they come to fruition.
    Again, I do not think that means that consolidations, even 
those of this magnitude, are inherently flawed or fatal to the 
prospect of competition; but I do think that consolidations, 
especially of this magnitude, have to be scrutinized and only 
approved if they come with the types of conditions that we and 
others have recommended in the proceedings before the Insurance 
Department.
    One note in closing: There was an op-ed piece in Sunday's 
New York Times by William Poole of the Cato Institute on Fannie 
Mae and Freddie Mac, and I do not get down to Washington much, 
but I know that is a great debate here. What he talked about 
was the danger that we are all seeing across the country in 
allowing a crucial market to have only two operators. And he 
pointed out that ``markets work best when numerous firms 
compete against each other.'' I think that is worth remembering 
here: Any market that becomes a private monopoly is in danger 
of becoming a hostage to that monopoly, no matter how extensive 
or well intentioned the regulatory oversight. It is not just 
that competition gets stifled, and with it the pressure to do 
better. It is that consumers can be harmed by the absence of 
the checks, balances, and safety valves that come from a 
competitive market.
    Thank you for the chance to be here. I am happy to answer 
any questions.
    [The prepared statement of Mr. Marshall appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Marshall.
    Our next witness is Mr. Michael Laign, President and CEO of 
the Holy Redeemer Health System, located in Huntingdon Valley, 
Pennsylvania; previously served as Executive Vice President of 
the Frankford Health Care System; bachelor's degree from the 
University of Pittsburgh and an MBA in hospital and health care 
administration from Temple.
    Thank you for coming in today, Mr. Laign, and we look 
forward to your testimony, 5 minutes.

 STATEMENT OF MICHAEL B. LAIGN, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, HOLY REDEEMER HEALTH SYSTEM, HUNTINGDON VALLEY, 
                          PENNSYLVANIA

    Mr. Laign. Thanks for having me here. Holy Redeemer Health 
System is a nonprofit organization which provides a wide range 
of health care and health-related services, including an acute 
care hospital, home health and hospice services in Pennsylvania 
and New Jersey, two skilled nursing facilities, assisted 
living, a retirement community, low-income housing, an active 
living community, and a transitional housing and 
resocialization program for homeless women and children in 
North Philadelphia.
    We employ over 4,000 people. Every day, we touch 20,000 
individuals. Twenty-five percent of our revenue is derived from 
IBC and/or IBC family of products. We offer IBC to our 
employees as one of their health insurance offerings. We also 
offer a competitor to our employees as well. I appreciate the 
opportunity to share our views with the Subcommittee on the 
proposed merger and consolidation of IBC and Highmark.
    While I share some of the fears and concerns expressed by 
some of the other witnesses here today or that will be 
expressed, on balance I see this merger as an opportunity to 
address needed change to the health care delivery and financing 
system in Pennsylvania. I believe a Blues plan whose core 
business and interests are focused on Pennsylvania is in our 
collective long-term interest. Holy Redeemer Health System 
would rather deal with a plan and a plan leadership with a 
vested interest in making Pennsylvania a better place to live 
and work.
    I know arguments have been made on both sides of the issue 
about the competition or lack of competition between Highmark 
and IBC in southeastern Pennsylvania and other parts of the 
State.
    In a sense both arguments are ``right,'' but both miss the 
underlying long-term challenge we face in making our health 
care system better for all stakeholders.
    From my perspective, our health care system has and will 
continue to suffer from an abundance of short-term thinking, 
everyone, including Government, is out to cut the best deal for 
themselves at the expense of creating an affordable, 
sustainable system that serves all of our interests.
    I think we all recognize both in Pennsylvania and across 
the Nation that the rate of increase in health insurance costs 
is not sustainable over the long run. Employers, consumers, 
State and the Federal Government are all struggling to maintain 
coverage not to mention the continuing growth of under- and 
uninsured citizens.
    In short, for us in Pennsylvania I think the merger between 
Highmark and IBC represents an opportunity to begin to 
rationalize and transform the health care system in the 
Commonwealth for the future. This is a once-in-a-generation 
opportunity to help reform and shape the health care system 
through an insurance enterprise that by all estimates would be 
responsible for over 50 percent of the health care lives and 
revenues in our State.
    The merger done properly, with the right leadership, 
appropriate safeguards and appropriate, sustained Government 
oversight, could help to, as it has been mentioned: reduce 
administrative costs; improve quality; achieve greater 
uniformity in our patient safety and process improvement 
efforts; improve access to coverage; enhance the affordability 
of coverage; and, very importantly, create a more transparent 
system.
    If coordinated with complementary and consistent Government 
health programs and policies, it should be possible to help 
drive many needed reforms of Pennsylvania's health care system. 
In making this case, I fully understand how difficult it will 
be to achieve these kinds of objectives. But not seizing this 
opportunity will result in business as usual.
    A couple of examples of how we have seen glimpses of what 
the future could be.
    IBC has engaged the provider community in a series of 
partnerships. One is with the Health Care Improvement 
Foundation, an organization that I chair. That organization 
formed the Partnership for Patient Care to coordinate patient 
safety and clinical process improvement efforts. Its focus is 
to accelerate the effective adoption of evidence-based clinical 
practices by pooling resources, knowledge, and efforts for all 
health care providers in our region. Every acute care hospital 
in the Delaware Valley has participated in the partnership, and 
it has now been expanded to long-term care providers and other 
stakeholders.
    On another level, my system and IBC and Cardone Industries, 
a major manufacturer of auto parts with over 4,000 employees in 
the Philadelphia market, have collaborated to create a virtual 
partnership for the provision of high-quality, cost-effective 
health care, wellness screenings, and illness prevention and 
education services for Cardone and their employees--clearly an 
effort not only to improve care, but to reduce costs so those 
employees and those jobs would stay in Pennsylvania.
    As I indicated previously, any merger of Highmark and IBC 
must include some important safeguards or conditions built into 
the approval process. I have outlined a number of those in my 
testimony that was written, so I am not going to go into those 
today. But I would be happy to discuss those--I am looking at 
the time--during the question-and-answer time.
    [The prepared statement of Mr. Laign appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Laign.
    We turn now to Mr. David Balto, Senior Fellow, Center for 
American Progress, focusing on competition and health care; 
previously served at the Antitrust Division of the Department 
of Justice and at the Federal Trade Commission; received his 
undergraduate degree from the University of Minnesota and his 
law degree from Northeastern University School of Law. The 
floor is yours, Mr. Balto, for 5 minutes.

 STATEMENT OF DAVID BALTO, SENIOR FELLOW, CENTER FOR AMERICAN 
                   PROGRESS, WASHINGTON, D.C.

    Mr. Balto. Thank you, Senator Specter. CAP wants to applaud 
the Chairman and appreciate the Chairman and the Ranking Member 
for all of their hard work and the recent hearings on many 
antitrust issues which deserve a lot of scrutiny.
    I am here representing CAP, several consumer groups, and 
the National Association of Self-Employed. My testimony 
outlines at the beginning the alarming trend of consolidation 
that the Chairman spoke of. The groups I represent feel that 
every day. The National Association of Self-Employed find it 
increasingly difficult to provide insurance coverage for their 
members and their employees, as consolidation has led to 
increasing premiums.
    On the consumer side, this increasing consolidation has led 
to a dramatic increase in the number of uninsured which have 
increased by 17 million to one out of every seven Americans 
over the past several years.
    The Highmark-IBC merger may seem complex, but is really 
relatively simple. Let's go back to Justice Potter Stewart and 
see what he had to say about the antitrust laws. Thirty-five 
years ago, he instructed us, ``The central message of the 
Sherman Act is that a business entity must find new customers 
and higher profits through internal expansion--that is, by 
competing successfully rather than by arranging treaties with 
its competitors.''
    These two companies had a treaty. It was a non-compete 
agreement. And when that agreement expired, they decided to 
make that treaty not to compete permanent. And that treaty 
should be stopped because it will prevent competition in 
southeast Pennsylvania.
    What are the simple facts?
    First, IBC and Highmark used to compete in southeast 
Pennsylvania.
    Second, in 1996, they entered into an agreement not to 
compete. It expired in 2006, and a few weeks later, they 
entered into this agreement. They could compete right now 
today. The consumers in southeast Pennsylvania could receive 
the benefits of that competition.
    Third, Highmark's CEO has been explicit about the company's 
desire to be a statewide provider of Blue Cross/Blue Shield 
services. Their incentive to expand to the rest of the State is 
clear.
    Finally, we know what the impact of that expansion would 
be. Highmark entered into central Pennsylvania 6 years ago, and 
within that 6-year period, because they rolled up their sleeves 
and they competed, they have acquired a 33-percent market 
share. And because of that, Senator, CBC rolled up its sleeves, 
and it is competing more aggressively. And because of all of 
that competition, employers of all sizes, consumers, and 
providers are doing better.
    Now, imagine, Senator Specter, if it is 2001 and instead of 
Highmark-IBC, it is Highmark-CBC, and they came in before you 
and they said, ``Please let us merge. We have no desire to 
enter into central Pennsylvania.'' And if the antitrust 
authorities had permitted that merger, all of that competition 
that has occurred over the past 6 years would be lost.
    Now, one of the things that the parties say is we have no 
intent to enter, but decades of Supreme Court and lower court 
decisions have said that when you look at the evidence of entry 
in a potential competition case, you do not accept their 
assertions at face value. You do not rely on subjective 
evidence. You look at objective evidence, in part because 
subjective evidence is just basically the party's statement. 
And the objective evidence here tells a compelling story that 
Highmark has the incentive and ability to enter, and that entry 
would improve competition in southeastern Pennsylvania.
    In this regard, I have to say as a former official and 
antitrust enforcer for over 15 years, it is particularly 
disturbing that the Justice Department cleared this 
investigation in less than 60 days on over two occasions. If 
you did an investigation in less than 60 days, you would not 
have the time to actually test propositions and seek objective 
evidence.
    Now, let me touch on efficiencies. These parties have made 
a scale argument: We need this merger because we need to 
compete better against big guys. That reminded me of the same 
argument that was made in Philadelphia National Bank, when 
Philadelphia National Bank wanted to acquire another bank in 
Philadelphia so it could compete better against the banks in 
New York. And Justice Brennan said, no, that is not kosher. You 
cannot go and deprive the consumers of Philadelphia of 
competition just because you want to compete more aggressively 
elsewhere.
    The law makes it clear that efficiencies have to be merger 
specific, that there is no less anticompetitive way to achieve 
these efficiencies. These are two successful, extremely 
profitable, extremely talented companies, and I would venture 
to say that on their own they would be able to achieve most of 
the efficiencies they seek through this merger. Thank you for 
the opportunity to testify, and I look forward to your 
questions.
    [The prepared statement of Mr. Balto appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Balto.
    Our next witness is Mr. Henry Allen, Senior Attorney at the 
American Medical Association, working primarily on antitrust 
issues. Prior to joining AMA, he practiced in health care law 
and litigated cases in forums ranging from the Superior Court 
of Alaska to the U.S. Supreme Court. Graduated magna cum laude 
from Washington University, bachelor's degree in economics, and 
a J.D. master's in public administration.
    Thank you for coming in today, Mr. Allen, and the floor is 
yours for 5 minutes.

   STATEMENT OF HENRY S. ALLEN, JR., COUNSEL, PRIVATE SECTOR 
  ADVOCACY DEPARTMENT, AMERICAN MEDICAL ASSOCIATION, CHICAGO, 
                            ILLINOIS

    Mr. Allen. Thank you, Senator Specter. The American Medical 
Association commends this Subcommittee for leadership in 
recognizing the threats that unchecked health insurer 
consolidations pose to the delivery of health care in 
Pennsylvania and across the country. We appreciate the 
opportunity to present testimony on consolidation in the 
Pennsylvania health insurance industry.
    In Pennsylvania, where health insurer entry from outside 
the State has been difficult and little incumbent competition 
exists, the potential competition that Highmark poses to IBC is 
the only market mechanism that protects patients from higher 
premiums.
    This potential competition also offers the prospect that 
physicians practicing in IBC's territories will have somewhere 
else to sell their services. A merger would foreclose this 
alternative and deprive physicians of the ability to negotiate 
competitive health insurer contract terms that touch on every 
aspect of patient care. Accordingly, the AMA opposes the 
proposed merger of Highmark and IBC.
    The market shares of Highmark and IBC are more than 
sufficient for the merger to be found presumptively illegal. 
The merger would result in a combined entity with more than 70 
percent of the fully and self-insured commercial health 
insurance market in the Commonwealth. In short, this proposed 
merger is so anticompetitive that it results in a statewide 
monopoly. This monopoly characterization is buttressed by the 
substantial barriers to market entry. Health insurers that have 
successfully competed in other parts of the Nation have barely 
any presence in Pennsylvania. Because there has been little to 
no entry in either of Highmark's or IBC's dominant market 
areas, this merger would permanently eliminate each firm's 
biggest potential rival.
    Highmark and IBC assert that they do not compete in the 
same market, that they operate in different regional markets. 
Even assuming the insurance market in Pennsylvania is regional, 
the merger will substantially reduce competition. IBC is 
dominant in its alleged regionalized market. In the absence of 
a merger, Highmark's entry as a competitor would result in a 
substantial deconcentration of IBC's regional market.
    IBC has the means, other than through merger, to enter 
IBC's territory. In the past, Highmark would have marketed its 
Blue Shield Plan in IBC's territory but for Highmark's 
agreement with IBC to exit that territory for 10 years. That 
market division agreement expired around the time this 
consolidation was proposed. Today, Highmark is free, capable, 
and desirous of offering its services in the southeastern 
Pennsylvania territory where IBC presently sells.
    There is no meaningful difference between this potential 
competition and actual competition. As Areeda and Hovenkamp 
observed in the leading treatise on antitrust law, once a firm 
like Highmark is recognized as a factor ``in future predictions 
about the market, that firm must be counted as a competitor 
even though that firm has not yet won its first bid or indeed 
has not made any bid at all.''
    To reason otherwise understates the competitive significant 
of mergers that, like here, occur in highly concentrated, 
noncompetitive markets. Indeed, where the merger results in a 
market share of monopoly proportions, the merger should 
constitute a Section 2 offense of maintaining a monopoly 
because it eliminates either actual or potential competition.
    DOJ's clearance of this merger greatly concerns the AMA. 
The Government has challenged only three of more than 400 
mergers involving health insurers and managed care 
organizations over the past 12 years. As a result, markets for 
third-party payers, especially commercial insurance plans, have 
grown increasingly concentrated. Studies show overwhelmingly 
that in this market environment, physicians across the country 
have virtually no bargaining power with dominant health 
insurers.
    Competition is essential to the health of the free market. 
Competition among insurers forces them to hold the line on 
premiums and provide improved service. Accordingly, the AMA 
respectfully requests that this Committee urge the Federal 
antitrust enforcement agencies to more rigorously enforce the 
antitrust laws with respect to proposed health insurer 
consolidations.
    Thank you, Senator. I would be happy to answer questions.
    [The prepared statement of Mr. Allen appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Allen.
    We now turn to Dr. Barry Harris, Principal and Board 
Chairman of Economists, Incorporated, former Deputy Attorney 
General for Economics in the Department of Justice Antitrust 
Division; bachelor's degree in mathematics from Lehigh 
University and Ph.D. in economics from the University of 
Pennsylvania.
    We welcome you here, Dr. Harris, and the floor is yours for 
5 minutes.

STATEMENT OF BARRY C. HARRIS, BOARD CHAIRMAN, ECONOMISTS, INC., 
                        WASHINGTON, D.C.

    Mr. Harris. Thank you, Senator. As you said, my name is 
Barry Harris, and I am an economist. I have been doing work in 
antitrust and competition issues for more than 30 years. And as 
you pointed out, I was at the Department of Justice. I was the 
chief economist there. My official title was Deputy Assistant 
Attorney General. I hope to be brief today.
    My full testimony was presented to the Pennsylvania 
Insurance Department, and it is part of the public record. The 
analysis considered relevant markets; it considered competition 
within these relevant markets; it considered potential 
competition; and it considered other issues as well.
    The overall conclusion I reached is that there is no basis 
to conclude that the proposed consolidation of Highmark and IBC 
would reduce competition. The reason for this is simple. 
Highmark and IBC do not compete with each other in the sale of 
commercial insurance for any customer. That is--and this is 
important--no customer will have fewer choices after the 
transaction than they do today.
    Now, as you have heard, there is a lot of speculation about 
issues of potential competition, and at least what I have seen 
is it is just speculation. I agree with Mr. Allen and Mr. Balto 
that it should be based on objective criteria. And perhaps you 
may want to ask Dr. Melani later, but he laid out at the PID 
hearings a list of reasons why Highmark does not believe it is 
in its interest to enter southeast Pennsylvania in the absence 
of this transaction.
    Now I would like to turn to my overall conclusion, which is 
that the transaction will not harm competition. Again, as other 
people have said, the Department of Justice has reviewed this 
transaction twice. My understanding of that process is a bit 
different than has been presented.
    Thousands of documents were presented to the Department of 
Justice. The parties gave the Department of Justice additional 
time so that it could complete its investigation. The 
Department looked at direct competition; it looked at potential 
competition; it considered sales of both commercial and non-
commercial products. And twice the Department of Justice 
provided clearance.
    My take on that is that the Department of Justice reached 
the same conclusions that I have reached, and that is that the 
proposed consolidation of Highmark and IBC will not lessen 
competition in any insurance market in Pennsylvania.
    One last point. There have been several claims that there 
is a State market here and that the shares are very high. And 
it is a basic tenet of antitrust law and competitive analysis 
that shares only make sense in a properly defined market. And 
there is no State market for health insurance products in 
Pennsylvania. If you are a consumer in Philadelphia, you have 
no ability to access the same products that are offered 
consumers in Pittsburgh. The prices may differ; the products 
themselves may differ.
    Basically, the product in Philadelphia is not a substitute 
for Pittsburgh and vice versa. And it is true throughout the 
State. So, consequently, any shares or conclusions drawn on the 
whole State do not provide you with the basis for appropriate 
economic and competition analysis.
    Thank you, and I, too, would welcome questions during the 
question-and-answer period.
    [The prepared statement of Mr. Harris appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Harris.
    Our final witness is Dr. Henry Miller, Managing Director of 
Navigant Consulting, Inc. More than 35 years' experience in the 
field of health care practice, a CPA, Dr. Miller developed 
research costing as a method for measuring costs of health 
services; a bachelor's degree and an MBA from the City College 
of New York, Ph.D. from the University of Illinois.
    Thank you for joining us, Dr. Miller, and we look forward 
to your testimony for 5 minutes.

    STATEMENT OF HENRY MILLER, MANAGING DIRECTOR, NAVIGANT 
               CONSULTING, INC., WASHINGTON, D.C.

    Mr. Miller. Thank you, Senator Specter. As you indicated, I 
have worked on health insurance and health finance issues for 
more than 30 years, including work for clients based in 
Pennsylvania, in other States, and for the Federal Government.
    I was asked by UPMC Health Plan to analyze the impact of 
the proposed consolidation of Highmark and Independence Blue 
Cross and to testify today on my findings. UPMC is an 
integrated delivery and financing system and the second largest 
nongovernmental employer in Pennsylvania. UPMC Health Plan 
provides commercial group coverage to over 6,000 employers with 
approximately 330,000 members, Medicare and Medicaid coverage 
to another 185,000 beneficiaries, and services an additional 
700,000 members through a variety of other benefit programs 
such as behavioral health, CHIP, short-term disability, 
employee assistance, and wellness programs.
    I have prepared a detailed report for UPMC Health Plan on 
the impact of the proposed Highmark and IBC consolidation, and 
I would be happy to provide a copy of this report to the 
Committee if it is requested. Today, in my testimony I want to 
concentrate on four issues:
    First, briefly identify the markets that are going to 
affected by the consolidation;
    Second, cite evidence that previous health insurer 
consolidations have not led to administrative savings;
    Third, that Pennsylvania's hospitals will be adversely 
affected by the increased financial pressure that will result 
from the combined entity's leverage during hospital contract 
negotiations;
    And, finally, that the proposed consolidation will 
adversely change the market for health insurance in 
Pennsylvania to the detriment of health care consumers and 
providers.
    There was just some recent discussion on the issue of 
whether the market was a statewide market or a regional market. 
My point would be that the commercial health insurance market 
is a complex market that includes markets that are separate for 
individuals who are purchasing coverage for small groups and 
for large groups. And at least some of those customers operate 
in a statewide market.
    Understanding that the health insurance market operates on 
a statewide basis for some customers is important because the 
consolidation of Highmark and Independence Blue Cross will 
create a single entity that will obviously have a dominant 
market share in the State. In testimony that I provided to the 
Pennsylvania Insurance Department, I carefully calculated 
market share for Highmark and IBC in Pennsylvania and 
determined, based upon the 12 million people who live in 
Pennsylvania and the 7,649,000 who have commercial health 
insurance, that approximately these two--not approximately, but 
these two entities combined will cover 68.8 percent of the 
population.
    When considering a merger or a consolidation, it is 
important to determine who will benefit. Reduced administrative 
costs are commonly cited as a benefit of consolidation. Despite 
the fact that this benefit is cited frequently, it is important 
to understand that few, if any, health insurance company 
mergers in the past 10 years have resulted in lower 
administrative costs. The complexity of health insurer 
operations and their reliance on information technology has 
meant that administrative savings have been elusive.
    Last year, I served as the financial consultant to the New 
Jersey Commission on Rationalizing Health Care Resources. The 
commission was established by Governor Corzine to address 
concerns about the financial instability of many of the State's 
hospitals. My review of hospital finances in Pennsylvania 
raises similar questions about hospitals' ability to withstand 
increased financial pressure. Pennsylvania hospitals have lower 
margins, less liquidity, and are less able to cover their 
existing debt than the average U.S. hospital. More importantly, 
Pennsylvania hospitals have physical plants that are more than 
14 percent older than the plant of the average U.S. hospital. 
The consolidated Highmark/IBC entity will have extraordinary 
leverage in hospital contracting at a time when hospitals are 
considerably less able to withstand that leverage. Analyses 
that I have completed indicate that reimbursement rates are 
lower and premiums are higher in States that have health plans 
with large market shares.
    Because of their size, Highmark and IBC already have 
significant competitive advantages in the Pennsylvania market. 
Their advantages are evidenced by the difficulty other health 
insurers have in competing in Pennsylvania as compared to other 
States. If the consolidation is approved, the combined entity 
will provide coverage to at least two-thirds of Pennsylvania's 
residents and have substantial financial resources that can be 
used to further increase their market share. Consolidation will 
certainly not make it easier for other health insurers to 
compete in Pennsylvania and likely will make such competition 
more difficult than it is today. Furthermore, no meaningful 
benefits will accrue to the residents of Pennsylvania that 
offset the impact of the resulting decline in competition.
    Thank you.
    [The prepared statement of Mr. Miller appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Miller.
    Beginning with you, Mr. Laign, you testified that this 
merger would enhance affordability. Would you amplify that? Do 
you believe that this merger will make health insurance more 
affordable?
    Mr. Laign. I believe that this will give us an opportunity 
to experiment and try sort of innovative solutions, just as I 
mentioned with the Cardone organization.
    Senator Specter. Experiment?
    Mr. Laign. Or pilots, however you want to look at it, that 
we will be able to, in fact, work collaboratively not only 
within the Philadelphia market but across the State.
    Senator Specter. Well, when you talk about experimentation, 
it is speculative as to what the result will be. If you--
    Mr. Laign. Well, I can tell you in a very--
    Senator Specter. If you have a merger, you have got 
scrambled eggs. If it does not work out, then what? But your 
statement was that you concluded it would enhance 
affordability.
    Mr. Laign. I did in my testimony talk about a catastrophic 
plan that I suggested that both health insurers may want to 
look at that I think would be one potential way that we could 
make health care affordable. What I was just alluding to, 
though, was the relationship that we have developed with 
Cardone, and I can tell you that is a partnership between IBC 
and industry and a health care provider all geared to providing 
excellent health care; also, by the way, reducing cost, and a 
big part of that is through the reduction in utilization of 
services and the more efficient utilization of services.
    For example, we are now looking at ways together to make 
sure that their employees and their dependents receive all the 
pharmaceuticals that are prescribed for them. People do not 
always take their prescriptions according to the way the doctor 
has ordered. By working together, we think we can create, 
again, innovative models to address those types of issues. 
Improving care, reducing cost.
    Senator Specter. Ms. Scanlan, you cite in your testimony 
that in central Pennsylvania where Highmark competes with 
Capital Blue Cross, reimbursement rates for doctors and 
hospitals are higher. Could you amplify that? Does that 
competition result in more compensation for doctors and 
hospitals, as your statement specifies?
    Ms. Scanlan. What I can adequately say--and we have some 
charts attached to the testimony that we submitted--is that the 
operating margins of the hospitals in the middle of the State 
are higher than the operating margins in the rest of the State. 
Because of the way these agreements are entered into between 
the plans and the individual hospitals, I am not privy to the 
absolute numbers of what those payments are. But when we look 
at the financial stability or status of the hospitals in the 
central part of the State--
    Senator Specter. You say their operating margins are 
higher, but that is not really responsive on the issue as you 
state in your written testimony, that reimbursement rates for 
hospitals are higher. Is that so?
    Ms. Scanlan. I cannot, as I said before, speak to the 
absolute amount of what those reimbursement rates are. The 
assumption is that it is causative, that the rates are higher, 
which leads to higher operating margins.
    Senator Specter. I noted earlier that Temple University 
Health System and the University of Pennsylvania Health System 
have not taken stands on this proposed merger. Can you tell us 
why?
    Ms. Scanlan. I do not know why the individual systems have 
not taken--or have spoken in a more neutral fashion. Both of 
those entities are represented on the Hospital Association 
Board. The process that we went through in the association was 
to hold regional hearings amongst our members, have a special 
task force, and then the board evaluated and deliberated about 
this at numerous meetings. Both the CEO of Temple and the COO 
of the University of Pennsylvania Health System sit on both the 
HAP Board and the HAP Executive Committee, and I can tell you 
that it was a unanimous decision on the part of the board to 
oppose the merger as proposed.
    Senator Specter. Did Temple or Penn oppose the merger in 
your deliberations on the board?
    Ms. Scanlan. No.
    Senator Specter. They took no position?
    Ms. Scanlan. They, along with the rest of the board, 
unanimously took the position to oppose the merger as proposed.
    Senator Specter. So they did oppose the merger.
    Ms. Scanlan. Within the association.
    Senator Specter. Mr. Harris, are you representing UPMC here 
today?
    Dr. Harris.
    Mr. Harris. No. I have testified on behalf--
    Senator Specter. Dr. Miller, you are representing UPMC?
    Mr. Miller. Yes.
    Senator Specter. Dr. Harris, you have testified that you 
believe the merger would be beneficial to the health care 
systems and ultimately helpful to the consumer?
    Mr. Harris. I believe it will be, but let me just parse out 
two different parts. I did not work on the calculation of cost 
savings and efficiencies. I only look at the competitive 
aspects, and my conclusion with regard to the competitive 
aspects is there will be no harm to competition, no reduction 
to competition. And the process of competition causes cost 
savings ultimately to be passed on to consumers. So, in that 
regard, yes, I do believe it will be beneficial to consumers.
    Senator Specter. And that is the basis for your favoring 
the merger?
    Mr. Harris. Well, again, I do not want to parse words, but 
I had a narrow assignment, and that was to look at the process 
of competition. And I strongly believe that it will have no 
impact on competition. If--
    Senator Specter. Well, are you saying that you are not 
taking a position on the desirability of the merger?
    Mr. Harris. I mean, I have no specific position. I have 
only done a competitive analysis. But the process of 
competition does cause cost savings to be passed on to 
consumers. So, to the extent these cost savings will be 
realized, it will be a merger that is beneficial to consumers.
    Senator Specter. Well, you are talking about cost savings 
as a result of efficiencies, economy, and size?
    Mr. Harris. Correct, as an example.
    Senator Specter. I am just trying to figure out whether you 
are for it or against it, Dr. Harris.
    Mr. Harris. I mean, I am not sure how to be clearer. I 
had--
    Senator Specter. Well, yes or on.
    Mr. Harris. My experience is that these kinds of mergers 
are good for consumers, but I did not do the analysis with 
regard to the cost savings.
    Senator Specter. Your experience is they are good for 
consumers, so you are for the merger.
    Mr. Harris. Well, in that regard, yes.
    Senator Specter. Well, is there some other regard?
    [Laughter.]
    Senator Specter. I am just trying to find out your 
position. I am trying very hard not to lead you. I know how to 
lead a witness, but I am trying very hard not to lead you.
    [Laughter.]
    Mr. Harris. My analysis of the merger focused on the 
competitive process, and I see no reason to believe that this 
competition will cause a competitive harm.
    Accepting the calculations of cost savings, that is an 
important part of the competitive process, so--
    Senator Specter. No reason to believe that it would not, 
with the possibility of an exception.
    Mr. Harris. If you accept it, then I do believe it will be 
a beneficial merger.
    Senator Specter. OK. Dr. Miller, there had always been a 
sense that UPMC, whom you represent, and Highmark had a very 
close working relationship in the Pittsburgh area. Why is UPMC 
opposed to this merger?
    Mr. Miller. In my experience, in my experience as a 
consultant to UPMC, I have not seen the evidence of that close 
working relationship. What I have seen is that UPMC as a health 
plan, not UPMC as a hospital provider but UPMC as a health 
plan, vigorously competes with Highmark and is concerned about 
the potential impact of Highmark growing larger and with 
greater surpluses and having a greater sense of competitive 
leverage as a result of this merger.
    Senator Specter. Well, UPMC has some lines of insurance 
coverage of its own, right?
    Mr. Miller. Yes.
    Senator Specter. Describe to what extent UPMC has those 
lines which would put them in a possible competitive situation 
with Highmark on providing insurance.
    Mr. Miller. Very definitely competitive. UPMC offers 
coverage in a number of different categories, including what we 
would normally describe as health coverage, managed care 
coverage, to about 330,000 people, all of whom are in western 
Pennsylvania, which means that they are competing directly with 
Highmark for business. UPMC has 6,000 employers who have 
currently purchased coverage from UPMC Health Plan. In addition 
to that, UPMC Health Plan provides behavioral health coverage 
and other types of coverage as well. But the experience of UPMC 
Health Plan, the health plan itself, which is a part of UPMC, 
the experience of the health plan is that it vigorously 
competes for business in western Pennsylvania with Highmark 
right now.
    Senator Specter. Mr. Allen, you have contended that 
Highmark could easily re-enter the Philadelphia area market 
because it already has a network of providers there. If 
Highmark does not compete in southeastern Pennsylvania, what 
does it mean that they have a network of providers there? Is 
that activated, operative?
    Mr. Allen. In prior years, they were the Blue Shield Plan, 
and it continued to be operating as Blue Shield. And they, 
therefore--they do have connections with physician groups 
there. My understanding is that they have the network--I do not 
know whether those physicians are actually actively contracted. 
But the Blue Shield Plan is statewide plan, and they are Blue 
Shield. They have, through Blue Shield, physicians everywhere 
in Pennsylvania. They are under contract.
    Senator Specter. So Highmark is operating under Blue Shield 
in eastern Pennsylvania, southeastern Pennsylvania?
    Mr. Allen. They had an agreement not to do that. That 
covenant not to compete with IBC has expired, and with the 
expiration of that covenant not to compete, they are ready and 
able, by virtue of their physician relationships, to compete 
there in southeastern Pennsylvania. That is my understanding.
    Senator Specter. Mr. Marshall, in your testimony, you 
contend that the proposed merger between Highmark and IBC would 
reduce potential competition. Potential competition is 
obviously a factor. What indicators are that, absent this 
merger, Highmark would compete with IBC in eastern or 
southeastern Pennsylvania?
    Mr. Marshall. First, Senator, I would like to think that at 
some point the regulatory oversight of the insurance industry 
would ask that question and perhaps force some competition in 
that end. I think if State Farm and Allstate were to say let's 
divide up the State and not compete with one another, there 
would probably be some pretty extensive regulatory review, and 
that should happen there.
    I think, second, the practice of Highmark itself, it has 
gone into central Pennsylvania. There is no reason it cannot go 
east, further east. I do appreciate that--and I guess, third, 
they both have--Highmark and IBC must have been somewhat 
tempted to compete or else they would not have felt a need to 
have a 10-year covenant against it.
    And I guess, fourth, I would like to think that businesses 
generally want to expand and grow, and businesses generally 
want to enter into new markets and new territories. Certainly 
that is the hallmark of all of the companies we represent. And 
so while current management at Highmark may not have any 
intention of going east, I would think that there would be 
future management that very well might.
    Senator Specter. Mr. Frick, do you have any intentions of 
going west?
    Mr. Frick. No, Senator. The infrastructure that would be 
required to build a statewide brand would prohibitive, and it 
would divert resources and needed funds from serving our 
customers in southeastern Pennsylvania in the way that they 
require it. No, sir.
    Senator Specter. Dr. Melani, do you have any intention of 
going east?
    Dr. Melani. No, Senator, we do not.
    Senator Specter. Dr. Melani, how has it worked out in 
central Pennsylvania where Highmark competes with Capital?
    Dr. Melani. Senator, that is a great question. It has not 
worked out well. We entered that marketplace in 2002, and the 
reason we entered that marketplace was at that time we had a 
substantial amount of business in that marketplace that we 
shared with Capital Blue Cross. In addition, we had a large 
number of employees housed in that marketplace. There were 
4,000 employees. And we had relationships in that marketplace 
that had been developed and sustained over 60 years.
    At that time, Capital Blue Cross was threatening to talk 
all the business that we shared into a downstream company owned 
solely by them, and we were faced with the situation where we 
were going to lose significant amounts of revenue profitability 
if that would happen by being forced out the marketplace. So we 
elected to compete. We went in that marketplace using our 
brand, Pennsylvania Blue Shield, and established a hospital 
network to match up with our physician network. Our experience 
over the last 5 years, although each of the plans--Capital Blue 
Cross and Pennsylvania Blue Shield--basically took what market 
we had and split it 50/50, the financial experience has been 
dismal. Over the 5 years on that book of business, we have a 
minus 1-percent operating margin on that book of business.
    In addition, I think Ms. Scanlan outlined exactly what the 
problem is. As we have entered that market, the hospitals and 
physicians have used their market power and the divisiveness 
that is created by way of having more health plans to raise 
costs. They have raised the cost of accessing physician 
services and hospital services, and margins of the hospitals in 
that region have gone up substantially.
    Senator Specter. Well, is Highmark competing now with 
Capital in that market?
    Dr. Melani. We are, and our premiums in that market have 
risen faster in that market than the other markets we operate 
in. So it has been a disaster for customers and for us as a 
corporation.
    Senator Specter. Dr. Melani, why do you think the Hospital 
Association is opposed to the merger?
    Dr. Melani. Because they represent hospitals that would 
like to get paid more money.
    Senator Specter. And will they be paid less money if the 
merger occurs?
    Dr. Melani. No, because we will not gain any more market 
share in the markets we operate in. We will have no more market 
power in any single market today, so there is no more leverage 
today than there will be after the merger, so we would be able 
to--
    Senator Specter. But you say they are opposed to the merger 
because they would like to be paid more money.
    Dr. Melani. Yes, they would like to decrease our market 
position in the marketplace.
    Senator Specter. Well, you said because they would--
    Dr. Melani. I am sorry. They would oppose the merger-I am 
not sure why they would oppose the merger, frankly, because it 
does not change the market dynamics that exist today. We do not 
compete. We are in different markets, and it does not change 
the market dynamic between Highmark or IBC and its providers--
hospitals and physicians. It just gives us some additional 
scale to lower our operating costs, get administrative 
efficiencies, and leverage other kinds of services in the 
health care cost equation, like pharmaceuticals, durable 
medical equipment, laboratory services. It would have no impact 
on physicians and hospitals.
    Senator Specter. Mr. Marshall, it is my understanding 
that--or let me just ask you the question. Have premiums gone 
down due to competition in central Pennsylvania?
    Mr. Marshall. Have premiums gone down over the last 6 
years? No, Senator. Have they gone up by less of a margin than 
they have gone up in the more concentrated markets? I believe 
there they have. I also think the one thing that gets left out 
of all of this, frankly, when an insurer faces competition and, 
therefore, does not make as much money as it used to, I think 
that is a good thing for consumers. I think that is a good 
thing for the marketplace.
    Senator Specter. Would you repeat what is a good thing for 
consumers? That is what I have been looking for in this entire 
hearing.
    Mr. Marshall. I think if an insurer says that because it 
faced competition it is not making as much money as it wishes 
it were, I think that is a good thing for consumers. That is 
what competition is meant to do for consumers. It I meant to 
hold down just how much money--
    Senator Specter. You say premiums have not gone down in 
central Pennsylvania, but they have not gone up as much as they 
did in areas where there was not the competition like between 
Capital and Highmark?
    Mr. Marshall. That is my understanding. That is my 
understanding about a year ago, and I cannot speak for what 
their rates have done in the past year. I also--
    Senator Specter. Would you find out and let the 
Subcommittee know?
    Mr. Marshall. Yes, Senator. I also think the one point that 
gets left out, it is not just what providers get paid or even 
what the premiums are. It is also what the quality of the 
service and the innovations of the service are. You look in the 
health insurance marketplace in central Pennsylvania and 
throughout, the innovations that have happened with health 
savings accounts, transparency, and even a lot of the managed 
care and utilization controls only came about from competition. 
That is where the genesis was. It was actually not even among 
our larger members. It was among some of the very small health 
insurance members that those ideas came about. You lose that 
when you do not have a competitive marketplace.
    Senator Specter. Mr. Frick, I am advised that the 
Independence Blue Cross reserves are $1.7 billion and the 
Highmark reserves are $4 billion. Is Independence Blue Cross in 
a position where you have insufficient reserves?
    Mr. Frick. You are correct, Senator; our surplus is 
approximately $1.7 billion. That represents only 63 days of 
claims payments. And in Pennsylvania, the Insurance Department 
did an exhaustive review in 2005 of the Blues' surplus and came 
to the conclusion that none of the Blues had excessive surplus. 
The legislature did a review and came to the same conclusion.
    Senator Specter. What conclusion was that?
    Mr. Frick. That none of the surplus amounts of the four 
Blue Plans were excessive.
    Senator Specter. Who concluded that?
    Mr. Frick. The Pennsylvania Insurance Department, as well 
as an independent study that was subsequently done by the 
legislature. And, Senator, we use--the question about using the 
surplus to benefit subscribers, we do that on an ongoing basis 
when we do our financial planning, when we set rates, when we 
plan for investment income. And it enables us to operate at 
lower margins than our for-profit, publicly traded competitors.
    Senator Specter. When you say that it is only 63 days of 
claims payments, but during those 63 days you are also getting 
more premiums.
    Mr. Frick. Well, our surplus represents--we pay about $850 
million a month in claims for services to hospitals and 
physicians on behalf of our members.
    Senator Specter. And how much do you get in premiums?
    Mr. Frick. Our premium last year was in excess of $10 
billion.
    Senator Specter. So $850 million in--
    Mr. Frick. $850 million in claims payments per month out of 
a monthly premium of less than $1.5 billion.
    Senator Specter. It looks like at $10 billion annual 
premiums and 850 paid out--
    Mr. Frick. Million a month. To put it another way, Senator, 
as I said, about 88 cents of our revenue or premium dollars--
    Senator Specter. Well, the figures you have just given me, 
you have a deficit. Twelve times $850 million in payments comes 
to $1.2 billion. So you are losing--are you losing money?
    Mr. Frick. Eighty-eight cents of every--
    Senator Specter. Do not go back to 88 cents. You told me 
that you have payments of $850 million a month. Isn't that 
right?
    Mr. Frick. Did I say 850 or 650?
    Senator Specter. Well, which is it? I believe you said 850.
    Mr. Frick. Let me check my notes, Senator. I know--
    Senator Specter. It is only $200 million, Mr. Frick. That 
is not much among friends.
    [Laughter.]
    Mr. Frick. It is significant, Senator.
    Senator Specter. How much?
    Mr. Frick. It is significant, when you said
    Senator Specter. Is it 850 or 650?
    Mr. Frick. Let me check my notes.
    Senator Specter. Take your time. Mr. Frick. Absolutely. It 
is $850 million a month, yes.
    Senator Specter. OK. Well, when I multiply 12 times 850, I 
get $10.2 billion. If your premiums are $10 billion, which you 
just said, you are losing money.
    Did you know he was losing money, Dr. Melani, when you 
agreed--
    [Laughter.]
    Dr. Melani. That is why we need to merge.
    Senator Specter. That is why he needs to merge, but how 
about you?
    Mr. Frick. Our operating margin last year was 1 percent. 
Our investment income was 0.6 percent. We operated.
    Senator Specter. Now, come on, Mr. Frick, don't start 
giving me figures--
    Mr. Frick. We are not losing money.
    Senator Specter. I want to deal with 12 times 850 million, 
which is $10.2 billion, as composed with--well, take a look at 
the transcript, Mr. Frick. Your figures, I think, do not add 
up, and take a look at it and provide the Committee with the 
information.
    Mr. Frick. Absolutely, Senator.
    Senator Specter. Dr. Melani, how can a company run as 
efficiently as Independence Blue Cross with Mr. Frick, although 
his math may not be too good, how could they get along with 
only $1.7 billion in surplus whereas you have to have $4 
billion in surplus?
    Dr. Melani. Yes, it is a difference in the kind of risk 
that we each bear. Each of our companies has a different make-
up of the book of business that we have in different types of 
risk that we carry. Certain types of--
    Senator Specter. Sufficient to have more than twice the 
amount of reserves?
    Dr. Melani. Yes, Senator.
    Senator Specter. Why?
    Dr. Melani. Our reserves are also--have also been deemed to 
be below the excessive level, and although our reserves-
    Senator Specter. Need to be below the excessive level?
    Dr. Melani. Yes.
    Senator Specter. What does that mean?
    Dr. Melani. They are at a sufficient level. The Insurance 
Department has determined that our reserves are in the 
sufficient level.
    Senator Specter. Would you repeat that?
    Dr. Melani. They have determined that our reserves are 
sufficient to cover the risk that we have and not excessive.
    Senator Specter. Who made that determination?
    Dr. Melani. The Insurance Department, the Pennsylvania 
Insurance Department.
    Senator Specter. Would they approve even higher reserves?
    Dr. Melani. Yes, sir.
    Senator Specter. Is there any limit to what they would 
approve?
    Dr. Melani. Yes, there is, sir.
    Senator Specter. What is it?
    Dr. Melani. What they do, Senator, is they look at the risk 
that you have in your business, because all of us carry 
different lines of business. Some of us are in Medicare. Some 
of us are in Medicaid. Some are in commercial business. We have 
other lines of business, too--workers' compensation, we have 
vision insurance, dental insurance, all types of businesses 
that we have. And each of those have different levels of risk.
    So the NAIC, the National Association of Insurance 
Carriers, has established a methodology to do an apples-to-
apples comparison, and they take your surplus and they look at 
the relative risk you have, and they come up with an equation 
and a number called risk-based capital, and it is a percentage 
number. And that is how you can compare all of us to see how we 
are in relative solvency. And then they set up guidelines with 
that risk-based capital to determine whether or not your 
organization is solvent or not based on that ratio.
    In the State of Pennsylvania, they have capped that ratio 
at 750 percent. Above that, they consider it excessive, and 
they begin to do things to bring that level of surplus down.
    Senator Specter. Let me ask everybody on the panel the same 
question, starting with you, Dr. Miller. Is there any basis for 
doctors and hospitals being concerned about this proposed 
merger on the grounds that there may be too much power in a 
combined entity which would give them undue power in 
negotiating payments to doctors and hospitals?
    Mr. Miller. I definitely believe that there is. One of the 
points that you were just making was that, combined, the 
surplus--I am familiar with somewhat different numbers, but in 
the vicinity, a combined surplus of $6 to $7 billion, which is 
not only high in itself but so much higher than any other 
insurer would have in the State that it gives them the 
capability to exert substantial leverage through a number of 
different approaches. And one of the approaches would be in 
terms of increased pressure on physicians.
    Right now, they exert a considerable amount of pressure on 
physicians and on hospitals, if for no other reason than 
because of their size and what that represents of the 
physician's or hospital's patients. In a typical situation, 
either IBC or Highmark probably provides coverage to 25, 
perhaps even 30 percent--about 25 percent of the patients of 
any one particular hospital, and perhaps even more for some 
physicians. And when you are in that kind of a position, and 
now in a position of being even larger and being able to exert 
greater pressure, then you can obtain substantial discounts. 
And the evidence is there. One of the points I made in my 
testimony was that I studied States where Blues Plans had very 
substantial market shares of the type that the Highmark/IBC 
consolidation would create. And in almost every instance, the 
payment levels, the reimbursement levels to physicians and 
hospitals are lower than they are in States where there is more 
competition.
    Senator Specter. Mr. Frick, do you think that hospitals and 
doctors have any basis at all for concern about this proposed 
merger in giving undue leverage and bargaining power to a 
merged entity? The question Dr. Miller answers in the 
affirmative, do you think--I know your answer is no, but tell 
me why.
    Mr. Frick. Well, as you highlighted, Senator--and I was 
pleased that Temple and University of Pennsylvania and Holy 
Redeemer and also Children's Hospital of Pennsylvania, Dr. 
Steve Altschuler, testified in Philadelphia about the 
importance of our relationship and our partnership. We are all 
worried about health care costs--
    Senator Specter. But did Penn and Temple think--did they 
testify in favor of the merger?
    Mr. Frick. They testified--
    Senator Specter. They liked your relationship.
    Mr. Frick.--about the relationship.
    Senator Specter. But did they testify in favor of the 
merger?
    Mr. Frick. They testified about our partnership and its 
importance to their institutions and its importance to their 
patients and our customers.
    Senator Specter. Mr. Frick, do you think there is any 
concern that if they testify against you, you could retaliate 
in some way?
    Mr. Frick. Not at all, Senator. Our products are dependent 
on access to high-quality hospital and physician networks.
    Senator Specter. Well, why didn't Temple and Penn testify 
in favor of the merger then? You are being coached by Dr. 
Melani--
    Mr. Frick. No, no--
    Senator Specter.--and that is perfectly--that is perfectly 
appropriate. You cannot hinder a witness, but you can coach him 
a little. Go ahead, Dr. Melani. You answer the question. Or is 
it outside your jurisdiction since--
    Dr. Melani. You would have to ask them because we do not 
have any idea why they would not testify pro or con.
    Senator Specter. You do not know why? Do you adopt that 
answer, Mr. Frick?
    Mr. Frick. I want to explain that in Pennsylvania, I think 
the hospitals, as well as we are, are concerned about health 
care costs. But I think the institutions that we deal with in 
southeastern Pennsylvania are proud of our working 
relationships. And do I believe they are worried about 
retaliation or leverage? The market dynamics in southeastern 
Pennsylvania does not change after the merger, Senator. Our 
relationships, our products and services, remain the same. We 
are in two separate markets.
    Senator Specter. Well, Mr. Frick, it is different as to 
whether they like the relationship contrasted with whether they 
favor the merger. That is different.
    Mr. Frick. Yes.
    Senator Specter. Are you a volunteer, Mr. Balto? Let the 
record show someone raised his hand.
    Mr. Balto. Yes, I want to reply on a couple things.
    First, as a former Government antitrust official for 20 
years, I would not rely too much on who complains and who does 
not complain. I burnt a lot of shoe leather trying to get 
people to complain about activities by firms that were 
monopolist, and the problem is, before this merger or after 
this merger, they are going to have to live with the monopolist 
so they are going to be reluctant about complaining. Should 
they--
    Senator Specter. So you think there is a reluctance about 
complaining?
    Mr. Balto. Sure. I mean, my experience in mergers, you can 
ask people at either antitrust agency, they will tell you that 
that is very common.
    Senator Specter. Do you think retaliation is not totally 
out of the picture?
    Mr. Balto. You are going to have to live with these 
people--whether the merger occurs, you are going to live with a 
firm with a 70-percent market share one way or another. But 
what I wanted to do is try to reformulate the question a bit, 
because what Mr. Harris is suggesting is that all you are doing 
is changing the name tag on the firm you are dealing with. This 
is not the operative question here. The operative question here 
is not whether or not you will have less choices. It is, But 
for this merger, wouldn't you possibly have more choices? You 
would have Highmark on the edge of the market, either poised to 
enter or perhaps entering, and that would improve choices for 
consumers and for--
    Senator Specter. Do you think there is a significant 
likelihood that Highmark would enter Independence Blue Cross' 
territory?
    Mr. Balto. I think that consistent with the CEO's 
statements, it is consistent with their past history, and work 
now the-
    Senator Specter. Highmark's?
    Mr. Balto. Highmark's past history.
    Senator Specter. Would anybody--now I have got a lot of 
hands going up.
    [Laughter.]
    Senator Specter. We are going to have to conclude in a few 
minutes, but go ahead, Mr. Laign.
    Mr. Laign. I guess since I am the lone provider, I would 
like to answer the question, too. I do not feel that this 
merger will affect their leverage on rates whatsoever. I think 
the reserves are important. A number of us in the health care 
industry have been through the failures of insurance companies 
and the impact that has had on us, negatively. We have ended up 
getting 50 cents or less on the dollar from those failures.
    As a health care provider, I believe cash reserves are 
extremely important, too. We have 151 days in cash at Holy 
Redeemer Health System, and I do not believe that is enough, 
nor do the rating agencies believe that is enough.
    I guess what I am hopeful is that the regulators--and I 
believe they will; I have been extremely impressed with our new 
insurance commissioner--will do their job and they will provide 
the necessary oversight of both Highmark and IBC to assure that 
providers are paid fairly. There are appropriate appeal 
processes, and we do create--
    Senator Specter. We have two more hands that are up. I will 
hear two more responses. Dr. Harris, then Mr. Allen.
    Mr. Harris. I have known Dave Balto for a long time. We 
worked together, I guess, in the Government and in private 
practice. But I have to disagree with him for two different 
reasons.
    One, reading newspaper articles and, in my mind, 
misinterpreting what is said in those newspaper articles is not 
how you do an entry analysis. You look at the specific reasons 
open to that firm. You look at the specific market, and you 
ask: Will that entry likely be profitable? Moreover--and I just 
wrote a chapter in an ABA book on this topic. Sitting on the 
edge of a market does not affect things in that market if entry 
takes a long time and if a market is difficult to enter. All 
the testimony here is that this is a difficult market to enter, 
and he is basically confusing two things. He is confusing what 
is called a market with no sunk costs, where it is easy to 
enter, and one where it is more difficult. And in a market like 
this, having someone at the edge does not have much of an 
impact on competition. And, moreover, Highmark's analysis says 
they are not going to enter.
    Senator Specter. Mr. Allen, you can have--
    Mr. Allen. Sure. Just to echo a bit on Mr. Balto's point, 
in southeastern Pennsylvania where IBC now has a 70-percent 
market share, that is overwhelmingly more than what is required 
to force physicians to take fees that are anticompetitive, 
below competitive levels, and compromise their practices. It 
only takes about a 20-percent market share before physicians 
basically are over a barrel in their negotiations. So it is a 
sad day when here Highmark would be, we would say, entering the 
market, giving physicians an opportunity to--giving physicians 
an opportunity to have some competition for the contract.
    And then, Senator, on the question that you asked me 
earlier about the ability of Highmark to utilize the physician 
network in southeast Pennsylvania, their ability to actually 
come in and give some relief to the marketplace, including the 
physician market, that information, the information that I have 
on that came from Monica Noether's report. She has said that, 
``Highmark already has an existing presence in southeastern 
Pennsylvania through its professional provider network and its 
participation in products jointly marketed with IBC in that 
region. Since Highmark is a professional services plan with 
providers in southeastern Pennsylvania, Highmark already has an 
existing physician network under contract in southeastern 
Pennsylvania.'' And that comes from a page of Monica Noether's 
expert report.
    Senator Specter. Dr. Melani, you have your hand up?
    Dr. Melani. Yes, Senator, thank you. I think a lot of 
discussion at the table has been about competition, and I think 
we have clearly stated--and I think it is factual--that we do 
not compete today and this merger will not change the market 
dynamics that exist today. Most of the speculations are on 
potential competition, and it is truly speculation. And a lot 
of that has been based on statements that are attributed to me, 
and those statements are correct. I have said that Highmark 
does have a desire to be a statewide organization. What I also 
did in those statements was to go on and say I believe there 
should be one Blue Cross/Blue Shield in the State of 
Pennsylvania. And at the time that those statements were made, 
we were in discussion with IBC about the consolidation, and 
that was our intended way to become a statewide organization.
    We have never, ever stated that we intended to compete in 
the Philadelphia marketplace, and we do not intend to compete 
in the Philadelphia marketplace.
    Senator Specter. Mr. Frick, would you like to have another 
comment? You and Dr. Melani have the laboring oar here, so I 
will give you another chance to comment, if you want to.
    Mr. Frick. Well, I view Highmark as a partner. They are not 
a competitor. We have jointly offered products throughout our 
history. We have made shared investments for the benefit of our 
communities. We are both Blue Plans. And we want to continue 
this relationship in a new and different way, and the $1 
billion in net economic benefit to the Commonwealth as a result 
of this combination is a progressive step forward to address 
the issues that you have articulated today: affordability, 
access, and quality. It is what we work to achieve every day, 
and this combination will certainly improve that for 
Pennsylvania. And I think our history speaks to that in working 
together.
    Senator Specter. Mr. Frick and Dr. Melani, this 
Subcommittee would be interested in a short statement as to how 
the merger would impact compensation to physicians, to 
hospitals--and having extended that request to you, I would 
extend it to everyone--Ms. Scanlan, Mr. Marshall, Mr. Laign, 
Mr. Balto, Mr. Allen, Dr. Harris, Dr. Miller--what would the 
impact be likely on compensation to physicians, number 1; 
compensation to hospitals, number 2, the impact on premiums 
which are paid, significantly by employers but sometimes by the 
individuals; and what impact would it have on the consumers in 
terms of reducing the number of uninsured consumers and how it 
would impact on the consumers.
    This is going to be an ongoing matter, and I think it would 
be useful. It has been a very good hearing, and I wanted to be 
sure it was balanced and asked Highmark and Independence Blue 
Cross for additional witnesses, and they suggested Dr. Harris 
and Mr. Laign. We appreciate your coming in. We appreciate all 
of your coming in. We do not often have nine witnesses at that 
green-felt table.
    That concludes the hearing. Thank you all very much.
    [Whereupon, at 4:06 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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