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36–569 PDF 2007

S. HRG. 110–90

EXAMINING HEALTH CARE MERGERS IN

PENNSYLVANIA

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 9, 2007

PHILADELPHIA, PENNSYLVANIA

Serial No. J–110–26

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MICHAEL O’NEILL, Republican Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENT OF COMMITTEE MEMBER 

Page

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

WITNESSES 

Buckley, James R., President, Delaware Valley Health Care Coalition, Inc., 

Philadelphia, Pennsylvania ................................................................................. 16

Burns, Lawton R., James Joo-Jin Kim Professor, Professor of Health Care 

Systems and Management, and Director, Wharton Center for Health Management and Economics, Wharton School, University of Pennsylvania, 

Philadelphia, Pennsylvania ................................................................................. 11

Casey, Hon. Robert P., a U.S. Senator from the State of Pennsylvania ............. 3

Frick, Joseph A., President and Chief Executive Officer, Independence Blue 

Cross, Philadelphia, Pennsylvania ..................................................................... 4

Marshall, Joseph W. ‘‘Chip’’, III, Chairman and Chief Executive Officer, Temple University Health System, Philadelphia, Pennsylvania ............................. 19

Melani, Kenneth R., M.D., President and Chief Executive Officer, Highmark, 

Inc., Pittsburgh, Pennsylvania ............................................................................ 7

Rendell, Hon. Edward G., Governor, State of Pennsylvania ................................ 2

Rodriguez, Pedro, Executive Director, Action Alliance of Senior Citizens, 

Philadelphia, Pennsylvania ................................................................................. 17

Schott, C. Richard, M.D., Vice Chair, Board of Trustees, Pennsylvania Medical Society, Harrisburg, Pennsylvania .............................................................. 14

White, Hon. Don, State Senator, 41st District, Pennsylvania, Indiana, Pennsylvania ................................................................................................................. 9

QUESTIONS AND ANSWERS 

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

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

SUBMISSIONS FOR THE RECORD 

American Medical Association, Washington, D.C., statement ............................. 56

Buckley, James R., President, Delaware Valley Health Care Coalition, Inc., 

Philadelphia, Pennsylvania, statement .............................................................. 59

Burns, Lawton R., James Joo-Jin Kim Professor, Professor of Health Care 

Systems and Management, and Director, Wharton Center for Health Management and Economics, Wharton School, University of Pennsylvania, 

Philadelphia, Pennsylvania, statement .............................................................. 62

Frick, Joseph A., President and Chief Executive Officer, Independence Blue 

Cross, Philadelphia, Pennsylvania, statement .................................................. 68

Marshall, Joseph W. ‘‘Chip’’, III, Chairman and Chief Executive Officer, Temple University Health System, Philadelphia, Pennsylvania, statement .......... 75

Melani, Kenneth R., M.D., President and Chief Executive Officer, Highmark, 

Inc., Pittsburgh, Pennsylvania, statement ......................................................... 83

Rodriguez, Pedro, Executive Director, Action Alliance of Senior Citizens, 

Philadelphia, Pennsylvania ................................................................................. 90

Schott, C. Richard, M.D., Vice Chair, Board of Trustees, Pennsylvania Medical Society, Harrisburg, Pennsylvania, statement ........................................... 93

White, Hon. Don, State Senator, 41st District, Pennsylvania, Indiana, Pennsylvania, statement .............................................................................................. 97

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THE HIGHMARK/INDEPENDENCE BLUE CROSS 

MERGER: EXAMINING COMPETITION AND 

CHOICE IN PENNSYLVANIA’S HEALTH INSURANCE MARKETS 

MONDAY, APRIL 9, 2007

UNITED STATES SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, Pursuant to notice, at 9:30 a.m., in the 

Kirby Auditorium, The Constitution Center, Philadelphia, Pennsylvania, Hon. Arlen Specter, presiding. 

Present: Senators Specter and Casey. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Senator SPECTER. Good morning, ladies and gentlemen. The 

hearing of the Senate Judiciary Committee will now convene. We 

will be considering today the proposed merger of Independence 

Blue Cross and Highmark, two very large companies which provide 

health care insurance for Pennsylvania—Independence Blue Cross 

in the eastern part of the State and Highmark in the west. 

We all know the importance of health care. Health is our No. 1 

capital asset. Without good health, there is nothing any of us can 

do. And I am Exhibit A on that proposition and thankfully enjoying 

good health because of excellent medical care. But we need to provide that medical care for all Americans, and this proposed merger 

has very major implications for people in the Commonwealth of 

Pennsylvania. 

These two companies are enormous in their importance in the 

State. Independence Blue Cross has 64,000 employees, serves about 

3.4 million Pennsylvanians, has arrangements with more than 

16,000 physicians and more than 70 hospitals. Highmark, similarly, had a dominant share of the market in western Pennsylvania, covering 4.6 million Pennsylvanians, 30,000 physicians, and 

takes care of approximately—or has arrangements with approximately 100 hospitals. 

There are real concerns, which have been expressed from time to 

time, about the financial undertakings of these two companies, especially with respect to the surpluses. Highmark has a surplus of 

some $2.6 billion, Independence Blue Cross a surplus of $1.2 billion. There is a recognition that surpluses are necessary for unanticipated costs, but there is a real question as to whether that is 

excessive. 

2

When you take a look at executive compensation—and all of this 

on the public table—compensation for the CEO of Highmark is 

$896,000, $2 million in bonuses, and another $315,000. And when 

you are looking at nonprofits, candidly, there is a question as to 

whether it really is nonprofit. 

There is a projection that there will be a saving of some $1 billion in consolidation and efficiencies. Well, that raises the question 

as to where that $1 billion is going to go. And to move the hearings 

along, I wrote to the CEOs of these two companies asking them for 

the specifics as to where the $1 billion would go. They talk about 

covering the uninsured. If that were to be the case, that would be 

very salutary. We have many Pennsylvanians, in accordance with 

the national picture, who do not have health insurance. 

We have a real concern about the bargaining power and dealing 

with the hospitals and dealing with doctors. Last year I presided 

at a hearing in the Judiciary Committee where the doctors are 

looking for an antitrust exemption so that they have more bargaining power in dealing with Independence Blue Cross and 

Highmark. So these are all major, major issues. 

We are joined today by the distinguished Governor of Pennsylvania, Edward Rendell, and the distinguished Senator—maybe 

both Senators are distinguished, but I will certainly say Senator 

Casey is distinguished. Senator Casey has been in the Senate only 

a short time, but he is already on the Judiciary Committee, at least 

on occasion. 

We have eight witnesses. Many people wanted to testify. We do 

not expect to be able to answer all of the questions today, but today 

is a start. To give the key players a chance to express themselves, 

we are going to ask everybody to observe the time limits very closely. I am at 41⁄2 minutes on an opening and will close in less than 

30 seconds. We have allocated an hour and a half, and we are 

going to have to move right along and focus on the issues to stay 

within the time limits. 

All prepared statements will be made a part of the record, and 

now I am pleased to yield to my distinguished colleague and friend, 

Governor Rendell. 

STATEMENT OF HON. EDWARD G. RENDELL, GOVERNOR, 

STATE OF PENNSYLVANIA 

Governor RENDELL. Well, thank you, Senator, and I will be very 

brief. As most of you know, Senate bill 550, sponsored by Senator 

White, who is with us today, passed the Senate and is in the 

House, and it will give the Insurance Commissioner the broad 

power to approve or disapprove mergers for nonprofits, a power 

that the Insurance Commissioner has for for-profits at this time. 

You never can predict what happens in the legislature, but whether that bill passes or not, the Insurance Commissioner has the 

power to conduct hearings around the State, and we will conduct 

hearings in four or five different locations, fairly exhaustive hearings, over the next several months. 

Of course, the law allows for and requires public comment to go 

on the record, and there will be ample opportunity for that as well. 

So both through the public comment process and through the hearVerDate 0ct 09 2002 11:20 Jul 25, 2007 Jkt 036569 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\36569.TXT SJUD1 PsN: CMORC
3

ing process, we hope to get exhaustive input before any final decisions are made on this issue. 

However, I do want to compliment Senator Specter and Senator 

Casey for taking the lead here and bringing some of these issues 

to light early, because I think it is important that the public understand what is at stake and what the intent of the parties is in this 

merger. 

I, too, share—and I am sure Senator Casey does as well—two 

great concerns: what this merger will do to competitiveness in 

terms of the consumer, the businesses who buy and provide health 

care for their employees, the employees who pay premiums, those 

who are self-insured as well. That is of great concern to me. Pennsylvania presently does not have enough competition, and the question of a price point, we have tried to do things to engender that 

competition. But our competition is limited, and we want to determine what, if any, effect this has on the competitive process from 

that angle. 

But, second, as the Senator said, we very much care about our 

physicians and our hospitals. Physicians have been squeezed on 

pricing because in many areas there is a dominant carrier and that 

carrier sets the price for a procedure, and it is essentially take it 

or leave it for that physician. We want there to be greater flexibility and greater competition from that standpoint as well. 

Having said that, I would be remiss if I did not also say, however, that the two companies who come before us today are, in my 

judgment, superb corporate citizens of the State of Pennsylvania. 

They contribute in so many different ways, and when we sought 2 

years ago, Senator, to expand our adult basic care program, which 

is the existing program for working Pennsylvanians, these companies took the lead in reaching an agreement with the head of the 

Office of Health Care Reform, Rosemarie Greco, to put significant 

dollars—significant dollars—into the very significant expansion of 

the ABC program. When we outlined this year our prescription for 

Pennsylvania, which will cover over the course of the next 5 years, 

the remaining 757,000 Pennsylvanians that do not have health 

care, these companies stood forthright and supported those efforts. 

When we pushed a bill to cover all of our children in Pennsylvania, a bill that I signed in October of 2006, both companies were 

very supportive of those efforts. We appreciate that, and they are 

good corporate citizens. They are excellent employers. So they start 

off with, in my book, a solid presumption. However, the issues that 

Senator Specter has raised and the issues that I have highlighted 

are very significant and must be resolved in a satisfactory way. 

Senator SPECTER. Thank you, Governor Rendell. 

Senator Casey? 

STATEMENT OF HON. ROBERT P. CASEY, A U.S. SENATOR 

FROM THE STATE OF PENNSYLVANIA 

Senator CASEY. Senator, thank you very much. 

I first of all want to thank Senator Specter for bringing us together today for a lot of reasons. One is because of the nature of 

this question for the people of Pennsylvania, but also I want to 

commend his leadership on so many aspects of health care, which 

is such a critical issue for the State and for the country. And we 

4

are honored by the presence of the Governor and his work to expand health insurance in Pennsylvania. 

We face, I think, in the country a real challenge on obviously a 

lot of aspects of health care—cost being principal among them—but 

I think there is an opportunity this year in the Congress. Senator 

Specter and I have worked very hard to make sure that at the Federal level the Children’s Health Insurance Program is expanded, 

so-called SCHIP. Governor Rendell is an example of someone who 

is trying to expand health care coverage in Pennsylvania by a significant number. At the same time, the Federal Government, at 

least the Bush administration, wants to go in the opposite direction 

if their budget proposal is any indication—which it is. 

So it is a critical issue for the State, and I think when it comes 

to this question of Independence Blue Cross and Highmark, obviously we have some real concerns about the potential anti-competitive nature of this arrangement. We are concerned about, as Senator Specter said, the level of surplus that both companies have 

right now. And we are also concerned in a broader way about the 

impact that this merger would have on health care and jobs in 

Pennsylvania. 

We will not reach conclusions today necessarily. We will not be 

able to ask and answer every question. But it is a very good start, 

and I think this hearing and others like it, in conjunction with the 

State, the hearings that Governor Rendell referred to at the State 

level, I think will inform and enlighten the people of Pennsylvania 

about this. And I join Governor Rendell in commending a lot of the 

work that has already been done by these two firms to expand the 

number of Pennsylvanians who are covered and to provide quality 

health care for the people of the State. 

But I think we have real opportunities this year in terms of the 

Federal budget and legislation, and also we want to make sure that 

we get this right when it comes to the impact of this merger on the 

people of Pennsylvania. 

Senator, thank you again. 

Senator SPECTER. Thank you very much, Senator Casey. 

We turn now to our first witness, Mr. Joe Frick, President and 

CEO of Independence Blue Cross. Thank you very much for joining 

us today, Mr. Frick, and we look forward to your testimony. I 

might just say that each witness will be allowed 5 minutes, and 

then there will be rounds of questioning at 5 minutes each. 

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

Mr. FRICK. Well, thank you again, Senator Specter and Senator 

Casey and Governor Rendell, for the opportunity to speak to you 

today about why the combination of Highmark and Independence 

Blue Cross into a new company is good for Pennsylvania and how 

it will create value for our customers, for health care providers, the 

communities we serve, and, most of all, for the people of our great 

Commonwealth. 

I am very pleased to be here today on a panel with recognized 

leaders in our community and hear their perspectives on this important matter. 

5

The unanimous vote 10 days ago by the boards of Highmark and 

IBC to combine our two companies begins an extensive review process. We look forward to working cooperatively with State and Federal regulatory agencies and with public officials who want to understand the impact of this combination on the people of Pennsylvania. Today we will continue the open dialogue we have already 

begun with key stakeholders in health care about how this combination will enable us to better serve their needs. We welcome 

your participation. 

You know, every major national and local survey in the last year 

has shown that the No. 1 issue on people’s minds is the availability 

of affordable health care coverage. It is no wonder. Every year employees shoulder more of the cost of health insurance, fewer employers offer health coverage, and there are more uninsured. Our 

mission at Independence Blue Cross and at Highmark is to provide 

access to quality, affordable health care. 

We strongly believe this combination is mission driven and will 

not reduce competition or choice in the health insurance marketplace in the Commonwealth. First and foremost, the combined companies will generate more than $1 billion in additional resources 

over 6 years for health care in Pennsylvania. This is new money, 

and it goes beyond any commitments we have today. These additional resources will come largely through savings from business efficiencies that the two companies cannot produce individually. The 

savings will enable us to invest in new market-leading capabilities 

that are increasingly important to consumers and providers. 

The combined company will avoid duplicating future investments 

in costly technology and administrative requirements. These savings will fund and allow us to more quickly take advantage of cutting-edge technology to improve the quality of care, such providing 

electronic personal health records or e-prescribing tools. 

We will also achieve significant savings by consolidating computer systems used for claims processing, enrollment, medical management, and provider transactions. One new capability this will 

allow us to pursue is real-time claims adjudication, a major benefit 

for both patient and physician. 

By using the best practices of Highmark and IBC to perform 

more efficiently, the combined company will have the resources to 

expand wellness initiatives that keep people healthy and disease 

management programs that help the chronically ill lead healthier 

lives. 

We also listened to our customers’ concern about ever-increasing 

pharmacy costs. The combined company will reduce prescription 

drug costs by launching initiatives that capture higher rebates, 

pharmacy discounts, and lower the cost of administration—economies possible only with a larger membership base—and these savings of approximately $285 million will go directly to our customers. 

Since we do not have shareholders or investors like our publicly 

traded competitors, the combined company will be able to reinvest 

this $1 billion in savings into the health care needs of our customers and community. Our first priority is to direct more than 

$650 million to expand access to health insurance for Pennsylvania’s uninsured and underinsured—$650 million over and above 

6

our current commitments. The increasing number of uninsured in 

the Commonwealth drives up health care costs for all of us. We will 

spend roughly $350 million to extend for 3 years the Community 

Health Reinvestment agreement we have with the Commonwealth. 

Another $300 million will fund other programs or newly developed 

products to expand health care coverage in Pennsylvania. 

Most of our customers’ premium dollar, more than 85 cents of 

every dollar, pays for the medical care our members receive. Less 

than 10 cents of each premium dollar goes to administrative fees. 

The combined company will not increase administrative fees for 2 

years—direct savings to our customers’ premiums of almost $300 

million that would not be possible without an IBC/Highmark combination. 

There has been much speculation about what our ultimate plans 

are. I assure you both our boards and executive teams are committed to our Pennsylvania-based, not-for-profit status as one of 

the key factors that differentiates us. In 2006, Highmark and IBC 

contributed over $200 million to support community health and 

education programs, such as those focused on fighting hospital-acquired infections, providing clinics for the uninsured, increasing the 

supply of nurses through scholarships, and preventing childhood 

obesity. These efforts are increasingly important and will continue. 

The proposed combination will not reduce competition. First, 

Highmark and IBC do not compete and never have—

Senator SPECTER. Mr. Frick, how much more time will you need? 

Mr. FRICK. Less than a minute, Senator. 

Senator SPECTER. Proceed. 

Mr. FRICK. Thank you. We are both licensees of the Blue Cross 

Blue Shield Association, a brand that is second to none and proudly 

insures one out of every three Americans. We have worked closely 

together for more than 50 years. However, we have virtually no geographic or customer overlap. So, by combining, we are not reducing competition. It is worth noting that today Pennsylvania is one 

of only five States in America with more than one Blue plan. With 

the Federal Government developing regions for Medicare PPOs and 

the Commonwealth exploring statewide risk pools, it is important 

for us to offer seamless statewide products, networks, and services. 

Highmark and IBC have major competition: national, publicly 

traded, highly capitalized companies—Aetna, Cigna, Coventry, 

United. All have access to capital to buy companies and add capabilities. Sierra Health Plan was recently purchased for $2.6 billion 

by United, one of our top competitors, with more than 33 million 

members and $71.5 billion in annual revenue. In 2005, Aetna spent 

$400 million to acquire ActiveHealth, a clinical data analytics company. 

When we began talking with Highmark almost 2 years ago about 

the possibility of working together, we had one goal in mind: access 

to quality, affordable health care. Today we are very energized by 

the possibilities we see ahead. 

Thank you. 

[The prepared statement of Mr. Frick appears as a submission 

for the record.] 

Senator SPECTER. Thank you, Mr. Frick. 

7

We turn now to the President and CEO of Highmark, Dr. Kenneth Melani. Prior to joining Highmark, he was President of West 

Penn Cares, certified in internal medicine, summa cum laude from 

Washington and Jefferson, and medical degree from Wake Forest. 

Thank you for being with us today, Dr. Melani, and the floor is 

yours. 

STATEMENT OF KENNETH R. MELANI, M.D., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, HIGHMARK, INC., PITTSBURGH, 

PENNSYLVANIA 

Dr. MELANI. Thank you, Senator Specter, Senator Casey, and 

Governor Rendell, for the opportunity to speak to you today about 

why the proposed combination of Highmark and Independence Blue 

Cross into a new company is good for Pennsylvania and how it will 

create value for the communities in which we operate, for our customers, for health care providers, and, most of all, for the people 

of Pennsylvania. 

We recognize that this hearing is the start of what may be an 

extended review process involving State and Federal regulatory 

agencies with input from the Pennsylvania General Assembly and 

the U.S. Congress, and we welcome the opportunity to discuss the 

proposed combination of Highmark and Independence Blue Cross 

and are committed to working cooperatively to help ensure that 

this process is open. 

Before the announcement of this agreement to combine the two 

companies, we had been regularly briefing key stakeholders in 

Pennsylvania on the status of the discussions between the two companies, and we will continue this open dialogue as we move forward. 

We expect some individuals and organizations may have some 

apprehension and some pointed questions about the potential impact of this agreement. Because there are still many details that 

have to be decided about how to integrate the two companies, we 

may not be able to answer all of your questions today. I assure you 

that we will provide you with updates about the new company as 

important business issues are decided. 

We ask that members of this Committee, other people here 

today, and all Pennsylvanians keep an open mind and look at the 

big picture in weighing the merits of this agreement. The boards 

of directors of the two companies took this approach during their 

thorough review of this transaction and concluded that the combination of the two companies is good for Pennsylvania. In fact, 

both the Highmark and Independence Blue Cross boards unanimously approved the agreement to combine the two companies. 

Why will this new company be good for Pennsylvania? Joe Frick 

addressed many of the reasons in his remarks, but in addition to 

helping improve access to affordable, high-quality health care, the 

new company will serve as an engine for the Pennsylvania economy 

for years to come. Currently the two companies have a total annual 

business impact of $4.2 billion on the State’s economy, representing 

monies generated in Pennsylvania because of Highmark and Independence Blue Cross. We employ more than 18,000 Pennsylvanians, and we help produce jobs for another 54,000 people in businesses that provides goods and services to the two companies. 

8

Although we are both nonprofit corporations, we provide substan- tial tax revenue for the State with our subsidiaries paying $113.6 

million in State taxes in 2006. 

In the future, the new company has the potential to become an 

even larger contributor to the State’s economy. I believe we will be 

able to grow our business to meet the shifting needs of our current 

customers and new customers, not only in the area of health insurance but also in our dental and vision businesses and other related 

services through partnerships with other Blue Cross Blue Shield 

companies throughout the country. The additional revenues generated through the business growth means we can bring back more 

money to Pennsylvania, create more jobs in the State, and stimulate additional business opportunities for Pennsylvania-based companies. 

Equally important, while we anticipate gaining operating efficiencies as a result of the combination, we expect that any potential impact on employment will be managed through attrition and 

business growth. In other words, we plan to use our collective 

workforces to meet the changing needs of our customers and provide employees with opportunities for professional growth. Now, as Joe has discussed, the new company will generate $1 billion in economic benefits that will be used to achieve savings for 

our customers and to expand access to health insurance for Pennsylvania’s uninsured population. What I would like to talk about is 

why this combination is a plus for health care providers, including 

physicians. 

As a physician, I, too, am concerned about the changes taking 

place in the financing and delivery of health care and how they 

may be affecting the physician-patient relationship and the quality 

of patient care. For a number of reasons, however, I believe the 

new company will have a positive effect on physicians, primarily 

because it will allow them to spend more time with patient care 

versus administrative tasks of a medical practice. The new company will work to identify best practices to help simplify administrative transactions with physicians and hospitals, using the most 

effective means of electronic connectivity, and at the same time, we 

will continue to approach health care on a region-by-region basis. 

Because the delivery of health services is a local issue, we will concentrate on maintaining our well-established relationships with 

physicians to address unique medical needs of our customers—their 

patients—in each region. 

The new company’s commitment of $650 million to expand access 

to health insurance for Pennsylvania’s uninsured will also benefit 

hospitals, physicians, and other health care professionals by providing more revenue for the medical services they provide. Physicians have been a valued partner in both Highmark’s and IBC’s 

longstanding missions, and we want to continue that spirit of collaboration, especially with the development of an electronic personal health record to help address quality, patient safety, and cost 

issues. 

I would also like to take a moment to address a question in your 

recent letter relating to concerns raised by physicians, hospitals, 

and other health care providers about reimbursements to health 

care providers. 

9

Physicians and hospitals will be important to the new company’s 

success as they have been for decades to the success and longstanding missions of Highmark and Independence Blue Cross. One 

of the principal ways that we have met our customers’ expectations 

in the marketplace is by offering health benefit programs that include access to the broadest networks of physicians, hospitals, and 

other providers. To help achieve broad provider networks, we have 

strived to fairly reimburse providers for medical care provided to 

our customers. 

I want to be very clear on one other point. The new company will 

continue to maintain fair and reasonable provider payment levels. 

The $1 billion in economic benefits that Joe has discussed and I 

have been discussing today will not result from changes in physician and hospital reimbursement levels. 

All of us must recognize that the rising cost of health care is 

straining the country’s system of employer-sponsored health insurance. For this reason, the new company will strive to balance fair 

and reasonable provider payment levels—

Senator SPECTER. Dr. Melani, how much more time will you 

need? 

Dr. MELANI. Ten seconds.—with the need to maintain comprehensive and affordable health benefit programs for consumers. 

In closing, the two companies are coming together to be better 

able to serve the people of Pennsylvania with a focus on providing 

access to affordable, high-quality health care coverage. The new 

company will achieve operating efficiencies, freeing resources to invest in programs and services that will benefit our group customers, individual customers, physicians, hospitals, and the communities in which we operate. 

For these reasons, Highmark and Independence Blue Cross have 

agreed to combine to build a better company for Pennsylvania, and 

I welcome the opportunity to respond to any questions you may 

have. 

[The prepared statement of Dr. Melani appears as a submission 

for the record.] 

Senator SPECTER. Thank you very much, Dr. Melani. 

Our next witness is Senator Don White. We very much appreciate his joining us here. He represents the 41st District of Pennsylvania and has since 2000. He serves as Chairman of the Senate 

Committee on Banking and Insurance. Bachelor’s degree from Juniata College in 1972 and a real leader in this field. 

Thank you for being with us today, Senator, and the floor is 

yours. 

STATEMENT OF HON. DON WHITE, STATE SENATOR, 41ST 

DISTRICT, INDIANA, PENNSYLVANIA 

Senator WHITE. Thank you, Senator Specter. Senator Casey, always a pleasure. Governor, good to see you here. It is an honor to 

be invited by Senator Specter to testify at this important public 

hearing, and I want to applaud him for scheduling this event. 

I appreciate the opportunity to provide the Judiciary Committee 

with a perspective of the Highmark/Independence Blue Cross merger from the State government level and discuss the concerns I—and 

others—have regarding this proposal. The potential effect on the 

10

availability and quality of health care coverage in Pennsylvania 

could be profound. 

You have already heard from the principal players in the merger, 

as well as from officials from the health care industry, and are 

fully aware of the magnitude of this proposal. The questions Senator Specter posed to Highmark and IBC prior to this hearing are 

most appropriate and accurately summarize the concerns we all 

should have. 

The State legislature is moving rapidly to ensure maximum review and oversight over this proposed merger when it occurs. Currently, under the Commonwealth’s GAA Amendments Act and the 

Insurance Holding Companies Act, the Pennsylvania Department 

of Insurance is empowered to review proposed mergers of for-profit 

health care providers. Such review is intended to protect the interest of both policyholders in the marketplace by directing the Department of Insurance to protect the integrity of the insurance 

market through a review of corporate transactions for anticompetitive effect. 

Unfortunately, under current law the Highmark IBC deal, because it involves two Blues organizations, is not subject to the 

same scrutiny. 

In response, I introduced Senate bill 550, which as the Governor 

mentioned has passed the Senate, and it would provide the Pennsylvania Insurance Department with oversight power over mergers 

involving nonprofit health care insurers, such as Blue Cross Blue 

Shield. Senate bill 550 will ensure this proposal comes under the 

same scrutiny as if they were for-profit corporate transactions. 

If the existing gap in the department’s regulatory authority is allowed to persist, the department will remain unable to protect the 

interest of the Blue plans’ policyholders in ruling on corporate 

transactions or a review of any pending transaction involving the 

parent Blue plans for anticompetitive effect. However, I am confident we will correct this gap in a very timely manner. The State 

Attorney General must have authority necessary to review this proposed merger, and I am working with his office to ensure that is 

the case. 

I am encouraged by this Committee’s concern about the quality 

and availability of health care coverage in Pennsylvania. From 

what I understand, there is a potential for a review of this merger 

at the Federal level under the Hart-Scott-Rodino Antitrust Improvements Act. I would assume Highmark and IBC will file an advanced notice of this merger with both the FTC and the Department of Justice since its value greatly exceeds the thresholds that 

trigger this Federal requirement. 

I strongly urge this Committee to recommend to those Federal 

agencies that they scrutinize this merger for its impact on competition in the health insurance market and share their work with the 

State legislature, the Insurance Department, and our Attorney 

General. While Pennsylvania does not have a State antitrust law, 

our Attorney General can take action under the Federal law. 

Therefore, coordination between State and Federal review is essential. 

While economies of scale and efficiencies might be achieved by 

this merger and result in positive short-term benefits, there must 

11

be some concern over its long-term effects. Creating the third larger insurer in the Nation with specifically defined geographic territory is not, I believe, in the best interest of competition, and the 

reality is competition is in the best interest of the consumers. 

There is no better regulator than a competitive marketplace in 

terms of bringing better service, better products, and better prices 

to consumers and in terms of giving consumers and providers real 

and fair choices. 

In my own district, I have seen the problems providers and consumers face from a lack of competition in health insurance. I spent 

27 years in the industry. It can lead to some real predatory practices. We need to make sure practices are not spread across the 

Commonwealth through this merger. 

Highmark and IBC contend the merger should be approved 

based on the premise that it will result in savings. If so, then there 

needs to be ironclad assurances that those savings will occur not 

only in the short term, but also in the long term. Further, any savings should not be used to support growing operations in other 

States or in lines of business outside of insurance. Moreover, we 

need to make sure those savings do not come at the cost of consumers’ accessibility to needed health care and to the doctors, hospitals, pharmacists, and others who provide that care. Finally, this 

merger must not undercut the social mission obligation that 

Highmark and IBC have—an obligation that is part of their being 

excused from premium taxes and affords them other statutory advantages under Pennsylvania law. 

Again, thank you, Senator Specter, Governor Rendell, and Senator Casey, for your interest in this critical issue, and I look forward to working with you on this matter in the months ahead. 

[The prepared statement of Mr. White appears as a submission 

for the record.] 

Senator SPECTER. Thank you very much, Senator White. 

Our next witness is Professor Lawton Burns, Professor of Health 

Care Systems at the University of Pennsylvania Wharton School, 

a graduate of Haverford, a doctorate and MBA from the University 

of Chicago. 

We appreciate your coming in today, Professor Burns, and we 

look forward to your testimony. 

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

MANAGEMENT AND ECONOMICS, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA, PHILADELPHIA, PENNSYLVANIA 

Mr. BURNS. Thank you, Senator. In the interest of transparency, 

I should say that I have been a happy enrollee of Independence 

Blue Cross for the last 12 years. However, last week they sent me 

an Explanation of Benefits form that overcharged me $100 in 

deductibles, so I think I can present a balanced viewpoint here 

today. 

I have reviewed the statement issued by Highmark and Independence Blue Cross about the benefits of the merger. I think what 

is missing is any sort of explication or a road map as to how those 

12

benefits are to be achieved. And, frankly, as I look at it, most of 

these benefits may not be attainable for the following sets of reasons: 

First, the merger is characterized as a ‘‘combination,’’ and there 

is nothing in the statement that talks about the actual integration 

or consolidation of the infrastructure of these two health plans. 

And as a result, it is hard to envision where any savings or efficiencies are going to spring from, from this combination and, in 

fact, there may be duplication. Most mergers achieve savings, at 

least in the short run, by combining administrative functions or reducing administrative head counts. That does not seem to be the 

case here because one of the goals of the mergers is to create jobs. 

Second, the most efficiencies and synergies that result from corporate mergers result from defined pre- and post-merger integration efforts, and there is no detail here in the statement regarding 

how these efforts are going to be conducted, both pre- and postmerger integration. Also, to the extent that these benefits and 

synergies exist at all, they may already be attainable by two very 

large-size independent corporations right now. 

Third, even in the presence of such efforts and defined post-integration strategies, scale economies and merger efficiencies are difficult to achieve. The econometric literature shows that scale economies among health plans are reached at a much smaller size than 

these two plans currently exist at. As a result, there may be minimal economies of scale for these two plans to reap. In addition, the 

econometric evidence also shows that there is very little economies 

of scope in health plans. And so combining operations to serve a 

diverse population may not result in any additional savings either. 

Another reason why these benefits may not be attainable is that 

the recent historical experience with mergers of managed health 

care plans and other types of enterprises does not reveal any longterm efficiencies. Indeed, a recent Wall Street analysis of the mergers of investor-owned health plans in the last few years shows that 

the majority of these mergers underperform the market within 2 

years after the merger. More broadly, the literature and corporate 

strategy shows that the majority of corporate mergers, 60 to 70 

percent of them, fail. What explains the low success rate for corporate mergers? One major problem is the failure to deliver on the 

sources of value, which is extremely difficult to do. And, in fact, the 

literature shows that mergers of two evenly sized larger firms are 

perhaps the most difficult to pull off altogether. 

So, if all of this is true, why then do mergers continue to occur? 

Well, there are a number of reasons, but I think the one reason 

that we ought to consider here is the fact that a merger reduces 

the number of competitors or potential competitors in the market 

by at least one. What is so important about the sheer number of 

competitors? Well, econometric evidence shows that in the managed 

care field, an increase in the number of competitors is associated 

with both lower costs and lower premiums. Conversely, a decrease 

in the number of competitors is associated with an increase in costs 

and an increase in premiums. 

The evidence also shows that the sheer number of competitors 

exerts a stronger influence on these outcomes than does the penetration levels of managed care in a local market. The most signifiVerDate 0ct 09 2002 11:20 Jul 25, 2007 Jkt 036569 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\36569.TXT SJUD1 PsN: CMORC
13

cant effect of the Highmark/IBC proposed merger is the removal of 

one potential competitor from the Pennsylvania health plan landscape. One might then wonder what this landscape looks like statewide, and, in fact, the Commonwealth has four Blue Cross plans. 

If you look at the respective market shares of these four Blue Cross 

plans, Highmark dominates the western part of the State, Independence Blue Cross dominates the southeastern part of the State, 

and Highmark has a significant presence in terms of joint operating agreements with the Northeast Pennsylvania Blue Cross plan 

up in the northeast sector of the State. 

In effect, Highmark controls not only the western portion of the 

State, but also a solid piece of the northeast, and with the pending 

merger with Independence Blue Cross, Highmark would control not 

only the western portion but most of the eastern portion as well. 

Now, as noted, this would not lead to any further concentration 

in any of the specific regions within the State, and one reason is 

because they have historically operated in their own separate territories. Another reason why is that most of these regions are already concentrated. It is already not very competitive in each of 

these regions. 

So the net effect of a Highmark/Independence Blue Cross merger 

might then be a nearly statewide confederation of Blue Cross plans 

controlled by Highmark with strong domination in each region. 

What has changed is not so much the local market-level concentration but, rather, the common ownership and control of the plans 

that enjoy this concentrated market power. 

Is this a cause for concern? Well, one would think that this might 

have a potentially deleterious effect on the health care plans in the 

center of the State that would—

Senator SPECTER. Professor Burns, how much more time will you 

need? 

Mr. BURNS. I will be done in 30 seconds, Senator. 

Senator SPECTER. Thank you. 

Mr. BURNS. This might have a deleterious effect on the plans 

that operate in the central part of the State. It might also have a 

deleterious effect on potential entry into the State by investorowned health care plans from outside of the State. And it is widely 

believed that the Blue Cross plans fear entry into the Pennsylvania 

market by these States because of their access to capital, as has 

been mentioned here. 

At present, there is little econometric evidence to support the 

presumed benefits and synergies of the merger. To date, the two 

firms have failed to provide a convincing rationale and game plan 

for extracting the value from this combination. 

Thank you, Senator. 

[The prepared statement of Mr. Burns appears as a submission 

for the record.] 

Senator SPECTER. Thank you, Professor Burns. 

Our next witness is the Vice Chairman of the Pennsylvania Medical Society, Dr. C. Richard Schott. Board-certified in cardiovascular disease, Clinical Assistant Professor of Medicine at both 

Hahnemann and Temple, medical degree from Hahnemann. 

We appreciate your being here, and the floor is yours, Dr. Schott. 

14

STATEMENT OF C. RICHARD SCHOTT, M.D., VICE CHAIR, 

BOARD OF TRUSTEES, PENNSYLVANIA MEDICAL SOCIETY, 

HARRISBURG, PENNSYLVANIA 

Dr. SCHOTT. Good morning. I am C. Richard Schott, Vice Chair 

of the Pennsylvania Medical Society Board of Trustees. Let me 

begin by thanking Senator Specter, Senator Casey, and Governor 

Rendell for inviting the Pennsylvania Medical Society to speak at 

today’s hearing on the proposed merger of IBC and Highmark. 

As you already know from the news reports, the proposed IBC/

Highmark merger is a mega-merger. It would form the third largest health insurance company in the country. The new company 

would control 53 percent of the Pennsylvania health delivery market. Based on the enrollee figures, the combined IBC/Highmark 

company is estimated to have 8 million enrollees. The majority 

would be Pennsylvanians. This new company would ensure the majority of our State’s residents. Prior to announcing their intentions, 

the Pennsylvania Medical Society was able to meet with the CEOs 

of both companies, and we continue our dialogue with them. 

Historically, the Pennsylvania Medical Society has expressed 

concerns when mergers are announced. We are not rushing to judgment until we have all the questions answered. Similarly, we hope 

that regulators and others will not push this marriage down the 

aisle until we can ensure it does no harm to the public. 

Some believe the growing trend at consolidation within the 

health insurance market has the potential to imperil competition, 

which threatens both health care quality and patients’ access to 

care. Highmark and IBC currently do not compete in the same 

areas of the State, but that does not mean that their proposed 

merger could not do harm. There are patients, employers, and physicians who live along those non-compete Blue lines that define 

their territories, who presently do have some choice and do, to 

some extent, drive pricing. A merger of this size could deter new 

competition in these markets. 

Will the size of this merger stop other health insurers from entering the Pennsylvania market? In theory, the new IBC/Highmark 

company should gain economies of scale. Will those economies of 

scale benefit the public? And after those economies of scale are initially realized, then what happens? 

Highmark and IBC stated that the new combined company will 

have the resources to hold administrative fees flat for 2 years. 

Then what? Published studies show that health insurers exhaust 

their economies of scale at 100,000 to 150,000 enrollees. Insurers 

with 1 million, 2 million, 5 million, or 8 million enrollees are not 

any more efficient and may, in fact, lose efficiency as they become 

larger. 

After 2 years, can we expect a big jump in the merged companies’ 

operating costs? Will any competition still exist in Pennsylvania to 

keep their costs in check, or will competition in Pennsylvania be 

stifled? 

Competition generally improves pricing, consumer choice, clinical 

quality, and service quality. Reduction in competition could negatively impact everyone—patients, hospitals, health care professionals, and the Government. With an expanded insurance monopoly, the new company could exclusively control the insurance marVerDate 0ct 09 2002 11:20 Jul 25, 2007 Jkt 036569 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\36569.TXT SJUD1 PsN: CMORC
15

ket that now allows for premium competition. Similarly, this could 

create a huge monopsony in which there is only one buyer of health 

care goods and services in the market. This would negatively impact health care professionals and hospitals, giving them little opportunity to play on a level playing field. 

Let me say that again: A level playing field. 

This concern leads us to our most important question. If this 

merger goes there, will there ever be a level playing field between 

health insurers and health care professionals who already are not 

able to collectively negotiate the terms of their contracts? Will we 

be able to select insurance products we accept, or will the single 

mega-company dictate that providers participate in all their products? The all-products clause. Will there be fair contracts, or will 

the current standard of ‘‘take it or leave it’’ become ‘‘take it or 

leave’’? 

All this comes at a time when we are already not competitive in 

the national market to attract and retain high-quality young physicians here in Pennsylvania. Will insurers focus even more on costcutting mechanisms with less regard to patients’ needs? Who will 

be here to speak for their needs? 

The lack of competition among health insurers, as well as the 

consolidation of health insurers across the Nation, raises very serious concerns for the provision of quality patient care. As a patient 

advocate, physicians are often undermined by dominant insurers 

who prevent them from ordering necessary or the most appropriate 

testing. We feel we have already a dysfunctional market with annual double-digit health insurance premiums, unilateral decisions 

about hospital payments, below-market hospital fees, below-market 

physician fees schedules that are unilaterally imposed, and yet substantial profit levels for insurers. 

Based on the 1997 Federal Trade Commission/Department of 

Justice Horizontal Merger Guidelines, Pennsylvania would already 

be categorized as ‘‘concentrated.’’

Senator SPECTER. Dr. Schott, how much more time do you need? 

Dr. SCHOTT. Thirty seconds, please. 

Senator SPECTER. Thank you. 

Dr. SCHOTT. Under the guidelines, a merger of markets that 

raises the HHI index, which is what the Government uses to measure the effects of competition, Pennsylvania already has an HHI 

that is over 1,500, which is concentrated. We feel this number is 

even distorted because of the regionalization at the present time, 

that it looks at Pennsylvania as if the competition were uniform 

across the State. We feel strongly that this will exceed the FTC 

guidelines, and we would emphasize that, quoting from the guidelines, ‘‘As the HHI market concentration increases, competition and 

efficiency decreases. The chances of collusion and monopoly increases.’’

In conclusion, I ask: Will the proposed IBC/Highmark merger be 

good for Pennsylvania? At first glance, maybe. But below the surface, there are some serious questions that need to be investigated. 

That is why something this immense needs the attention of the 

Federal Government through the Department of Justice and the 

Federal Trade Commission. 

Thank you for your concerns. 

16

[The prepared statement of Dr. Schott appears as a submission 

for the record.] 

Senator SPECTER. Thank you, Dr. Schott. 

We now turn to Mr. James Buckley, President of the Delaware 

Valley Health Care Coalition. A graduate of St. Joseph’s University, previously served in various positions as managing the pension and health and welfare fund for Plumbers Local 690. 

Thank you for being with us, Mr. Buckley, and we look forward 

to your testimony. 

STATEMENT OF JAMES R. BUCKLEY, PRESIDENT, DELAWARE 

VALLEY HEALTH CARE COALITION, INC., PHILADELPHIA, 

PENNSYLVANIA 

Mr. BUCKLEY. Senator Specter, Senator Casey, Governor Rendell, 

thank you very much for allowing us to be here. The Delaware Valley Health Care Coalition is a group of 

union health and welfare funds that have joined together to take 

advantage of discount pricing. Currently, we represent 91 funds in 

the Commonwealth of Pennsylvania, 190,000 members, and over 

400,000 lives. In 2006, a very conservative estimate of our total 

spent was $1.5 billion. 

At this point in time, the Delaware Valley Health Care Coalition 

has no position regarding the planned merger between Highmark 

Blue Cross—Highmark—and Independence Blue Cross—IBC. This 

is simply due to the fact that there is very little information concerning the potential effects of this merger available to health care 

consumers and providers. 

We have learned some information from the various press organizations and speaking to representatives of the Blues, and what we 

understand is this merger is going to take from 3 to 5 years to complete. There will be an infusion or an allocation of $650 million to 

the State government, bringing the total amount given to the State 

government of $1.1 billion. There will be a 2-year cap on the administrative fees by both Highmark and IBC. There is going to be 

a $285,000 infusion of cash into the Blue Cross prescription drug 

program in fee reductions and drug cost reductions. 

The new corporation will be nonprofit. It will be headquartered 

in Camp Hill, Pennsylvania, and there will be no layoffs. All employee reductions will be achieved through attrition. Also, there 

will be no buyouts or golden parachutes. 

Although at this time the DVHCC has no official position, I am 

here on behalf of our directors to express our profound concern and 

hope that certain questions regarding this merger will be answered 

through the Committee’s review process. Our concerns and questions focus on whether the resulting entity will foster greater competition in the Commonwealth to the benefit of health care consumers, payers, and providers, or stifle competition to the detriment of these groups. 

Both organizations have a tremendous amount of money in reserves, both being owed in part to their nonprofit status, to be used 

for the uninsured in our Commonwealth. In 2005, it was reported 

that the reserves of Highmark Blue Cross and Independence Blue 

Cross were $2.8 billion and $1.43 billion, respectively. 

17

By combining the Blues organizations and the hopeful efficiencies created, our directors are concerned with how excess reserves will be utilized. Will these reserves be used to create better 

and more affordable health care systems for the citizens of our 

Commonwealth? Or will they be used to finance predatory pricing 

practices of the new merged company? Will the excess reserves and 

economies of scale created by the unified insurer be used to smooth 

rates from year to year? Will there be guidelines that control what 

reserves may be used for? And if so, who will be charged with the 

oversight of these reserves? Will the anticipated reduction of 9,000 

jobs through attrition eventually resulting in approximately $450 

million per year upon completion of the workforce reductions pay 

for runouts for employees’ health care whose employer becomes insolvent or disease management for all insured? Further, will the 

reductions in the workforce affect service provided and, consequently, the quality of care provided in the Commonwealth? 

Of great concern to our member directors is whether or not the 

new entity, with its integrated systems, will provide a greater flow 

of information concerning quality of care providing by hospitals and 

physicians in the Commonwealth and payment information? It is 

our sincere hope that there will be a mandate for transparency 

with regard to information on hospitals and physicians and, further, and more importantly, that this information will be shared 

with the Pennsylvania Health Care Cost Containment Council, an 

organization that has compiled an invaluable knowledge base on 

health care quality in the Commonwealth, and who, I might add, 

without renewed enabling legislation will cease to exist in 2008. 

It is our sincere hope that these questions will be answered and 

the issues be addressed when this merger is scrutinized by the 

Committee and the Department of Justice, as well as the Insurance 

Department of the Commonwealth of Pennsylvania. 

Thank you again for allowing me to be here. I will take any questions when the time comes. 

[The prepared statement of Mr. Buckley appears as a submission 

for the record.] 

Senator SPECTER. Thank you, Mr. Buckley. 

We now have our next witness the Executive Director of the Action Alliance of Senior Citizens of Greater Philadelphia, Mr. Pedro 

Rodriguez. He had been Legislative Director for Philadelphia City 

Council. Bachelor’s degree from the State University of New York 

in Economics. 

We appreciate your being here, Mr. Rodriguez, and we look forward to your testimony. 

STATEMENT OF PEDRO RODRIGUEZ, EXECUTIVE DIRECTOR, 

ACTION ALLIANCE OF SENIOR CITIZENS, PHILADELPHIA, 

PENNSYLVANIA 

Mr. RODRIGUEZ. Thank you, Senator Specter. Good morning, Senator Casey, Governor Rendell. Thank you for this opportunity to 

add a consumer perspective to the pending merger of Independence 

Blue Cross of Southeastern Pennsylvania and Highmark of Western PA. 

The planned Blue Cross merger in Pennsylvania is a potential 

disaster for Pennsylvania consumers. It is a mega-corporate reshufVerDate 0ct 09 2002 11:20 Jul 25, 2007 Jkt 036569 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\36569.TXT SJUD1 PsN: CMORC
18

fling of the deck chairs on our sinking Titanic health care system. 

It demonstrates once and for why all Americans need a program 

like Medicare or a single-payer health care insurance system. 

This proposed merger poses more questions than answers. It 

also, in a very tragic way, points to the failure in Pennsylvania for 

government and consumers to have a place to ask those questions 

and try to get some answers and clarity, questions such as: Is this 

the first step toward a for-profit conversion? According to a report 

by Community Catalyst of Boston, the Blues’ charitable commitment, such as the provision of coverage to children and other lowincome individuals, has been decreasing since 2000. Will the merger reverse the trend or make it worse? 

Already, Independence Blue Cross is a de facto for-profit corporation, having transferred most of its assets to its for-profit subsidiaries. IBC admitted that 90 percent of its revenues come from the 

for-profit companies it owns. 

There are no clear and substantial benefits to the public from 

this merger. The Blues will not commit to premium reductions or 

pledge to put a ceiling on premiums. Rising Blue Cross premiums 

will contribute significantly to the increasing rate of those without 

insurance, particularly older people who are not yet eligible for 

Medicare. There are no guarantees that individuals with flat incomes, who are dropping coverage, or ‘‘buying down’’ to coverage 

with reduced benefits or increased deductibles will realize a better 

deal with this merger. 

The Blues’ statutorily mandated charitable obligations will not 

be expanded under this merger. The Blues have cleverly misrepresented in their press release that $650 million will go to expanded 

coverage for the uninsured. This is a bald-faced misrepresentation 

to the public because they did not clarify that most of this money 

had already been obligated under a binding agreement with Governor Rendell signed in the fall of 2004 requiring annual charitable 

payments beginning in 2005 under the Annual Community Health 

Reinvestment (ACHR) program. There appears to be no substantial 

expansion of charitable payments coming from this proposed merger. 

In addition, no one can say the proposed merger is in the public 

interest unless there are guarantees that the new entities pay fairly for services. It is not in consumers’ interests if as result of the 

merger the Blues are able to low-ball payments to doctors and hospitals, causing them to end up closing their medical practices or 

hospital doors. No matter how low the cost of health insurance, if 

services are unavailable, the savings are worthless. 

To determine whether the proposed merger is in the public interest, we need to know how it will lower health care costs, and 

whether it will allow more people to afford health care and make 

it easier for the State to grow jobs and eliminate unnecessary bureaucracies. The merger is not in the public interest if all it does 

is free up more money for the Blues to start more for-profit subsidiaries. I don’t think anyone can say it is in the public interest unless we see how much savings are being projected and to whom the 

savings flow. Will those savings go to huge salaries for top executives or to provide increased access to health care for working people in Pennsylvania? 

19

What is also of grave concern is the appalling absence of any decent consumer protection law or enforcement within the State and 

Federal Governments. The catch-up bills of Senator Don White and 

Representatives Todd Eachus and Phyllis Mundy would finally 

amend the State’s Insurance Holding Company Act to include the 

Blues with other insurance companies so that a planned merger 

would now need Insurance Department approval. The Department 

for the first time would be able to determine if the Blues merger 

would ‘‘substantially lessen competition,’’ but this, again, is grossly 

inadequate. 

We should have a body of laws that require the Blues, and other 

insurance companies, to first demonstrate a substantial benefit to 

the public before any merger is approved—a standard that has 

been effectively used for utility companies in Pennsylvania for a 

long time. 

Because the Pennsylvania Insurance Department has always 

been a paper tiger or a captive of the insurance and Blues industry, 

consumers need much more in protections. Consumers need a right 

to have standing to intervene in Insurance Department proceedings, have rights to discovery, and have their fees and costs 

paid by the insurance company if they make a ‘‘substantial contribution’’ to the result—as provided for in California law. 

To conclude, Pennsylvania has 2.8 million people without health 

insurance or underinsured. That is a whopping 27 percent of the 

non-elderly population. The proposed merger does not promise to 

solve this crisis. We appeal to Washington to lend the consumers 

of Pennsylvania a hand and to come and ask the tough questions 

about this proposed merger. 

Thank you. 

[The prepared statement of Mr. Rodriguez appears as a submission for the record.] 

Senator SPECTER. Thank you, Mr. Rodriguez. 

Our final witness is Joseph ‘‘Chip’’ Marshall, Chairman and CEO 

of Temple University Health System. Bachelor’s degree and law degree from Temple University. 

Thank you for coming in today, Mr. Marshall, and the floor is 

yours. 

STATEMENT OF JOSEPH W. ‘‘CHIP’’ MARSHALL III, CHAIRMAN 

AND CHIEF EXECUTIVE OFFICER, TEMPLE UNIVERSITY 

HEALTH SYSTEM, PHILADELPHIA, PENNSYLVANIA 

Mr. MARSHALL. Thank you. Good morning, Senator Specter, Senator Casey, and Governor Rendell. I am Chip Marshall, Chairman 

and CEO of the Temple University Health System. On behalf of all 

of our employees, physicians, and patients, thank you for the opportunity to testify today on the Highmark/Independence Blue 

Cross Merger—a matter of significance to the Temple University 

Health System, the southeast Pennsylvania region, and the entire 

Commonwealth. 

At the outset, let me share with you some background on the 

Temple University Health System, whose hospitals have steadfastly provided their communities with compassionate, high-quality 

care for more than 150 years. The Temple University Health System is comprised of five hospitals, including Temple University 

20

Hospital, Temple University Children’s Medical Center, the Temple-Episcopal Campus, Jeanes Hospital, and Northeastern Hospital. 

Last year, we handled a quarter-million emergency department 

visits, admitted approximately 60,000 inpatients, provided over a 

half-million outpatient visits, and delivered more than 6,000 babies. 

Temple University Hospital and Temple Children’s serve as the 

chief clinical training sites for the Temple University School of 

Medicine. Together, these hospitals are the region’s only Level I 

Trauma Center for adults, children, and burn victims. 

Our Health System family also includes the Temple Transport 

Team, our state-of-the-art ground transport unit that provides 

rapid transport from central Pennsylvania to the New Jersey coast. 

Temple Physicians, Inc., our network of community-based doctors’ 

offices, serves Philadelphia, Bucks, and Montgomery counties. 

When I joined the Health System as CEO, I established a goal 

for the health system to become a high-quality, regional health care 

provider. We are entirely committed to excellence, as evidenced by 

our continued investment in our professional workforce, facility improvements, and advanced medical technologies. 

It is with this background that I offer my views on the proposed 

merger of Highmark and Independence Blue Cross. As both an IBC 

network provider and as a purchaser of its insurance product for 

an 8,000-employee health system, thank you for bringing national 

focus to this important matter affecting competition and choice in 

the Pennsylvania insurance market. 

I realize that at this early stage, we do not have sufficient information to make firm declarations or recommendations. Over the 

next several months, however, hospitals, physicians, consumers, 

employers, and other stakeholders will closely monitor merger developments. As they do, it will become clear that the benefits promised by Highmark and IBC will not be self-executing simply as a 

result of this merger. Benefits of a consolidated plan will be 

achieved only with strong efforts of all stakeholders in the health 

care industry. Only if done right could the combination of 

Highmark and IBC offer opportunities for efficiencies in the insurance market and a deeper commitment to the social missions of 

these plans. 

Ultimately, the issue is whether stakeholders in the health care 

delivery system will benefit from or be disadvantaged by the combination of Highmark and IBC. To help resolve this, I believe it is 

imperative that several questions be explored. 

First and foremost, how would a consolidation of Highmark and 

IBC affect access to care? If hospitals and physicians are not compensated fairly for their services, or they are closed out of provider 

networks, then the supply of vital services will be restricted at the 

expense of those who need care. 

Second, would a consolidation of Highmark and IBC damage or 

destroy the social missions of these plans? In eastern Pennsylvania, 

IBC is an important part of the community and is highly valued 

for its corporate leadership and financial support of many worthy 

causes. Temple Health System, for example, has collaborate with 

IBC in our joint roles with the Philadelphia Chamber of Commerce, 

21

Select Greater Philadelphia, and the CEO Council for Growth, as 

well as many outreach activities designed to improve the health 

status of our communities. We hope this civic partnership will be 

preserved. In western Pennsylvania, stakeholders will have their 

own questions as to how a merger would be managed with high expectations from a strong Philadelphia area market. 

Third, how do we balance the benefits of price competition with 

the financial and social burdens imposed on hospitals, which are 

required to provide 24-hour access to all who present to their emergency rooms? 

Fourth, how will financial benefits that accrue to a combined 

Highmark/IBC plan be shared with patients, hospitals, physicians, 

and the communities they serve? Will employers and consumers 

benefit from lower premium costs and improved products that 

might be offered by a stronger, more efficient, and effective company? 

Finally, what impact would a consolidation have on an already 

fragile health care system? As we consider this issue, we must be 

vigilant in balancing the competing interests of hospitals, physicians, insurers, employers, consumers, and patients. A market 

change of this magnitude must fortify, not weaken, Pennsylvania’s 

health care delivery system. A consolidated company must be 

steadfastly dedicated to working with providers to ensure their continued ability to offer quality care to our patients, for it is the patients around whom we are all centered. 

In closing, let me emphasize that the standard economic competitive analysis might not be entirely sufficient in considering the impact of a consolidated Highmark and IBC. The dominant IBC market share in the region, the overall complexity of the health care 

market, including the virtual inability of providers to sell their 

services directly to consumers, thus necessitating that insurers be 

an efficient and effective component of the delivery system are all 

factors that have to be carefully considered in evaluating a possible 

consolidation. 

On that note, we must keep in mind that with time, Pennsylvania’s health care system requirements will change. What is efficient and effective today did not exist 10 years ago and will change 

over the next 10 years. Pennsylvania—

Senator SPECTER. Mr. Marshall, how much more time will you 

need? 

Mr. MARSHALL. Just 30 seconds, Senator. Again, it is too early 

to take a position for or against the proposed consolidation. We 

would not want to oppose a merger simply because of possible 

downsides. If carefully executed, with constructive involvement 

from hospitals, physicians, employers, consumers, and other stakeholders, a consolidation could provide an opportunity to stabilize 

Pennsylvania’s health care system, preserve the economic stability 

of its businesses, and ensure access to care for all its citizens. We 

at Temple Health System are committed to working with all stakeholders on this important issue. 

Again, thank you, Senators and Governor Rendell, for your leadership on this issue and for allowing me to testify today. 

[The prepared statement of Mr. Marshall appears as a submission for the record.] 

22

Senator SPECTER. Thank you, Mr. Marshall, and thank you all. 

We now turn to 5-minute rounds from the panel, and I would 

begin with you, Dr. Melani. When we talk about nonprofits, there 

is a real question as to exactly what that means. Right now Congress is wrestling with a pay increase for Federal judges, who earn 

$165,000 a year. When we look at executive compensation at 

Highmark in excess of $3 million, and when we look at a surplus 

of $2.6 million, would there be savings potentially to premium payers if that surplus was not maintained or the level of executive 

compensation if nonprofit really has to have some significance in 

terms of not being for-profit? 

Dr. MELANI. Yes, Senator, let me address your question. The 

number of lives that Highmark covers across the Nation is actually 

28 million, not 4.6 million. It is 4.6 million in the State of Pennsylvania who have health insurance. We service 28 million individuals 

around the United States. So if you were to charge our customers 

for my compensation, it is about 50 cents per customer per year—

I should say 10 cents per customer per year, is what it comes out 

to be. So that would be the savings to the customer. I guess that 

was part of your question, what would the savings be if I received 

zero income. It would be about 10 cents per customer per year. 

Senator SPECTER. Well, Dr. Melani, whatever the saving would 

be, there would be a saving. But what I am sort of groping for is 

really what does ‘‘nonprofit’’ mean. We have had some concerns expressed that this might be a precursor to having Highmark and go 

profit, as WellPoint did, the second biggest health carrier in the 

United States. And I am not sure that being for-profit would necessarily be more profitable than nonprofit. But can you assure us 

that that is not in the offing to go for-profit? 

Dr. MELANI. We have no intent to go for-profit. Not-for-profit for 

us is two things: One is a corporate structure, and it is a corporate 

structure that exists for purposes of taxing and other things. And, 

frankly, our not-for-profit status is a bit of a misnomer because we 

pay just about every corporate tax there is—property taxes, all of 

those things. So we get very little in the way of tax forgiveness as 

a not-for-profit in the State of Pennsylvania. 

What it really means for us is a philosophy in the way we manage. It is the corporate mission. It is a community-focused mission. 

It is the ability to actually look at the community as a whole and 

work on initiatives for the community for the long term, without 

concern about shareholders, without returning value to shareholders other than the people of the Commonwealth of Pennsylvania. Our shareholders are the people we serve in Pennsylvania, 

the people in Pennsylvania. So everything we do as a not-for-profit 

is geared around trying to make health care more affordable, more 

accessible for the people of Pennsylvania, and that is our not-forprofit mission. That is our not-for-profit status. 

We do not intend to veer from that. Corporately, we enjoy that 

structure. We enjoy the purpose for which we exist. Our employees 

are engaged. I as the chief executive am engaged in that. We do 

not have any intent to convert to a for-profit organization. 

Senator SPECTER. I am going to have to move on to Mr. Frick. 

We do not have a whole lot of time here. 

23

Mr. Frick, Dr. Melani testifies about you have fair and reasonable premiums, but is it better to rely upon competition to hold 

down premium costs? And would you favor an antitrust exemption 

for doctors and hospitals to negotiate with Independence Blue 

Cross? 

Mr. FRICK. Well, the first question about our provider reimbursements and competition, as I mentioned in our testimony, over 85 

cents of every dollar that we take in in revenue from our customer 

goes directly out the door to pay for health care services to the hospital community and the physician community on behalf of our 

members. We are proud of that. That is a number that is much 

higher than the publicly traded competitors that we referenced earlier. 

Senator SPECTER. Well, if you have this kind of a merger, would 

you say that it would be fair to give a little more bargaining power 

to doctors and hospitals not to be restrained by antitrust in negotiating with Independence Blue Cross and Highmark? That is my 

last question. I only have a few seconds left. 

Mr. FRICK. Well, Senator Specter, I think the leverage is joint 

today. We need quality providers to render care, and we look every 

year at fair and reasonable compensation. We had a 30-percent increase in the last 5 years in our payments to providers, and actually, the number of participating providers in our network has increased 11 percent. So I think all of us are aligned more today than 

ever in terms of fair and reasonable compensation, and also to 

make sure that the fees we pay reflect quality and performance 

and the health status of all of our members. I think that is the priority. 

Senator SPECTER. Thank you, Mr. Frick. 

Senator—Governor Rendell? I almost demoted you. 

Governor RENDELL. That is all right. I am sorry to the other panelists to address these questions almost exclusively to Mr. Frick 

and Dr. Melani, but it is the nature of where we are, and I did 

have one question for Senator White, which I cannot resist since 

I have got him here. 

To Dr. Melani or Mr. Frick, there has been a lot of talk about 

what the increases in level, the $1 billion increase, but I think it 

is very important that we start from understanding what the baseline is. And I know we do not have a lot of time, but can you give 

us an understanding of the baseline of the charitable commitments 

that IBC and Highmark make right now? And it is my understanding—Mr. Rodriguez said that this would just be money going 

to fulfill the commitment you made to us on the adult basic care 

program. It is my clear understanding that that is not the case; 

this is above and beyond the existing commitment. But can you 

both give us an idea of your baseline? 

Mr. FRICK. Well, our obligation in 2006, Governor, was a total of 

$52.4 million, and $29 million of that was directed specifically to 

adult basic. And as you know as the architect of that agreement, 

the Community Health Reinvestment Agreement is scheduled to 

expire in 2010. So the $350 million that I alluded to is to extend 

that agreement for an additional 3 years, but through operational 

and technology savings, we believe we can also generate an additional $300 million in savings that we believe is most appropriate 

24

to direct to access and reducing the uninsured, because every 

stakeholder we talk to, that is the single most important issue in 

Pennsylvania, although Pennsylvania, I think, because of the historic partnerships between our government and the Blues, the rate 

of uninsured in Pennsylvania is much lower than the national average. And while I do feel good about that, because I believe it reflects the history of the Blues and our progressive leadership, I 

think with the additional commitent we would make as part of the 

consolidation, we can do better. 

Governor RENDELL. We are the seventh lowest in the Nation in 

terms of percentage of uninsured. That is correct. 

Dr. Melani, do you want to comment on that? Give us an idea 

of your baseline. 

Dr. MELANI. I agree with what Joe says, that the Community 

Health Reinvestment initiative sunsets in 2010, so a portion of this 

is the extension of the Community Health Reinvestment initiative. 

But there is $300 million of additional funds over 6 years that will 

be applied to the uninsured. That is in addition to continuing our 

community commitments. Last year, combined, we committed over 

$250 million back to the community. Without the merger, those 

funds will not be available. 

Governor RENDELL. And just so I am clear, as you know, the 

Commonwealth, at least the administration, is asking the legislature to adopt something called ‘‘Prescription for Pennsylvania’’ that 

would ensure health care for all the uninsured. Adult basic care 

would phase out under that, and the money that is currently programmed for adult basic care would go into the pot that would pay 

for the increase in covering all the uninsured. It goes without saying that those payments would go to that program as well, the 

ABC payments. 

Mr. FRICK. And the additional funding that I spoke about, $300 

million, would go to whatever new programs or products we jointly 

believe the administration, the legislature, and us as Blues would 

best provide increased access to small employers and reduce the 

uninsured rate. Absolutely. 

Governor RENDELL. And I have one question for Senator White. 

Senator White deserves a great deal of credit for taking this issue 

head on and Senate bill 550 would remedy, I think, something that 

needed to be remedied by giving the Insurance Commissioner the 

right to approve or reject mergers between nonprofits. 

But as you know, Senator, we also have a proposal in Prescription for Pennsylvania to allow the Insurance Commissioner to rateset for health care, both for-profits and nonprofits. I hope you 

would be supportive of that because one of the things that has been 

expressed here is the concern by Senator Specter, Mr. Rodriguez, 

and others is what is going to happen to premiums and rates. Certainly we will be in a better position if the Insurance Commissioner 

has the ability to reject rate increases. 

Senator WHITE. Governor, you are absolutely right, and I think 

everybody—you are to be commended and lauded for Prescription 

for Pennsylvania, and you are getting a lot of support in the legislature for all parts of it. But I am sitting between these two giants 

here, and I feel a little squeezed. 

[Laughter.] 

25

Senator WHITE. But, you know, the community mission part of 

this is wonderful, and it is a great concept. And while it is helping 

the Commonwealth with the uninsured, which is, you know, a pretty staggering figure, 800,000 people, let’s not forget that we have 

11.2 million people that do have insurance, and they want to know 

where the benefits are coming from, too. 

Also, sometimes I have a problem—the reserve part of this I 

guess is something that I need to be better educated on because, 

Governor, as far as I am concerned, in my own mind I classify 

these as basically excess premiums. And we all pay into that. 

Governor RENDELL. Well, just to follow up, the legislature should 

understand the reserve issue as it is ruled on by Pennsylvania, and 

other States as well, and I agree. And we should do that as part 

of this process. 

But don’t you agree that in terms of protecting those 11.2 million 

who do have health care, it is important to give the Insurance 

Commissioner the ability to set rates? 

Senator WHITE. Absolutely, Governor. 

Governor RENDELL. Thank you. 

Senator SPECTER. Senator Casey? 

Senator CASEY. Thank you, Senator. 

I think my first question is directed to both Mr. Frick and Dr. 

Melani, and it is a question, I think, that a number of speakers 

today, a number of people in their testimony, as well as in the 

questions, spoke to either directly or indirectly, and that is the 

standard, the basic standard, which may not be required of both 

companies in this merger situation, but I think is a good standard 

for us to follow here in the State. So whether it is the mandatory 

legal standard or not, I think it is important to answer this question. And it is the basic overarching question of the so-called affirmative showing of substantial public benefits from this merger. 

I would ask both of you to answer that as best you can in the 

short period of time we have today, but also to supplement or amplify your answer in writing as part of the record of this Committee, and I would ask Senator Specter’s permission to do that, 

because I think that is one of the overarching questions: What are 

the substantial public benefits of this merger? If you could both answer, maybe Mr. Frick first. 

Mr. FRICK. Senator Casey, sure. I guess one of the reasons for 

the 2-year process between IBC and Highmark to come to this day 

today is because we both recognize our standing and importance—

not just in health care in Pennsylvania, but for the local communities. Our local communities want to make sure we preserve jobs. 

Our employer communities want to make sure that we keep rates 

affordable. Our partners in Government want to make sure we can 

continue to insure as many people as possible. Our provider partners want to make sure that reimbursement is aligned and fair and 

reasonable. 

So we have multiple stakeholders, and what Highmark and IBC 

believe is that by avoiding duplicative investments, cutting down 

on unnecessary administrative spending, every dollar that we can 

achieve from this consolidation, Senator, will go directly to make 

health care work better in Pennsylvania. That is our primary objective. We are not out-of-State companies. We are looking to be more 

26

efficient so we can reinvest whatever dollars we can accrue to make 

health care work better for all of our stakeholders—employers, the 

uninsured, our provider partners. That is our objective, and I believe that we do have to prove that to you or this combination 

should not happen. But that is how committed we are. 

Senator CASEY. Doctor? 

Dr. MELANI. Yes, Senator Casey, I think Joe articulated the answer quite well, but I will just restate that there are definitely economic benefits that will be derived, both direct and indirect. Direct 

benefits we talked about, which is the $1 billion that we will get 

back to the community over the first 6 years of operations, and 

those will continue in perpetuity from that point forward. But in 

the first 6 years, that is $1 billion of economic benefit that otherwise would not have been received, about half of which will go back 

directly to customers in savings through health care cost or administrative cost savings, and the other half will go toward the uninsured to help get them access to health care services that they 

need. 

The indirect is really the benefit we talked about which our companies bring to Pennsylvania every day. It is the employment that 

we have, the 18,000 employees we have located here in Pennsylvania. Unlike other companies that compete in Pennsylvania, you 

know, our employees are based here servicing the people of Pennsylvania and those nationwide, and we intend to continue that. 

In addition, the way we operate, we purchase in Pennsylvania. 

Over 85 percent of all of our services are purchased here in Pennsylvania from Pennsylvania-based companies who employ people 

here, another 54,000 jobs created by way of that. 

Also, our surplus, the way we use our surplus to generate economic benefit to the Commonwealth through procurement of services and companies that we have put in place servicing others 

across the Nation, those jobs are back here in Pennsylvania. Again, 

no cost to the Commonwealth, done by us. A great benefit to the 

Commonwealth. 

I do not want to also understate, though, the quality value, working with the providers in the community. We have historically had 

a 70-year relationship with providers in the community. We were 

started by providers, started by the Hospital Association, started 

by the Pennsylvania Medical Society. We have a rich tradition of 

working closely with the provider community in our markets. 

Yes, today things are tough. There is a tension because of health 

care costs. But we will continue that rich tradition of working face 

to face to improve quality of care and to try to make health care 

more affordable by advancing technologies, the personal health 

record, by looking at ways to increase our passthrough in our 

claims, by doing real-time claims adjudication, improving cash flow 

for physicians and hospitals. We will continue to look at initiatives 

on transparency, pay for performance—all those things that are 

critically important, that we will not be duplicating and confusing 

to the provider community or customers. One time, one place. 

Senator CASEY. I would just urge you in the future, as you did 

today but I think we need more detail, to be very specific about the 

benefits and remember that part of that standard has the word 

‘‘substantial,’’ and that means something that is going to have a 

27

phenomenal effect, a substantial effect on everyone’s life, and that 

means both health care coverage and I think it also means the 

question of cost. 

So I think when you are making your list and you are submitting 

for the record, not just for this hearing but for any filing, that you 

think about it in very specific and in broad terms what the word 

‘‘substantial’’ actually means. I think that is what people are looking for. 

We are out of time. 

Senator SPECTER. Thank you, Senator Casey. We have time for 

one more round of 4 minutes and still make our 11 o’clock termination time. 

Senator White, there have been some rumors that if this merger 

goes through, some current competitors will withdraw from the 

State; other potential competitors will not enter the State. How 

would you evaluate that? Would there be a significant impact on 

competition for similar competitors? 

Senator WHITE. The best way I can answer that, Senator, is to 

say that, you know, there are so many—whether this merger goes 

through or not, we are still in a state where, when you combine all 

the Blues coverage in Pennsylvania, they have—this did not happen overnight. This happened and developed over a 20-, 25-year period. And a lot of it had to do with broken unions and the fact that 

the unions always wanted the Blues. The Blues were always the 

No. 1 choice, and that has helped to generate this growth. 

I think right now what you have is the entry barriers for commercial businesses coming into Pennsylvania with the environment 

that we have today is not real positive. There are just so many barriers. They are going to continue to dominate the market, and I 

think this is something—this is a good step. I think something 

should have been done maybe along these lines in 1996, which we 

sort of just let it slip under our nose. 

But the point is that from a commercial end, when I was in the 

business, a lot of the times in the rural parts of Pennsylvania, Senator, you had—if I had my little companies that I represented, I 

actually did not want to handle health care. I handled the property/

casualty or life or disability or annuities and pensions. I did not 

want to handle health care because if my client was unhappy and 

then the next year I came back with a 20-percent increase in his 

premium, and I could not explain it to him, I had to go back to the 

same company, Highmark, and just get a cheaper plan. And that 

is the extent. There is no network in the area that I represent in 

Pennsylvania for—

Senator SPECTER. Dr. Schott, if this merger goes through, what 

impact will there be on the bargaining power of doctors and hospitals? How does this affect your interest in having an antitrust exemption for doctors and hospitals to join together to negotiate with 

Independence Blue Cross and Highmark? 

Dr. SCHOTT. Physicians find themselves at this point clearly at 

the bottom of the economic power structure in dealing with thirdparty payers and even at times in dealing with hospital systems. 

The reimbursement market for physicians is an important issue, 

not so much that I can take home salaries that some of our CEOs 

enjoy, but to retain and attract people to this market. And we have 

28

been progressively unable to do that because of both the economic 

and to a large extent the tort climate that we face in Pennsylvania, 

especially in southeastern Pennsylvania. 

The national average for third-party payer reimbursement for 

evaluation and management services, which is what most internists spend their life doing, is substantially above Medicare, while 

in southeastern Pennsylvania we have expected our doctors to work 

here at substantially below Medicare. 

Senator SPECTER. I am going to ask for a show of hands, with 

only 20 seconds left, of those on the panel who think there should 

be an antitrust exemption for doctors and hospitals to negotiate. 

You do not have to be yes or no if you have not had time to think 

about it. I would understand an abstention. But everybody on the 

panel who thinks that if this merger goes through, it would be appropriate to have an antitrust exemption for doctors and hospitals. 

If you favor that, raise your hand. Opposed? 

[Four in favor.] 

Governor RENDELL. Can I ask one question? Basically a yes or 

no answer. 

Senator SPECTER. No, no. You can ask several. 

Governor RENDELL. I thought we were out of time. 

Senator SPECTER. You have got 4 minutes. 

Governor RENDELL. Doctor, I hear what you say. Mr. Frick just 

told us that the increase in physician reimbursement has been 30 

percent over the last 5 years. Correct or incorrect? 

Dr. SCHOTT. I do not know that that number is absolutely true. 

I cannot substantiate that number. There are different issues that 

play into that number, and I know we are time-limited, but the 

ability of any given physician to be able to survive in this environment has been very marginal. 

The fact that southeastern Pennsylvania has high demands on 

service is an issue that we share the concern with IBC. When we 

are taking care of a patient, they frequently are probably sicker 

than the average and require a lot more services, and the system, 

as it has evolved, including the system where primary care physicians now are not given any advantage to go to the hospital to see 

their patients because their only revenue comes from what they do 

in their office. 

So there are a lot of factors here. I realize time is very limited, 

and I would be happy to spend as much time as any of you want 

to spend at any time to further discuss this. 

Governor RENDELL. Could the objective that Senator Specter is 

trying to reach with antitrust, would that not have been reached 

had the legislature approved the legislation on provider groups? 

Maybe you want to explain that to the Senator, the legislation that 

failed. 

Dr. SCHOTT. Well, the Senator is well aware of the Campbell bill, 

which was the national bill after which both the Texas bill and the 

Pennsylvania bill were patterned. That would have the ability for 

physicians to collectively bargain under the oversight of the Department of Health or the Insurance Commissioner or some Statebased agency. 

It is cumbersome. The process for doing that we would certainly 

like to address and tweak, but we would certainly be in favor of 

29

moving forward with that as a trade-off for the bargaining power 

that we are not going to have when we have one monopsonistic corporation. 

Governor RENDELL. And there were efforts in the Pennsylvania 

legislature to achieve that, and they failed. 

Dr. SCHOTT. Absolutely. 

Governor RENDELL. I will not say ‘‘miserably,’’ but they failed. 

Senator SPECTER. Senator Casey? 

Senator CASEY. I have one question for Professor Burns with regard to duplication. You were making assertions about what may 

happen to both economies of scale and efficiency and duplication. 

I was curious to have you explain at least the duplication assertion 

as to how this merger would, in fact, lessen the possibility that we 

could reduce duplication. 

Mr. BURNS. Well, Senator, the insurance business is a labor-intensive industry. It is not a capital-intensive industry. And so when 

you put together two firms that are located 300 miles apart, you 

are not going to really be generating job savings or efficiencies by 

combining those two companies because you will still have the 

same number of people doing the same number of things in both 

locations. 

I think we have some historical experience we can draw on here, 

and I do not mean to bring up some unpleasant memories, but 10 

years ago we tried to pull together a huge hospital system here in 

Pennsylvania that had one part of it in Pittsburgh and the other 

part of it here in Philadelphia, and that was the Allegheny system. 

And they made many of the same claims here, and they had the 

same difficulties that I have outlined in my report on trying to 

achieve these kinds of efficiencies. 

You have two labor-intensive markets—hospitals and health 

plans—operating 300 miles apart. It is hard to pull those together 

and automate them. 

Senator CASEY. One last question. As the Governor apologized, I 

will, too, to direct these to the two principals for today, but it is 

important. Children’s health insurance, we have 9 million kids in 

the country with no health insurance at all. This State does a 

much better job than most States. The Governor is trying to expand it. But how do you see this merger impacting the question of 

children’s health insurance, meaning how many are covered? And 

do you see it as having a positive impact on the number of children 

who are covered? 

Mr. FRICK. I do not think there is any greater priority than 

health insurance for children, and Highmark and IBC were pioneers with the administration in the CHIP program that has now 

become a national model. And I think why we are allocating a large 

percentage of the savings is for two things: one, no one in America 

should be without health insurance; and, No. 2, those who are are 

increasing costs for everyone else. 

So no matter what stakeholder we talk to, creating more access 

to health insurance is good for everyone, and there is no single 

greater priority for us. 

Senator CASEY. Thank you, Senator. 

Senator SPECTER. Well, thank you all for the testimony today. 

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ary Committee rules for the submission of written questions. I 

think the hearing has been very fruitful in exploring quite a number of issues—oh, Mr. Rodriguez, you had your hand up a few moments ago and wanted to say something in addition? 

Mr. RODRIGUEZ. Thank you, Senator. I just want to emphasize 

some of the comments made by some of the principals of the Blues 

about the commitment that they were not going to turn into forprofit corporations in the near future. I think if that is the case—

and they are very nice people, and I think we can take them at 

their word—they will have no problem in signing some binding 

agreement that they would not do so for 10 years. 

In addition to that, I believe that it would be in the best interest 

of consumers in Pennsylvania if part of the surplus is used to up 

the ante in terms of the $650 million that we have on the table, 

to increase that to about $1.2 or $1.5 billion to provide health insurance for Pennsylvanians. 

Senator SPECTER. Thank you very much, Mr. Rodriguez, and I 

thank—I see a hand in the audience. We would like to take questions, but we are at 10:59. 

Governor RENDELL. Fifteen seconds. 

Senator SPECTER. Go ahead. 

Audience MEMBER. Mental health coverage, separate, not equal. 

Magellan in Georgia, bean counters handling Blue Cross’ covering 

of—

Senator SPECTER. And your question is? 

Audience MEMBER. My question is, if we are going to have more 

Magellans with this big thing, or are we going to take a look at 

what—

Senator SPECTER. Okay. We have your question. 

Mr. Frick? 

Mr. FRICK. Well, as she alluded to, Magellan is our third-party 

provider for mental health and behavioral health services for Independence Blue Cross. Highmark does not use them now. 

Our comprehensive integration plan over the next 12 months will 

look at every aspect of our company to understand what is the best 

practice in that particular care area administration, and what we 

will deliver to the marketplace is what we believe is the best. 

Senator SPECTER. If anybody else has any questions, see Mike 

Oster, my executive director in Philadelphia, and we will be glad 

to ask them for the record. And if you have any questions generally, just communicate with my office, and I am sure Senator 

Casey would say the same, as would Governor Rendell. 

Governor RENDELL. Can I just say one thing on that? 

On that quick question, Prescription for Pennsylvania does require, unlike ABC, Adult Basic Care, mental health coverage, behavioral health coverage, and substance abuse coverage. So it is an 

improvement. The product in Prescription for Pennsylvania is a 

step up because it includes generic brand prescription coverage, 

which ABC does not, and it includes behavioral health, which ABC 

does not. 

Senator SPECTER. Gentlemen, thank you all very much for coming in today. As I said, this is just the beginning. There will be 

more questions. 

31

I want to thank the National Constitution Center for opening up 

this beautiful auditorium, and thank especially Joe Torsella, the 

President. 

That concludes our hearing. 

[Whereupon, at 11:01 a.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.]

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