Knox: No to Blue Cross Merger
Tom Knox is an immensely successful businessman who built his reputation on efficiently directing companies, such as UnitedHealthcare of Pennsylvania, where he served as CEO.
Feeling the call of public service, Mr. Knox served as a deputy under then-Mayor Ed Rendell, and as a mayoral candidate, fell just short of victory in the 2007 election. Since he desires to remain in electoral politics, he is running for governor in 2010.
Perhaps the one issue in which Mr. Knox has been most outspoken is his opposition to the proposed merger of the two largest Blue Cross entities in the state. Freindly Fire recently discussed the merits of the Independence Blue Cross (Philadelphia) and Highmark Blue Cross (Pittsburgh) merger with Knox.
Freindly Fire: Why do you believe the Blues merger will limit competition, and ultimately, lead to higher health-care costs?
Tom Knox: Over 10 years ago, IBC and Highmark entered into an agreement not to compete with each other in their respective areas. During the 10-year period of that agreement, both companies embarked on a pattern of activity whereby they built such a dominant market share in their respective regions that no one could enter the market and compete against them and they now have monopolies. As a result, the cost of health insurance in their areas is higher than it should be or needs to be. There is simply no pressure to control spending and to increase the efficiency of their operations. In addition, they have used this market power to drive down the reimbursement rates paid to hospitals and other providers so that the providers are forced to charge much higher rates for the same services to all other payers and uninsured patients.
Highmark and IBC typically get discounts averaging 80 percent off of billed charges. Aetna and United Healthcare, the two largest competitors are lucky to get discounts averaging 60 percent off of billed charges and everyone else gets an average of 20 percent off if they get any discounts at all. This huge advantage has not only kept any competition from entering their regions, but also has diminished the market share of any existing competitors. All of these practices and activities are anti-competitive and in my view constitute serious antitrust violations.
If the proposed merger is allowed to occur, it would put the proverbial icing on this cake and complete what obviously was a well thought out strategy to build a monopoly that was concocted more than 10 years ago. The culmination of this plan is to combine the two entities into a single company. While there may be some economies resulting from this combination, past conduct would lead one to believe that there is no real intention to use them to lower the costs of their products and pass them on to consumers.
In fact, both entities have already filed requests to increase their rates rather then reducing them. Since they had no competition before the merger, a stronger more powerful entity can only be expected to lessen, not improve the level of competition.
The expected results will be higher costs, not lower costs. Capital Blue Cross recently filed an extremely comprehensive submission including a market analysis by one of the top experts in this field. This submission clearly sets forth all of the details supporting these conclusions.
FF: In that regard, what would bring health-care costs "under control"?
TK: Costs could be brought under control by several measures. The first would be to deny approval of the proposed merger. The two companies should be forced to compete against each other. The studies filed with the Pa. insurance commissioner in opposition to the merger clearly show that this increased competition would lower the costs of health insurance. In addition, to even further ensure lower costs, the Pa. legislature should pass a bill that requires hospitals and other providers to charge the same rates to all payers for a particular service or services. Each hospital would be allowed to fix the rates being charged for particular services or procedures, but would be required to charge that same rate to all payers. This is called "single-payer rates." Passage of this law would eliminate the huge disparity in discounts that are enjoyed by the Blues, and would level the playing field among all health insurers and self-funded plans, so that they all pay the same rates for a particular procedure or service at any individual hospital. If the rates for services are the same, health insurers and hospitals would now have to compete based on outcomes, quality of services, and price. This supports transparency and efficiency in the market place. All of this will lower costs and improve the quality of services.
In addition, it would significantly lower the unnecessary costs currently incurred by hospitals and other providers in billing and collecting fees for their services. It would also eliminate the many costly errors in billing caused by the extreme complexity that charging many different rates for the same services entails. Other states that have similar laws requiring single payer rates have realized substantially lower increases in the cost of health insurance and health-care services over the past few years and have much higher rates of competition in their markets.
FF: Some years back, you were passed over as CEO of Blue Cross, as the position went to Fred DiBona. Does that situation in any way affect your opposition to the Blues merger?
TK: No. I have been extremely successful in the many business ventures that I have engaged in since leaving Blue Cross. I would never have been as successful had I stayed there. I am opposing the merger strictly on the grounds that it is wrong and anti-competitive. I personally experienced the difficulty in competing with IBC and Highmark in Pennsylvania first hand, with my efforts to start selling health insurance through my company Fidelity Insurance Group Inc. back in 2002-03. It was almost impossible to get the many hospitals and providers in their regions to give my company the same or even remotely similar discounts to those given to IBC and Highmark. I know how that kept the cost of our health plans higher than they should have been and the effect it had on the marketplace. It has only gotten worse over time and will get much worse if the proposed merger is approved without imposing conditions to alleviate the disparity in rates.
FF: Should the Blues be merged with for-profit health-care companies?
TK: Yes. Since they are currently nonprofit entities, any proceeds from such a sale/merger would inure to the Commonwealth of Pennsylvania. The current estimate is that such a sale of the two entities would generate over $12 billion for the commonwealth’s treasury. Using the rate of return on Pa.’s investments used by Gov. Rendell of 12 percent per year, this would generate over $1.4 billion per year without ever touching the principal amount. It would easily generate enough money to totally fund the cost of insuring the uninsured in Pa. and providing free drugs to seniors.
This brings up an interesting point. If two public companies merged, the shareholders would receive compensation or stock with a value at least equal to or greater than the value of their stock in the company being acquired. In this particular merger, since not for profit companies are involved, no one is paying or receiving any value for the ownership interests in IBC being acquired. Maybe the insurance commissioner should require Highmark to pay the fair value of IBC to the Commonwealth of Pa. in return for approving this merger?
FF: Blue Cross is certainly known for being an active member in the community, giving back dollars and resources in many areas. If Highmark takes over IBC, do you think this goodwill will continue?
TK: Past experience with Highmark’s merger several years ago suggests, no. While there will continue to be some giving back, the amount will be insignificant compared to their earnings and it is likely that Highmark will take over all operations and supplant the IBC hierarchy over a short period of time after the merger. This is what occurred after Highmark’s previous merger, despite assurances to the contrary prior to the approval.
Chris Freind can be reached at [email protected]