"MY FIRST experience in the emergency room was not pleasant. The first person I ever saw that had a medical crisis was a young woman who was working in a bottling factory, and got her hair caught in the machinery. It peeled back the scalp. She was sitting there with this huge gap in her head ... that alone was enough to make you somewhat sick. And then when they rolled [the skin] back to clean it up, and you could see the muscle underneath, that put an end to my evening. I went down on the floor. And I thought at that point, I wasn't sure I was going to make it in medicine."

-- Dr. Kenneth R. Melani

• • •

Nowhere was it writ in stone that Kenneth Melani, CEO of Highmark Inc., would become a doctor. Pittsburgh's native industries -- glass and metals and coal -- ran in his family, passed down by his working-class Italian grandfathers. His dad, a civil engineer at PennDOT, required the young man to work behind a drafting board during the summers (it was tortuous).

There was no adolescent epiphany, no light bulb, no moment of clarity when his future crystallized, when he just knew what he was destined to be; instead, it was a years-long process of elimination: What am I good at? What are my shortcomings?

It was in Springdale High School, Allegheny Valley school district, that Dr. Melani's math and science skills were honed. As a chemistry major at Washington & Jefferson, the self-described introvert was elected president of his fraternity, Kappa Sigma, and was compelled to accommodate social obligations around an enormous workload, lessons that come in handy as a health insurance executive: "You can either destroy yourself pretty quickly, or you can learn to balance social life and work."

His graduation from W&J (where he also played basketball) in 1975 took him to what is now Wake Forest University's medical school, where the first two years were spent rehashing his undergrad lessons in bio-chem, genetics and comparative anatomy. "That put me halfway into medical school. I couldn't turn around. So I was committed to do the next two years."

The commitment, he thought, would take him into pediatric oncology -- treating children with cancer. Ask anybody in pediatric oncology, any therapist at Children's Hospital, and they'll tell you how draining it can be, seeing sick kid after sick kid.

"It was too emotionally difficult. I really had a hard time," he says. Life as an ER attending physician wasn't for him either, a point underscored by his college encounter with the young woman from the bottling plant. A rotation in adult internal medicine, finally, suited him.

"For a person who likes math and science, it's very a much an analytical field of medicine."

And it was very much an analytical path that brought him into medicine in the first place. "As you look back, yeah, I can see the things that led to where I fortunately ended up."

For all that was initially uncertain about his career path, one thing was certain -- Dr. Melani would return from North Carolina, a place that in the late 1970s and early '80s was just beginning to show characteristics of the job mecca it would become, and end up in southwestern Pennsylvania, the place where he was born (New Kensington), where his first childhood home (Arnold) buckled and nearly caved because of mine subsidence, where he spent his formative years (Cheswick) around extended family: mom and dad and one sister, an aunt and an uncle and four cousins, a small clan by Italian Catholic standards.

The Pittsburgh he remembered was a vital city. The New Kensington of his youth was a robust town of pool halls and numbers games. That was changing by the time he returned home in 1979, for three years of residency at West Penn, but it didn't matter. His story began here, and though he could have made a life in Winston-Salem, or anywhere else, it probably will end here.

"Ken Melani is one of those great Western Pennsylvania stories," said Sy Holzer, president of PNC Bank. "He has made the most of every opportunity he has ever been given."

Some peoples' lives are framed by the gravity of their forebears' legacy; others by a singular, undeniable talent. The life of Dr. Melani, now 54, was not so much framed as it was forged, by his own personality and skills as a diplomat.

Those skills have him on the cusp of becoming one of the most powerful business leaders in Pennsylvania, and one of the most important health insurance executives in the United States. Highmark is seeking a merger with Philadelphia's Independence Blue Cross, and combined, the two nonprofits will have up to 26,000 employees, 7 million policyholders, a $24 billion organization -- physicians' practices, dental, vision, casualty and life, and of course health insurance.

If the merger is completed, he'd head the entire company as its CEO.

"It's a very serious responsibility," says Dr. Melani, who in his current job makes more than $3 million a year and occupies a radiant, 31st-floor office. "I step back and look at it and say, Oh my God, how did little me from Cheswick, a little kid from Arnold, end up in this position? I was just going to practice medicine, and that was overwhelming to me."

He did practice, for five years, with Dr. Donald Wilfong of Johnstown. Melani & Wilfong started from scratch in 1982, collected a roster of patients, added physicians, expanded into an Oakmont office, built a presence in hospitals and nursing homes. He was out of school, but still learning about his abilities -- to manage an office, to hire and fire, to run a company.

"He was an excellent physician. No one would dispute that," said Dr. Wilfong, who still sees patients. "But he was looking more at utilizing his skills as a manager than from a patient-care standpoint. ...

"His strengths were more his business-savvy, his computer literacy, [things] that 25 years ago weren't as standard as they are now," he said.

Those traits, Dr. Wilfong said, drew Dr. Melani away from day-to-day medicine. He soon was splitting his time between the young practice and a more speculative venture, West Penn Cares, a loose association of West Penn-affiliated physicians who used their collective bargaining capabilities to negotiate contract rates with insurance companies. It worked as a holding company among the doctors, and the capital raised from the physicians was used to invest in other ventures -- a commercial blood laboratory, a service that set up in-home intravenous therapy devices.

But the dual role meant less time for patients. Dr. Wilfong told him he'd have to choose one path or the other.

"It was a difficult decision for two reasons," Dr. Melani says. "One was, I had developed a lot of relationships with my patients. And I practiced in my hometown. ... My parents and my sister, my aunts and uncles, lived in the area. So their perception was, I was leaving and abandoning everybody, and I was giving up being a doctor."

Yet giving up the doctor's hours, being on call 24-7, was attractive, said Dr. Wilfong. Dr. Melani said the same in a 1991 interview. "There are still long hours, still a lot of demands. But I have a lot more freedom than when I carried my beeper."

The newfound freedom of the West Penn partnership soon led Dr. Melani out of medicine altogether, and into the insurance side of things. His tenure at West Penn Cares had run 4 ¹/₂ years, three as its CEO, when Highmark called upon his services in 1989, installing Dr. Melani as its new chief medical officer.

It seems to have been good timing. His first marriage, in 1975, produced two daughters, Christine and Carrie, but had ended in divorce in 1987. It was time to try something different.

When he came aboard at Highmark (then known as Blue Cross of Western Pennsylvania, before the merger that created Highmark) as its medical officer, Dr. Melani was fit, intense and a generation younger than his predecessors. The position, he said, was one that a doctor might accept at the end of his career.

"Back then," he jokes, the job might have gone to "somebody who was about two steps from their grave." But Dr. Melani, in his mid-30s at the time, was just a decade into his professional life. Craving for more than just a punch in, punch out job, he was put in charge of a Blue Cross insurance subsidiary, called Health Related Services.

He was not, say co-workers and superiors, immediately tapped for corporate stardom. "He wasn't even on our radar screen," said one boss. But he would slowly distinguish himself as someone who could read the tea leaves and see the future of health care; at no time could that talent have been put to better use than over the next dozen years, as "managed care" was gaining a foothold, swiftly cresting in popularity, then just as swiftly receiving rebukes from customers and politicians.

It was a revolution in health care. In 1992, "fee-for-service" plans (in which doctors are paid per service, and patients are later reimbursed by insurers) accounted for a majority of the health insurance marketplace. Just six years later, managed-care was 85 percent of the market, and "fee-for-service" down to 15 percent. And the Blues, in Pennsylvania and elsewhere, were just beginning to experiment with managed care generally and HMOs specifically, which promised to reduce insurance and health-care costs by contracting with select providers, and often routing medical decisions through a primary "gatekeeper" physician who made referrals to specialists.

In the same stretch of years, Blue Cross of Western Pennsylvania was planning a merger with Harrisburg's Pennsylvania Blue Shield. The merger was approved in 1996, but the early years were challenging, especially from a financial standpoint. Administrative costs were high, operating losses reached $90 million in 1998, five different software systems were used to process claims, and there were two separate customer service centers. There was even talk of going public, to raise some much-needed cash.

And yet Highmark was forced to go on a buying binge to fend off UPMC, acquiring medical and ancillary practices.

Dr. Melani, newly promoted to vice president of strategic business development and health services, had input into this process. And not all of what happened during this period was good for Highmark, or Pittsburgh, by his own admission.

"We made some missteps," he says. "We used to think it was important to not allow anybody to 'penetrate' the customer." In other words, if you ran an insurance plan and physician practices, you'd also want to own dental and vision clinics, to prevent customers from experimenting with other providers.

"It was not a healthy situation for the community, and for either organization. And it was a bit of a financial drain on both organizations," he says of UPMC and Highmark.

"We were sinking a lot of money into creating capabilities to defend each of our positions in the marketplace. ... That's money that could have been used in other, more constructive ways. [But] it was necessary from a strategic standpoint," in case UPMC and Highmark ever severed ties totally.

It nearly happened.

Given their friendly relations now, it's easy to dismiss the turn-of-the-century friction between Highmark and UPMC as corporate saber-rattling.

But the enmity was real. Highmark sued UPMC to stop its acquisition of Children's Hospital. UPMC was buying full-page ads in the Post-Gazette, saying its health plan was superior to Highmark's (Highmark sued about that, too, saying the ads "contained deceptive misstatements"

By 2002, UPMC had threatened to drop out of the Highmark network, meaning Highmark's 3 million health insurance policyholders wouldn't have had access to UPMC's system.

Several Highmark executives met with UPMC and tried to settle on a contract. None was successful. Then Highmark's CEO at the time, John Brouse, sent Dr. Melani to meet with UPMC's John Paul, the hospital system's former executive vice president and chief financial officer.

"It was a very difficult and ugly time, when it came to the relationship of our two organizations," Mr. Paul said. "There were obviously going to be some very difficult moments, and some periods where we would probably like to walk away."

But they didn't. They met regularly, for hours at a time, in a private room at the Duquesne Club, Downtown. As the June 30 expiration of the contract between UPMC and Highmark neared, a 10-year deal was struck, averting a divorce that might have proved catastrophic for consumers, Highmark, UPMC or all three. The relationship between the two giants was not only repaired, but advanced -- premium increases were complemented by $300 million in loans and grants, so UPMC could build a new Children's Hospital in Lawrenceville.

"It was partially the deadline, and it was partially the chemistry" between the two, Mr. Paul said. "But mostly, it was that Ken, being a Western Pennsylvanian, really was committed to what was right from a community standpoint. That's where our objectives met."

And suddenly, Dr. Melani -- without a business degree, without an MBA -- was the front-runner to replace the retiring John Brouse.

"I don't think he was really considered to be presidential timber" until late in Mr. Brouse's tenure, the former Highmark CEO said. Other in-house candidates -- Chief Financial Officer Bob Gray, VP George Grode, James Klingensmith -- were considered favorites, and a list of outside candidates, compiled by a headhunting firm, was just as impressive.

The fact that he was a Pittsburgh boy helped. Much more important, though, were his analytical and business skills.

"I really was able to appreciate Ken's thinking. Really bore to the crux of the problem without, seemingly, a lot of effort. Quick to digest salient points. Quick to get the picture," Mr. Brouse said. "And he's damn near clairvoyant when it comes to recommending strategies."

And the fact that he is a medical doctor -- a rarity among even health insurance CEOs -- gives him instant points with the physicians, who by the nature of their adversarial positions are often battling insurers.

"The physician relationship with Highmark has never been a good one," said Dr. Wilfong, Dr. Melani's former partner. "For one of our own to go inside, obviously, he's been on the other side. When he speaks to physicians, having been in the practice for five years, I think his credibility is greater than a suit who went through MBA school."

Dr. Melani took over as CEO in January 2003. He reshuffled Highmark's top brass and vowed to better control administrative costs (a promise he is now making if the Highmark-IBC merger is approved).

But that was the low-hanging fruit. More difficult was the years-long process of combining cultures at Highmark -- the doctor-oriented Blue Shield, and the market-facing, hospital-oriented Blue Cross. "That distinction between hospitals and physicians had worked its way into not being a good model," Dr. Melani says. "The people were not embracing the integration. ...We were still arguing over whose system we were going to pick; what functions were going to be located where."

The task inherited from Mr. Brouse was to get Highmark to rally around a common set of goals and missions. Mr. Brouse found Dr. Melani's demeanor to be an asset in that regard -- assertive, but without the appearance of unilateralism:

"He doesn't get his back up right away. He listens. He's a good poker player. He lets you make points, even though it may be very grating to him."

Part of his personal reputation -- affable, outgoing, always up for a drink or a round of 18 -- is the fruit of being foil for the last five years to UPMC chief Jeffrey Romoff, a recluse for much of his career who is known for being direct bordering on tactless.

But that doesn't mean Dr. Melani reputation isn't deserved, said Dr. Stan Marks, an oncologist and a friend. "He knows the fun side of life," he said, and for Dr. Melani, golf is lots of fun (if the weather and his schedule permit, he plays with his dad on Sundays). "Ken can shoot an 80, or he can shoot a 110. Once he gets into a funk, he's done. His vulgarity surfaces, he's throwing clubs -- he's that competitive.

"I don't think it's for show," Dr. Marks laughed.

Like many CEOs, he also donates time (and money) to pet causes. Two of his favorites are Pittsburgh's Variety Children's Charity and Holy Family Social Services, which counsels and provides living quarters for troubled youths. Sister Linda Yankoski, former CEO of Holy Family, said Dr. Melani is more than a board member.

"He's helped us organize our services -- do what's more important, let go of what's less important," she said. "He'll say, 'Why are you running this program? It's always running a deficit.' He understands the non-profit issues and concerns."

Dr. Melani-- who has spent five years in the Highmark CEO chair as of this month -- will need to draw on all the attributes his colleagues say he has, and a career of experiences, in his next role as CEO of the merged Highmark and Independence Blue Cross.

That's especially true as health insurance emerges as a prime issue in the 2008 presidential race. Several Democratic candidates want a universal health care plan. Unions want a "single-payer" system. Most developed countries offer it; can America be far behind?

And so another seismic shift, bigger than the HMO earthquake that shook health insurance in the 1990s, may be awaiting Dr. Melani in his new post.

"That will be a helluva job," said Mr. Brouse. "It will test him like he hasn't been tested."

Dr. Melani says he's ready for it. And his main task, before he retires sometime in the upcoming decade, will be positioning the new Highmark to compete in an altered marketplace, where the government isn't just a major buyer, but perhaps the only buyer of basic insurance.

"We want to make sure that Pennsylvania has a chance to get that business," he says. "You're trying to look, five, 10 years out and make a difference, make a positive impact."

Here, he's talking about the legacy of his business.

But what about his own?

The kid from Arnold says he wants to live to see Pittsburgh again become the place of possibility that he remembers from his childhood. And that means taking care of the children who will be that future -- through charities, including Highmark's Healthy High 5 program, and by creating "value" for the Pittsburgh region (in the form of that $300 million toward a new Children's Hospital) that may not be fully appreciated until he's done leading.

"OK, you're 54 years old, you're an old man," he says. "Here you are in this role. What good can you accomplish? ... I believe it's about making sure the next generation, and the generation behind them, have as much opportunity as I did in life."