Hearings near on Highmark, Delaware Blues affiliation
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As Highmark Inc. and Blue Cross Blue Shield of Delaware gird for next week's public hearings on their proposed administrative affiliation, the Pittsburgh health insurer is hoping for a better fate than the one that befell its proposed merger with Philadelphia's Independence Blue Cross.
By most indications, there are fewer political obstacles to this affiliation than the one formally proposed three years ago between Highmark and IBC; that merger was killed a year later by then-Insurance Commissioner Joel Ario.
That merger would have created a new company with increased market share in Pennsylvania; this partnership will be more akin to Highmark's relationship with Highmark Blue Cross Blue Shield West Virginia, formerly Mountain State BCBS.
As is now the case with that arrangement, Highmark would get to spread its brand to other markets: Blue Cross Blue Shield Delaware would become Highmark Blue Cross Blue Shield Delaware Inc. While the Delaware company would lose some board positions and autonomy, it would continue to operate as a separate legal entity, still headquartered in Delaware.
The Delaware company says the partnership is necessary because, among other reasons, it lacks the cash it needs to make important capital and technological investments over the next five years.
In documents filed with the state, BCBSD said upgrades would cost $130 million if it did not partner with Highmark and would cost only $50 million if the affiliation is permitted, allowing that BCBSD is able to piggyback on Highmark's existing infrastructure.
Under the agreement, Highmark will extend a $45 million line of credit that Blue Cross Blue Shield Delaware can tap as it encounters expenses related to the changeover to Highmark's systems and software.
BCBSD also says its financial footing would improve under the affiliation -- its 2015 "capital and surplus" would measure $199 million if the affiliation is approved, but $123 million if the Delaware company remains independent.
Despite the purported benefits, some -- especially providers -- were initially wary.
"Blue Cross Blue Shield of Delaware is the significant insurance payer in the state," with about 320,000 customers, said Wayne Smith, former Delaware House majority leader and now the head of the Delaware Healthcare Association, a hospital trade group.
"We had a lot of questions and concerns."
But most of those concerns have been mollified after hearing about Mountain State's transition into Highmark stewardship, which happened in 2004 and went smoothly, Mr. Smith said.
"There's a lot of synergy that makes an awful lot of sense," he said, especially considering that BCBSD has been looking for a new dance partner for years, ever since a similar affiliation with CareFirst Blue Cross Blue Shield of Maryland fell apart in 2006.
As with the Highmark-IBC process, the person with the ultimate yes-no vote on the matter will be Delaware's insurance commissioner. In this case, the commissioner is elected Democrat Karen Weldin Stewart. When the proposal was announced publicly last year, Ms. Stewart said, "At first blush, it sounds like it would be best for the people of Delaware."
Delaware's governor, Democrat Jack Markell, and Attorney General Beau Biden, son of U.S. Vice President Joe Biden, also figure to have input. Mr. Markell has asked questions about what the affiliation might mean in terms of Delaware jobs, and whether redundant positions might result in local job casualties.
Beau Biden's office and the state Department of Justice will determine whether the "affiliation" actually represents a "conversion," according to a spokesman for the department.
There are several criteria by which the transaction will be judged by the Justice Department -- for example, if there is a "substantial change or amendment to a certificate of incorporation which materially affects an entity's charitable or public benefit intent," that could represent a conversion.
If it were judged a conversion, the arrangement would come under heightened scrutiny, and the department could take action to "preserve the public benefit asset in the transaction," the spokesman said.
Mr. Biden has also asked Highmark and BCBSD executives about bonuses and executive compensation packages, and whether any BCBSD officials stood to benefit from agreeing to the affiliation; his office has yet to hear back on that matter.
Highmark spokesman Michael Weinstein said the deal would help the Pittsburgh insurer "operate more efficiently, by spreading our fixed operating costs over a larger base of members. This type of scale is important for Highmark so it can compete against much larger, for-profit health insurance companies."
On the matter of conversion, at next week's hearings, Mr. Weinstein said, "Highmark will try to show that Highmark shares certain core values with BCBSD: remaining a not-for-profit corporation with a commitment to meeting the health care needs and supporting the economy of local communities."
The hearings, to be held in all three Delaware counties, are scheduled to take place Monday, Tuesday and Thursday of next week, and are organized by the Delaware Department of Insurance.
First Published May 13, 2011 12:00 am