IBC President and CEO G. Fred DiBona, Jr.

By Christopher Guadagnino, Ph.D.

Published April 1997

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An aftershock from changes in Pennsylvania’s health insurance market appears to have hit the Delaware Valley. Soon after the recent consolidation of Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania—to form Highmark Inc.—Independence Blue Cross (IBC) announced its intent to purchase Pennsylvania Blue Shield’s stake in the Keystone Health Plan East HMO and other insurance products. When major players in the region’s health insurance industry announce changes of this magnitude, doctors may wonder if their practices will be shaken up. The move has been viewed as the beginning of further IBC consolidation, perhaps leading to a merger with Capital Blue Cross and Blue Cross of Northeastern Pennsylvania.

IBC’s proposal, filed with the state Insurance Department on Dec. 23, 1996, and currently pending review, would make several companies that were jointly owned by Blue Shield and IBC wholly owned subsidiaries of IBC: the Keystone HMO, Blair Mill Administrators—a third-party administration company—and CompServices Inc.—a workers’ compensation company. Keystone’s enrollment alone exceeds half a million, say industry analysts. Blue Shield’s indemnity component would continue as before.

The question arises what impact IBC’s full control of Keystone would have on physician’s relationships with hospitals over issues such as clout in reimbursement negotiations and clinical autonomy, and whether Blue Shield’s departure from Keystone marks the first step of its total divestiture from eastern Pennsylvania.

Physician Impacts

Critics of the deal worry that Shield’s departure from Keystone robs physicians of their negotiation leverage over physician reimbursement by lumping those negotiations together with hospital reimbursement. "Whoever signs the check governs what the employee will do or say," notes Philadelphia County Medical Society President Raymond J. Lodise, M.D. "As the concept of global payments continues to gain momentum, e.g., the HCFA demonstration project with Crozer-Chester now in place, the ‘hospital event’—which is now the new term—is going to give a global payment to the hospital, who then in turn will pay the physician for his services. The inevitable is that the physician will become a hospital employee," Lodise says.

Among the primary concerns of hospitals, charges Lodise, are filling beds, cutting costs and keeping the hospital’s hierarchy handsomely reimbursed. Hospitals could use their greater economic leverage against physicians—brought by the absence of Blue Shield from Keystone—to achieve greater control over clinical guidelines, argues Lodise. "Medical staffs must report their activities to hospital boards appointed by the hospital," Lodise points out. "That control exists now. Anything more than that would make physicians even less effective," Lodise says. Hospitals have mechanisms to monitor physicians who act contrary to the interests of the hospital and can use weapons like economic credentialing more vigorously than they are now, says Lodise.

Finally, the level of patient care could be lowered in the region should Blue Shield depart, says Lodise, because physicians accepted lower reimbursements from Blue Shield to allow it to offer charitable care. That would be less of a priority under the Blue Cross structure, Lodise projects. Some might reject this hypothesis under the argument that both Blues structures, Shield and Cross, have become motivated to preserve maximum provider discounts, not to provide more charitable care, but to remain competitive against for-profit insurance companies.

Others reject the premise of Lodise’s prediction that Shield’s departure from Keystone sets the stage for increased hospital power over physicians. An IBC-controlled Keystone product won’t change anything at the bargaining table or have a corrosive impact on physician guidelines, says Edward Shay, Esq., of the Philadelphia law firm, Saul, Ewing, Remick & Saul. IBC doesn’t consult hospitals about clinical guidelines, Shay says, and Blue Cross’s influence over hospitals has been in steady decline, he believes.

As for the loss of physician input to the reimbursement equation—because of the of Blue Shield’s exit—says Shay, physicians did not really have control over hospital activities in the way suggested by Lodise. "Some in organized medicine believe that physicians, as the original organizers of Blue Shield, had a voice in Blue Shield. That may have been true 30-40 years ago. I don’t think that has been true in the last ten years," says Shay.

IBC doesn’t want to do anything to disrupt the delivery system, Shay believes, as it is concentrating on securing covered lives in an increasingly competitive market. In fact, some physicians may even do better than before, as IBC pushes forward with its shared risk products, Shay adds.

Motivation for the Deal

It seems odd that Blue Shield would want to sell a 50 percent share in a profitable company like Keystone. Industry rumors have been circulating that IBC President and CEO G. Fred DiBona, Jr., paid considerably less than the value that auditors placed on the HMO. Some observers, including the Philadelphia County Medical Society, believe that Blue Shield’s willingness to sell Keystone and the other entities was a bargaining chip to gain IBC’s acceptance of the controversial consolidation of Blue Shield and Blue Cross of Western Pennsylvania to create Highmark Inc. Lodise points out that the timing of those transactions suggests a linkage between them: immediately upon receipt of the state Insurance Commissioner’s approval of Highmark’s creation, Blue Shield sold its share of Keystone and the other subsidiaries to IBC.

"I would argue with the view that the two are linked. They’re really not," says Pennsylvania Blue Shield spokesperson Brian Herrmann. "IBC’s approval was required," for the creation of Highmark, Herrmann acknowledges, "and that could have posed a problem. It did not. IBC never contested the merger," he says.

The state Attorney General’s office, which had high visibility in the Highmark deal, will have no involvement in the Keystone deal, said Press Secretary Sean Duffy. Whereas antitrust and charitable trust issues had to be resolved before Blue Shield could merge with western Pennsylvania’s Blue Cross, the sale of Keystone to IBC "may increase competition, as opposed to reducing it," says Duffy. It also does not have charitable implications, Duffy adds, because IBC is purchasing a stake in a for-profit entity. As to whether the Attorney General’s office has concerns about possible erosion of charitable care resulting from Blue Shield’s removal from physician reimbursement transactions, Duffy says he is not going to engage that issue, but adds that the Attorney General’s office would look into issues that might arise at a later time.

Some physicians feel betrayed by Shield’s decision to sell. Lodise, who is a corporate member of Pennsylvania Blue Shield and a vocal opponent of the Highmark merger, said that Shield’s corporate members were never told that Shield was in a position to sell off some of its assets. "They kept saying to the corporate body that, by merging their company with Blue Cross of Western Pennsylvania, they would be a stronger company. Why would you sell something off if you’re trying to get stronger?" says Lodise.

Herrmann claims that Blue Shield’s plans to sell its stake in Keystone to IBC "was communicated to corporate members prior to this being announced." As to the reason Blue Shield would sell its interests in a profitable HMO, Herrmann replies that the sale gives Shield added reserves to build on existing and future programs with Highmark and its subsidiaries, and adds, "we have very healthy and profitable managed care programs elsewhere in the state, we have a wholly-owned HMO in Lancaster County and we have Keystone Health Plan Central and West, along with dental and vision HMOs."

"Blue Shield was never that powerful in Philadelphia," says Harry Madonna, Esq., of the Philadelphia law firm Blank, Rome, Comisky & McCauley. This region is dominated by HMOs like US Healthcare, Qualmed, Oxford and Keystone, all trying to bulk up on subscribers, which means narrowing profits for the competitors who stay to tough it out, says Madonna. And with the recent announcement that Columbia HCA has set up a field office in the region as a staging area for market entry, Madonna asks, "Is that the market you want to come into? Why not concentrate your HMOs where your indemnity product is the strongest?" Blue Shield made a strong economic decision to divest from Keystone, Madonna maintains.

Impact on the Market

It is debatable whether Blue Shield’s departure from Keystone and the other insurance products will change marketplace dynamics in the Delaware Valley appreciably. Keystone was seen as a Blue Cross product, as IBC controlled the marketing and was the dominant manager of Keystone for years, according to Shay; Blue Shield was essentially a silent partner.

IBC can’t go anywhere else, so is here to stay, observes Madonna. But it won’t likely be sitting still. IBC has gone into New Jersey and Delaware to meet the needs of large employers, and has gotten good results from crossing state lines with a seamless product, Shay points out. The next logical step, says Shay, is for IBC to push out of the tri-state market and expand into the Lehigh Valley, since Anthem has a foothold in the south. With Capital Blue Cross and Blue Cross of Northeastern Pennsylvania looking into consolidation plans of their own, says Shay, IBC would be a logical partner for them to seek to achieve a critical mass of subscribers to be able to compete with Aetna and other insurers in the northern regions.

Making the three-Cross merger scenario even juicer are indications that Blue Shield plans to sell its 50 percent stake in Keystone Health Plan Central to Capital Blue Cross, according to the Philadelphia Business Journal. Furthermore, Capital Blue Cross is getting a license for a new HMO, says Shay. Pennsylvania may soon find itself split down the middle by two major Blues entities.

Herrmann says Blue Shield has no plans to sell either its southeastern Pennsylvania indemnity component or Keystone Health Plan Central.

All bets would be off should a lawsuit brought on December 6 against the Pennsylvania Insurance Commissioner for signing off on the Highmark merger be successful. The suit, brought by Lodise, the Philadelphia County Medical Society, the Pennsylvania Society of Internal Medicine and its president, Robert Sklaroff, M.D., seeks a stay of Linda Kaiser’s consent to the merger, and requires a public hearing to be conducted before the Highmark merger is legally consummated. Should the lawsuit be successful, believes Lodise, the Highmark consolidation would be "unscrambled" and would have to cease. That would change Blue Shield’s status considerably, and could change the dynamics of the IBC transaction.

The specter of for-profit conversion still looms for Pennsylvania’s Blues. Highmark’s consolidation agreement indicates that it shall not seek to convert its status for two years, or until an earlier conversion is authorized by legislation. That leaves the door to for-profit conversion open.

Shay foresees obstacles in the way of a Pennsylvania for-profit Blues company. Attorneys General around the country have awakened to the implications of for-profit acquisitions of hospitals, Shay notes [see Story of the Month, News Briefs], and are sharing information over the Internet about conversion operations. A further obstacle is the money that is given up to create a charitable foundation by a company seeking to convert to for-profit status. A company could, however, recoup the loss by going into public equity, Shay concedes. The ability of a Blue Cross plan to convert to for-profit status, Shay maintains, has dwindled from 3-4 years ago, as public perceptions are more critical of such moves than they were. Besides, Shay quips, would a Pennsylvania Attorney General up for re-election want to allow a Blue Cross in the state to turn for-profit?

Perhaps a more poignant rhetorical question is issued by Lodise: Will Pennsylvania allow the charitable issue to fall back to where it was before the formation of the Blues?