Head of antitrust section explains decision

James A. Donahue III, Esq., assistant chief deputy attorney general of the antitrust section, is one of the authors of the state Attorney General’s comments filed last May with the Pa. Dept. of Insurance regarding the proposed consolidation of Pa. Blue Shield and Blue Cross of Western Pennsylvania.

By Christopher Guadagnino, Ph.D.

Published January 1997

• The Blues' agreement with the PA Attorney General

• Attorney General's concerns expressed in May
  

• Merger Blues: Who's calling the tune?
  

• React to this article in the Discussion Forum.

PND: Why had the Attorney General filed comments with the state Insurance Department indicating concern over the proposed consolidation between Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania?

JD: There were two reasons. One involved the charitable trust aspect of this transaction. Blue Cross and Blue Shield had a charitable or social mission obligation under the Hospital Plan Act and under the Health Services Plan Act. We wanted to insure that this new entity would continue those obligations. The other concern we had was to insure that any competition would not be stifled by this new entity.

PND: Have those concerns been fully addressed?

JD: I think we have tried to address both those concerns as best we could. With our agreement, they have to continue open enrollment, they have to continue to provide programs for low income persons indefinitely, and they have to continue participation in the caring program for children and Pennsylvania’s children health insurance program for at least four years. They also have agreed to provide other services dealing with youth violence, teen pregnancy and other types of educational programs. We view those as important. Before that, there was a general statement that they would continue doing things, but it wasn’t specific.

PND: Does the agreement have an enforcement mechanism?

JD: If they didn’t live up to that agreement, then we would be able to take legal action.

PND: What happens after the four years?

JD: With respect to those programs, nothing would happen after the four years. They would not be obligated to participate in them. We would have to have a basis to renew it. One of the reasons that there was a four year limitation was that locking them into specific programs for a long period of time, there was a concern that they may become obsolete or that there might be a better use of their resources.

PND: Have they made any agreement not to convert to a for-profit entity?

JD: That would be a separate legal proceeding in and of itself. We will fight that battle if and when a conversion occurs. No part of the agreement with us deals with divesting charitable assets. What they’ve said is that there is no intention to convert to for-profit.

PND: Would a statutory action be required for them to do that?

JD: There’s a lot of dispute about that. There are a couple of different laws that apply to them right now, and it’s not clear that under those laws they could actually convert to non-profit status. If that would occur, there would be a number of legal issues that would have to be resolved. We don’t have the answers to all of them right now. Our office would be involved in resolving those issues. The courts would hear the case and answer the question.

PND: What role would the Attorney General’s office play?

JD: In a month we’re going to have a different Attorney General, and I don’t know exactly how he will view the situation.

PND: Is there anything about the final consolidation plan that was changed in order to respond to the antitrust concerns?

JD: There are basically three things that they agreed to with respect to the antitrust concerns. One was non-exclusivity: they can’t enter into exclusive arrangements with doctors or hospitals where the doctor or hospital has to agree that they could not deal with other health plans in order to deal with Highmark.

PND: Is there a timetable on that agreement?

JD: Yes, there is. That’s three years. Beyond that they would still be subject to the antitrust laws. There are certain circumstances when an exclusive contract may be unlawful under the antitrust laws and you would have to see whether those circumstances exist in three years.

PND: What else did Highmark agree to?

JD: They agreed not to enter into "most favored nations" provisions in hospital contracts. Often, if the biggest player in the market is demanding a most favored nations clause, the price they agree to becomes the floor, and often the effect of that is to raise the price of other people in the market. It also restricts the hospitals from selling off excess capacities they have at a discount, which they might want to do to become more efficient.

PND: Does that agreement also expire in three years?

JD: Yes, it does. Beyond that would depend on the facts and circumstances of the case at the time. Third, Highmark agreed to not represent to employers who are self-insured that they will not administer their plan if the employer offers more than one health plan. Blue Cross has gone out into western Pennsylvania and said to employers that you have to have 75 percent or more of your employees go with Blue Cross, otherwise we’re not going to sell you our service. The way we solved this was by limiting this provision to self-insured employers, which is a pretty significant part of the business in western Pennsylvania. They can offer their employees more than one health plan. We expect that will make business in Pittsburgh more competitive.

PND: Highmark’s creation means that the two former Blues entities could not compete with each other. How does the agreement you’ve outlined mitigate concerns about the merger being anti-competitive?

JD: Well, first off, they weren’t competing that much in the first place. They were potential competitors, but the potential competition clause really hasn’t been used very much in antitrust for about 20 years or so. It is now becoming one of the hottest issues in antitrust. The idea was to make it easier for an employer to offer more than one health plan to replace the competition that would be lost by the potential entrance into the market of Pennsylvania Blue Shield.

PND: The Attorney General’s filed comments in May mentioned divestiture of Keystone Health Plan West HMO as a way to mitigate considerable antitrust threshold calculations. What happened to that argument?

JD: We addressed that by the other things we did. What we hadn’t realized is that there was no practical way to actually divest that because it was not really a separate entity. It’s a separate legal corporation, but it’s not a separate operating corporation.

PND: How did the entities demonstrate that claimed efficiencies of a consolidation would be passed through to consumers?

JD: That issue was not addressed by our agreement. What we did was try to create a competitive market where they would be competing more with other plans and they’ll have to pass it on to consumers.

PND: How did the merging entities demonstrate that Pennsylvania Blue Shield would provide similar savings to other regional Blue Cross plans?

JD: That issue was also not addressed in our agreement. They’re all fairly large organizations and they could address those concerns directly with Highmark.

PND: Why were those concerns deemed important when the Attorney General filed comments, yet not addressed in the final agreement?

JD: They were concerns that we had at the outset. The agreement we reached is a compromise. That means some issues were dealt with and other weren’t. I think that, on the whole, the types of things that we agreed to provide the most benefit to the most number of people.

PND: How would you address criticisms that key concerns were dropped from the agreement?

JD: What we did is to look at where it was appropriate for us to be the final person to address those concerns. I think their position has been that Blue Cross and Blue Shield were not competitors, that they sold a complimentary product and this merger doesn’t change anything in terms of its competitive position in Western Pennsylvania. Our position is that while they have in the past sold a complimentary product, they are certainly each other’s best potential competitor. With these two positions, there is ultimately not going to be any agreement. They are 100 percent convinced in the strength of their position and we’re convinced in the strength of our position. The only way to resolve that rationally is to have a full trial and sort things out, but we think that our agreement, putting aside the legal issues, resolves issues in an effective manner. In a sense, we agreed to disagree and then came out to a resolution that dealt with the practical matters.