By Christopher Guadagnino, Ph.D.

Published May 2000

• React to this article in the Discussion Forum.

Stephen Foreman, Ph.D., J.D., M.P.A., is a health care economist and assistant professor at Penn State University. He has been commissioned by the Pennsylvania Medical Society to study the Commonwealth’s health insurance markets.

PND: Can you describe the study you did regarding the market dominance of Blue Cross plans in Pennsylvania?

SF: We’ve done three studies, starting a couple of years ago looking at the Pittsburgh market in connection with the merger of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield into the entity that became Highmark. We followed that with a study of the Philadelphia market, triggered by Independence Blue Cross’ unilateral reduction in physician fees in 1998. And last fall we updated our study of the Pittsburgh market to see what had happened since the Highmark merger. I’m also in the process of looking at the central Pennsylvania market in terms of some of the same issues.

We were primarily trying to get a handle on market share and market power of the major players in each of those markets. In Pittsburgh, what we found was that the merger that became Highmark really cut down on potential competition in the western part of the state. When we looked at Philadelphia, and as one might expect, the ability to unilaterally reduce payments to providers implies that there’s a substantial market power. We found that Independence Blue Cross held a rather large market share in Philadelphia and was using that share to engage in conduct that wasn’t exactly competitive.

PND: The Pennsylvania Medical Society and the American Medical Association have used your economic analyses in a joint request that the U.S. Justice Department investigate the market power of Independence Blue Cross and Highmark, alleging anti-competitive practices. One charge they made is that Highmark and IBC have agreed not to compete. Can you describe the evidence for that charge?

SF: First of all, if one goes to Highmark’s web page, the state is very neatly laid out into four areas and Highmark states almost flat out that the Blue Cross plans don’t compete in Pennsylvania. If you go to the State Insurance Commissioner’s HMO filings showing HMO enrollment levels on a county basis, in fact no Blue Cross plan competes with another in the state of Pennsylvania. No two Blue Cross plans have enrollees in a single county. Every county has only one Blue Cross plan in it. So it’s pretty clear that they’re not competing. I think probably there is an agreement not to compete. There’s at least an inference that it exists and I think that antitrust enforcement agencies, if they did a little bit of digging, could probably find that agreement.

PND: Aren’t Blue Cross and Blue Shield plans who use the Blues logo and brand name prohibited by their national charter from competing directly with each other in the same geographic area?

SF: First of all, whether they’re forced to do that by national agreement or not, the antitrust laws make it a per se violation for firms to divvy up into exclusive territories. Agreements not to compete like that are usually per se illegal now. They may argue that it’s necessary to have that in order to perfect their trademark. That Blue Cross trademark has been perfected for 50 years and may well have outlived its usefulness. If these exclusive territories are illegal under the antitrust laws, just to form an association to make an end run around them shouldn’t work.

PND: Did these entities achieve market power within the boundaries of antitrust law?

SF: The Blue Cross entities nationally got their market shares very often because they were first. There was a period of time when there were only Blue Cross plans in the states. Is Highmark maintaining its market power through merger and acquisition activity? I’d say yes to that. I don’t think that Blue Cross and Blue Shield should have been allowed to merge. I think they were both in a position to go into the HMO business and compete in western Pennsylvania, for example. It’s just another example of them improving their market position by virtue of an agreement and not because they’re better from a market standpoint. I think they have engaged in conduct to perpetuate and extend their market shares that is anticompetitive in nature and not part of skill, foresight and industry. Any effort by IBC or Highmark to take over the central or northeast part of the state shouldn’t be allowed to occur. I believe Highmark wants Capital Blue in Harrisburg, and Northeast has some financial troubles; IBC probably wants them. This continuation of merger and acquisition activity needs to stop.

PND: Did they use their market power to stifle competition?

SF: I think Highmark’s done it by virtue of their merger activity and some of the other ways it treats providers. I think clearly Independence Blue Cross has, by virtue of the all programs and most favored payer clauses and unilateral payment reductions. A most favored payer clause says that a provider will give the Blue Cross plan the best price it gives any other plan. The all programs requirement says that if you want to participate in one of our programs, you have to participate in all of them. If you want to serve the Blue Cross fee-for-service patients, which are lucrative, you have to serve their HMO patients, you have serve their PPO patients, you have to participate in their ASO plans, and for all of those you must give them the best rates in the market. If you combine all programs with most favored payer, it almost works out to an exclusive contracting arrangement. If you’re getting the best price on every product in the market, nobody could ever break in there. You put up an entry barrier where you’ve insured that any firm that’s going to come into the market is going to lose money. At best, they can offer employers premium structures similar to yours, but they cannot break in.

PND: What about Highmark?

SF: We looked at their contracts too. They’re not as egregious, but they still have some of the same problem provisions in them. For example, Highmark’s got an all programs requirement in their contract.

PND: Another charge the PMS and AMA have made is that Highmark and IBC are restricting patient choice. What evidence is there for that charge?

SF: When you’ve got a plan that has 60 to 80 percent of the market, that really reduces patient choice of insurance carrier. Pittsburgh’s employers, for example, have to offer a Highmark plan. As I understand it, unless smaller employers sign up 75 percent of their employees, Highmark won’t offer them the plan. In essence it really guarantees that Highmark gets locked in and the other smaller plans get excluded. We hear from employers that that’s the way Highmark in Pittsburgh and Independence Blue Cross in Philadelphia do business. Jack Steinberg of Philadelphia’s teachers union said, "We would have a revolt with our employees if we did not offer a Blues plan." The reputation of the Blues is such in both of those areas that the employees really get upset if you go away from the Blues.

PND: What market shares for Highmark and IBC did your market studies reveal?

SF: Based on the latest Interstudy data and Pennsylvania Insurance Commission data, Highmark in 1998 had a 69 percent market share in the six-county Pittsburgh metropolitan statistical area (MSA) for all of its health plans. The next highest market shares are HealthAmerica, with 15.36, HMO Pennsylvania with 7.64, and UPMC Health Plan with 5.16. There are a couple of other smaller ones. Those figures include fee-for-service, HMO, PPO, POS, Administrative Services Only, Medicare and Medicaid HMO services. Highmark also has a 70 percent market share for its Keystone Health Plan West HMO in the 29-county western Pa. region. None of the nine other plans in those 29 counties has more than 10 percent of the market.

Independence Blue Cross has about 57 percent market share in the Philadelphia MSA, which is nine counties. Aetna has a 19 percent market share in the nine-county Philadelphia MSA. In Philadelphia, none of the seven or eight other players has more than a 3.5 percent share.

PND: How do these market concentration data compare to those in the rest of the country?

SF: They are among the highest in the country. There are other regions with higher concentrations, western New York for example. But statewide, ours are probably the highest. Every MSA in Pennsylvania is highly concentrated, according to the Justice Department’s definition of concentration. I can’t say for sure that this problem is national. We surveyed medical society directors in the ten largest counties in the country. We got a whole range of nasty conduct that we see here in Pa.: unilateral fee reductions, delayed payments, take-it-or-leave-it contracts. But we may now be leading the country in nasty conduct by HMOs vs. docs.

PND: What evidence have you found that Highmark and IBC have unilaterally dictated contract provisions?

SF: The essence of being a monopoly is the ability to control quantity and fix price. Or, if you’re looking at a buyer monopoly, a monopsony is the ability to fix the amount that you pay. So, anybody who can unilaterally fix prices is clear evidence that they hold monopsony power. It’s not just price, by the way. If you look at the contracts that Independence Blue Cross imposes on physicians in the Philadelphia area, there are probably 10 to 20 terms in there that give Independence unilateral power to do some major things to physicians. For example, they can unilaterally change utilization review and quality standards that they apply to physicians who participate in their plans. There are a number of terms like that. I’ve reviewed the contracts, which are filed with the state. Anybody can go look at them.

If you look at HMO payment structures in Philadelphia and Pittsburgh, hospitals are getting paid well above the national averages and physicians are getting paid at or below the national average. In 1998, the national mean for in-patient payments is $38 per member per month; Philadelphia is at $48 per member per month; Pittsburgh is at $65 per member per month. On physician payment, in 1998 the national mean was $50 per member per month; Philadelphia is at $32 per member per month; Pittsburgh is $56.

PND: What data have you found that Highmark and IBC, as the PMS and AMA charge, continue to realize substantial profits while raising premiums and reducing payments?

SF: Philadelphia’s premium increases were some of the biggest in the country in 1998—during the same time they were reducing payments to physicians. Their profits increased, needless to say. If you look at IBC’s profit structure over the last five years, they’re the only player that made substantial profits in that market. Other than Aetna U.S. Healthcare, there isn’t another substantial player in that market. Highmark’s the most interesting one: they show underwriting losses, but then they show profits in the $60 to $70 million range at the parent level because they have $2 billion in reserves. Even with the underwriting losses in Pittsburgh, the premium structure to the business community in Pittsburgh is pretty high. The existence of profits presumes market power. In a competitive market you don’t see substantial levels of profit. Are these profits being used to reduce premiums? Are they being used to improve quality to consumers? Or are they being used for merger and acquisition activity? Is the money going out of state? For example, in the Philadelphia area, a substantial part of Independence Blue Cross’ profits is being used for out-of-state and off-shore acquisitions. If they force providers to accept lower prices and they don’t pass those benefits on to consumers and they just raise prices to businesses, then it’s bad for everybody. If they force prices too low, to the point that providers exit the market, then what are you going to do?

PND: How would you know you’ve reached the point at which providers have been forced to lower their prices so much that it’s harmful to patients?

SF: As a practical matter, you would take a look at which physicians are leaving the area and why, or which hospitals are going under and why. Who leaves first: the best ones or the worst ones? Do the quality people leave?

PND: What is the impact of health insurer market dominance on competition and innovation?

SF: The market tends to become ossified. In other words, the dominant insurer isn’t going to let in any competition, so the markets tend to get set the way they are. These dominant insurers make all the rules regarding price, quality and quantity. Clearly, both Highmark and IBC have market power. And market power is what the antitrust laws are designed to prevent. Highmark can get rid of UPMC Health Plan when they want. If the two of them are spending money to buy market share, Highmark has $2.1 billion in reserves. Basically, Highmark can lose $2 billion. Can UPMC afford to lose $2 billion just to stay even at a five percent market share?

PND: What recourse is there to reverse that kind of market dominance?

SF: We’re not alone in Pennsylvania with this. Eighty percent of the MSAs across the country have what Interstudy calls an dominant insurer HMO: 33 percent share or better. About half of them have an insurer with a 50 percent share. When you get to that point, even a hospital chain can’t negotiate on an even basis with a huge player like that. When you’re talking about physicians—how is a physician in a small practice ever going to have an even footing in negotiation with a player that size? Ideally, as a policy matter, breaking up the large insurer would probably be an advisable thing to do. Independence Blue Cross should be asked to divest Keystone Health Plan East. Highmark should divest Keystone Health Plan West. As a practical matter, it’s time-consuming, expensive, difficult. If you look at the Microsoft litigation, that is a picnic compared to what would happen in health care. It leaves you with a limited range of policy options. Some physician collective negotiation legislation or countervailing power legislation has been introduced in D.C. with the Campbell bill and in Pennsylvania with the Tilghman and Williams bills.

PND: What impact do you think that legislation would have if enacted?

SF: I think it would have limited impact at this point. The opponents of those bills say they’re going to cost a lot more. I did a study for the AMA that shows minimal, if any, economic impact. I guess part of the question is, would physicians really join together and be effective in negotiation with these large insurance companies? One can hope so. The idea that any group of physicians in the Philadelphia area could get big enough to negotiate effectively with a firm like Independence Blue Cross, with more than three million members and billions of dollars in revenue, I just can’t see that happen. I think it might help some, but I can’t see it solving the problem in the Pittsburgh region either.

If you have a monopolist at the insurer level, that monopolist will increase premiums to employers and it will decrease what it pays to providers. There’s two market distortions buried in there. If you give providers a countervailing power force through such legislation, that would get closer to a market equilibrium, but it wouldn’t get at equilibrium because now you have two monopolists. The equilibrium that you’re going to get is by negotiation and not by the unseen hand of the market. So it will be closer to equilibrium than a unilateral monopoly, but the two parties negotiating can’t find it. They need competition to do that. In other words, the best situation would be to have smaller HMOs and insurance companies. Collective negotiation legislation is not a substitute for full and open competition, in that it would lock in large insurance companies with some market power and now large provider negotiating cooperatives with some market power. You’d be locked into a second best world.

PND: Could Pa.’s collective negotiation bills give providers too much leverage and actually swing the pendulum the other way?

SF: Not at all. The Pennsylvania bills have limits in them that make them true countervailing power bills. The Pennsylvania Attorney General would have oversight over how providers can come together and what kind of arrangements they could get.

PND: What other means are open to physicians and other providers to gain bargaining power, as well as clinical decision making authority?

SF: I think that, given the point these markets are at, there needs to be a legal and a regulatory policy response. I think that those people who are entrusted with enforcing the antitrust laws ought to be scrutinizing these markets. Market conduct that’s questionable ought to be challenged from a regulatory standpoint. I think that where these insurers have large market shares, market dominance, I think that price and quantity probably needs to be regulated. That’s on the presumption that the markets aren’t restructured, which really ought to happen. I’m a free market economist. I would much rather see these markets do that. But when the markets break down to the extent that these have, that’s where you’re left.

PND: What agency would do the regulation?

SF: The Attorney General, Department of Insurance, Department of Health.

PND: Isn’t the Insurance Department already doing market conduct studies?

SF: Not to my knowledge. We’ve met with people at the Department of Insurance. They did not react in a way that indicated that they were studying these markets. They may be and didn’t tell us.

PND: What would have to happen for another insurance company to effectively compete with Highmark or IBC in these markets?

SF: Their CEO would have to be nuts! You need tremendous amounts of capital and lengthy staying power. And you need to be able to invest a lot of money without much return, ever. I think effective new entry here is not going to happen. There are entry barriers here. The markets are rigged by contract terms, so, if you can’t get a cost advantage from the providers and there’s no effective way you can market, how can you make inroads even with lots of money?