For-Profit Health Insurers Get the Blues

If Arkansas Blue Cross & Blue Shield isn’t sold anytime soon — and the board of directors insists it won’t be — it will be bucking a national trend.

Between 1995 and 2005, there were more than 400 mergers involving health insurers and managed care organizations, according to an April report by the American Medical Association in Chicago. Currently five of the largest heath insurance companies cover about 60 percent of the market.

The shrinking competition has alarmed the AMA and consumer groups as top executives usually walk away with millions of dollars in compensation.

“Patients do not appear to be benefiting from the consolidation of the health insurance market,” said Dr. J. James Rohack, an AMA board member, in an April news release. “Health insurers are posting historically high profit margins, yet patient health insurance premiums continue to rise without an expansion of benefits.”

The American Medical Association is calling for a study on the health insurance landscape.

“If not corrected, the imbalances in the marketplace will have serious negative long-term consequences for the health care system,” the AMA said in its report released in April called “Competition in Health Insurance.”

The Foundation for Taxpayer & Consumer Rights is opposed to the massive mergers because of the millions of dollars top executives receive after one is completed.

“The merger of WellPoint and Anthem, which formed the new WellPoint company, gave away close to $450 million in executive compensation,” said Jerry Flanagan, health care policy director for the Foundation for Taxpayer & Consumer Rights in Santa Monica, Calif. “With those execs’ salaries and golden parachutes, it means only one thing: We pay more for less coverage.”

The big payouts for top executives aren’t a slam dunk anymore, though.

The U.S. Department of Justice and state insurance departments are taking a closer look at the mergers.

In December, the DOJ required UnitedHealth Group Inc. and PacifiCare Systems Inc. to divest portions of PacificCare’s commercial health insurance business before it could proceed with a merger, according to a department news release.

The department also required United to modify and then cancel after one year its network access agreement with Blue Shield of California.

“The deal as originally proposed likely would have resulted in higher prices and lower quality commercial health insurance plans,” the DOJ news release said.

ABCBS

Industry observers say Arkansas Blue Cross & Blue Shield is ripe for acquisition by a national insurance carrier.

For one thing, its top executives are nearing retirement age.

CEO Robert Shoptaw, who is required by state law to be a member of the board of directors, is 59. Sharon Allen, president and chief operating officer, is 61.

Flanagan said typically when a health insurance executive reaches 60 years old, there are votes to increase his or her retirement bonus and salary.

“There is also a push to sell the company off to a larger or national insurer,” he said. “That’s a great way for the executives to cash out with huge payouts. … As the executive board ages, the financial incentive to sell the company increases.”

ABCBS is also a good candidate to be sold because it dominates a secondary market.

In 2004, ABCBS reported $61.9 million in net income on $908.7 million in revenue. In 2005, it had $51.6 million in net income on revenue of $916.5 million.

But ABCBS scoffs at the mention of selling.

“Our board has repeatedly reiterated their desire to remain an independent Arkansas-based company… And they’ve made that commitment very clear,” said ABCBS spokeswoman Max Heuer. “So that scenario isn’t even on anybody’s radar screen.”

Typically Blue Cross & Blue Shield companies have operated as local, nonprofit or mutual organizations, according to the Center for Studying Health System Change of Washington, D.C.

But since the mid-1990s, 14 BCBS companies have changed to for-profit entities and merged, either with Blue plans in other states or other companies.

WellPoint spokesman Jim Kappel wouldn’t say whether WellPoint has looked at or even considered Arkansas Blue Cross & Blue Shield.

“This is an industry that has consolidated over time, and we believe there’s going to be additional consolidation in the industry going forward,” he said. “We said one of our priorities is to look for additional opportunity from mergers and acquisitions, particularly with Blues plans that want to affiliate with us,” Kappel said.

WellPoint

In 2004, the insurance leader WellPoint Health Networks bought Anthem Inc.

The Foundation for Taxpayers & Consumer Rights objected to the acquisition because it learned top executives in the companies would receive about $450 million in payouts while WellPoint would rack up $4 billion in financing charges.

“The merger agreement fails to protect patients, business owners and other premium payers against future premium increases to cover the cost of the merger,” the Foundation said in a November 2004 news release.

WellPoint CEO Leonard Schaeffer received $235.2 million because of the merger.

Flanagan said premiums have risen between 30 percent and 50 percent in California as a result of the merger, but others say the mergers have helped keep a lid on health care costs.

Thomas A. Carroll, a health care services analyst for Stifel Nicolaus of Baltimore, said health insurance premiums have dropped in the past three years.

“If anything, consolidation has been good for prices,” Carroll said. “It’s not like the managed care companies are out there right now keeping their prices artificially high.”

Carroll agreed, however, that it “smells bad” when top executives walk away with millions after a merger.

Health care companies tend to be held to a higher level of social responsibility, and it doesn’t sit well with some consumer groups that an executive receives $100 million while there are 45 million uninsured people and millions more underinsured.

“On the other side of the equation, these are for-profit entities, and they’re in business to make money and to grow shareholder value. And a number of them have done that in the last several years,” Carroll said.

Still, the eye-popping executive compensation has also derailed some mergers.

In 2003, CareFirst Blue Cross Blue Shield asked the Maryland Insurance Administration to convert from nonprofit to for-profit status so it could be sold to WellPoint Health Networks Inc. of California.

Maryland Insurance Commissioner Steven Larsen rejected the move, and one of the reasons cited was the size of the executive bonuses, Carroll said.

Patients

It’s hard to tell what a merger will do for consumers, said Alwyn Cassil, the spokeswoman for the Center for Studying Health System Change.

“When insurers are more consolidated, they’re able to get better deals from providers,” she said. “The question for consumers is whether those lower rates get passed through to them on their premium payments.”

WellPoint’s spokesman Kappel said the mergers aren’t raising the premiums.

“Every time that WellPoint’s considered a merger, we’ve been able to reduce administrative expenses and grow membership in the newly acquired plan,” he said.

He said the mergers help keep insurance premiums affordable.

WellPoint covers 34.3 million people in all 50 states and operates 14 Blue Cross plans.

WellPoint also has a 90 percent retention rate, which “clearly indicates that we’re providing the products and services that people are looking for today,” Kappel said.

The mergers usually give doctors heartburn, though.

Doctors are typically organized in smaller practices and don’t have the market clout of hospitals. A merger might also hurt doctors’ chances of negotiating better rates.

“It’s easy for an insurer to say, ‘You don’t want to accept our payment rates — OK, fine. We won’t include you in the network,'” Cassil said.

The possibility of lowering physician rates was one of the Department of Justice’s concerns with the UnitedHealth Group acquisition of PacifiCare.

United would have had the ability to lower the reimbursement rates of doctors in the Tucson, Ariz., and Boulder, Colo., areas, the DOJ said.

“This likely would have resulted in a reduction in the quantity or quality of physician service provided to patients,” the DOJ said.

United is one of the largest health insurers, with 55 million lives covered and 2004 revenue of more than $37 billion. In Arkansas that years, it was the second-largest health insurance company, with $204.7 million in Arkansas premiums and a market share of 17.5 percent.

PacifiCare had 13 million health care members and $12.2 billion in revenue in 2004.

Carroll said the insurance industry has been consolidating for 20 years, and it will continue consolidating for 20 more.

“This anti-competition issue comes up every once in a while,” he said. “The industry always tends to prove that the market is just so fragmented. There’s more competition than you think.”