Insurer has an easier time in Delaware

Kenneth R. Melani, Highmark's chief, faces smooth sailing inhis Delaware merger bid.
Kenneth R. Melani, Highmark's chief, faces smooth sailing inhis Delaware merger bid.
Posted: July 01, 2011

Memo to Kenneth R. Melani, chief executive of Highmark Inc., Pennsylvania's largest health insurer:

Rent a shore house in Delaware, make it your happy spot, because it's definitely been more tranquil for you in the First State than it has been in the Keystone State.

These days, it's not even peaceful in Pittsburgh, Highmark's corporate headquarters, where Highmark and the city's most prestigious hospital system are engaged in high-stakes brinkmanship affecting tens of thousands of patients.

How bad is it in Pittsburgh?

The University of Pittsburgh Medical Center, which sells its own health-insurance plan, is threatening to stop accepting Highmark insurance in a dispute over payments for services. And Highmark announced Tuesday that it would spend $475 million, $50 million up front, to bankroll UPMC's rival, the West Penn Allegheny Health System.

Ahhh, but in Delaware . . .

In Delaware, a bill that would remove a major obstacle to Highmark's proposed affiliation with Blue Cross Blue Shield of Delaware sailed through the legislature, passing the Senate unanimously Tuesday and the House, 34-5, Wednesday.

Nothing like that happened in Pennsylvania when Highmark tried to mate with Independence Blue Cross, Philadelphia's largest insurer - a bid that ended in failure in early 2009.

In Pennsylvania, the legislature blocked every move. Leading the charge in the Senate was a former insurance broker, Donald White, chairman of the Banking and Insurance Committee. White made no secret of his distrust of the motives of the state's two biggest Blues. (Highmark is a Blue Cross Blue Shield firm.)

In Delaware, there were three public hearings on the proposed affiliation. The longest lasted 95 minutes, and only eight people testified.

"It was all kind of tepid," said Elliott Jacobson, spokesman for the Delaware Insurance Commission.

In Pennsylvania, there were more than four long days of hearings. Close to 100 people signed up to testify.

"It was passionate, with people of diverse points of view feeling very strongly about the benefits and dangers of the merger," said Lance Haver, who testified as Philadelphia's director of consumer affairs.

In Delaware, Melani was calm, "all spit and polish, the quintessential CEO," said Delaware Blues lobbyist David S. Swayze, who saw Melani at the Wilmington hearing.

Not so in Philadelphia, where Melani reddened in anger when U.S. Sen. Arlen Specter asked him how he squared his pay "in excess of $3 million . . . if nonprofit really has to have some significance in terms of not being for-profit."

Melani responded, "If you were to charge our customers for my compensation . . . it would be about 10 cents per customer per year."

When the pay issue surfaced in Delaware, it was not about Melani but about the Delaware Blues' chief executive, Timothy Constantine. He earns $420,000, but would be due $1.6 million if fired. (Highmark says it plans to keep Constantine.)

Highmark and Delaware announced their proposed affiliation in August, citing cost-cutting synergies. Constantine said premiums would rise steeply without the affiliation.

Delaware Attorney General Joseph "Beau" Biden decided to analyze the proposal based on a law passed in 2004, when the state pulled the Delaware Blues out of an affiliation with CareFirst in Maryland.

At the time, for-profit firms were acquiring many nonprofit insurers, a deal known as a conversion. The worry was that for-profit buyers would clean out the nonprofit's assets built up, in part, by tax breaks.

Delaware's solution was to pass a law requiring a for-profit buyer to "pay" for the nonprofit by setting up a foundation to help the state's uninsured.

"We acted to protect the public benefit assets" of the nonprofit, Delaware Sen. Patricia Blevins wrote in an e-mail.

The 2004 law Blevins sponsored formalized the conversion process in two circumstances - a takeover by a for-profit and a change in control.

On June 1, Biden ruled that the proposed Highmark-Delaware Blue Cross Blue Shield affiliation amounted to a change of control, making it a conversion, even though Highmark is a nonprofit company. Highmark said a conversion ruling would be a potential deal-breaker.

Led by Blevins, Delaware's legislature sprang into action, quickly "clarifying" the 2004 law so it wouldn't apply to the Highmark deal.

Now a final decision on the deal is up to Delaware's insurance commissioner, who, under the legislation, would get an expanded ability to protect Delaware Blues' $171 million in reserves.

Meanwhile, Highmark and the Delaware Blues issued statements saying they are "looking forward" to continuing the review process.

Next up are more hearings in September - a great month for a house at the beach.


Blues Duo

Highmark Inc.

Headquarters Pittsburgh

Revenue $14.6 billion

Surplus $3.7 billion

Members 4.8 million

Employees 20,500

Blue Cross Blue Shield of Delaware

Headquarters Wilmington

Revenue $545 million

Surplus $171 million

Members 398,805

Employees 624

SOURCE: Highmark, BCBSD


Contact staff writer Jane M. Von Bergen at 215-854-2769 or jvonbergen@phillynews.com.

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