Highmark buy may change insurance landscape

from Post Gazette

By Christopher Snowbeck, Pittsburgh Post-Gazette

Highmark Inc. spent $16 million last year to buy a Virginia company that it could use to sell health plans in Pennsylvania, a move that could prove significant in the local insurance market for small businesses.

The purchase enables the region's dominant health insurer to create a for-profit subsidiary that could compete in the "small group" market, where Highmark has been trying to convince the state Legislature to change the rules governing how companies set premiums. With a for-profit subsidiary, Highmark could, in effect, adopt the business practices of the for-profit competitors it has been trying to abolish in the small business marketplace. A "small group" in Pennsylvania is one that includes two to 50 people.

The new subsidiary -- called HM Health Insurance Company -- could be used in other ways, as well. HM Health has licenses to underwrite coverage in 46 states and Washington, D.C., and multi-state licenses could prove useful to Highmark if proposed federal legislation allows for interstate sales of health insurance to small business groups, said Cliff Shannon of SMC Business Councils in Churchill.

Highmark spokesman Michael Weinstein said the company is evaluating its options for the subsidiary.

Purchased in August from WellPoint Inc., a publicly-traded company based in Indianapolis that is an amalgamation of numerous Blue Cross plans, the company acquired by Highmark was basically a shell with licenses and financial assets but no employees and subscribers. The acquisition was noted by Highmark in financial documents released last week by the state Department of Insurance.

"The idea when we bought it was -- and we're still pursuing this -- the concern that there's this two-tiered regulatory framework for small employer health insurance," Mr. Weinstein said.

Highmark has argued for more than a year that legislative changes are needed so it can compete on a more equal basis with Aetna, HealthAmerica and other companies that price insurance policies based on the health status of employees. Because of their position as insurers of last resort in Pennsylvania, Blue Cross insurers don't collect this detailed information, also called "medical underwriting."

Competitors that consider health status when setting rates essentially "cherry pick," Highmark says, by offering affordable coverage to only low-risk groups. That leaves high-risk groups, which typically have large numbers of women or older men, with Blue Cross plans.

The acquisition, however, suggests that Highmark is positioning itself so that it can pursue an "if-you-can't-beat-em-join-em" strategy.

"I do think that it provides a certain amount of leverage in their discussions with the state legislature and regulators about the topic of small group reform," said Doug Moore, an insurance broker with Seubert & Associates in Bellevue.

"I do think the regulators, in particular, consider the turmoil in the market if Highmark shifted [the small-group business] to a for-profit carrier."

Critics of Highmark-backed reform bills argue that eliminating medical underwriting would effectively kill health insurance competition in the state.

Without the ability to consider health status in setting insurance rates, premiums would be a function primarily of the discounts that insurers negotiate with doctors and hospitals -- and Blue Cross plans because of their market share always get the best rates, according to supporters of medical underwriting.

Eliminating medical underwriting would have the effect of driving non-Blue Cross insurers from the state, critics say. They add that medical underwriting allows insurance companies to financially reward groups that have fewer risk factors, some of which can be controlled by personal behavior.

Although four bills addressing the issue were considered by the General Assembly last year, the debate didn't generate any results. Considering the importance of the small group business to Highmark -- it generates about $900 million in annual revenue -- the company felt the need to consider options other than legislation.

"One of the options that we were looking at was the use of this subsidiary as a means to market insurance to smaller employers," said Mr. Weinstein, the Highmark spokesman. "Why would we do that? We would not have to be subject to the same types of regulatory constraints if [small group] products were sold through this distribution channel."

While the debate continues at the state level, developments at the federal level could provide a different use for the subsidiary, said Mr. Shannon. A bill currently being considered would allow for the creation of health plans for small groups that cross state lines.

"Apart from facilitating interstate sales of small group health insurance, [the federal legislation] would lead to a further consolidation in the health insurer industry," Mr. Shannon said. "The ability to operate in a lot of states would become very important."