Bigger can be better when it comes to insurance companies if the circumstances are right, say healthcare providers in Massachusetts, where the state's second- and third-largest insurers have signed a memorandum of understanding to merge.
Thanks to merger, hospitals see benefits from competition with Blues
And providers in the Bay State say they are hoping the proposed merger between Harvard Pilgrim Health Care, Wellesley, Mass., and Tufts Health Plan, Watertown, Mass., unveiled last week creates just that situation.
“This could have a positive impact in the long run,” said Lynn Nicholas, president and CEO of the Massachusetts Hospital Association, Burlington. If the two not-for-profit insurers can become more efficient as one company and pass on the savings through slower premium growth, then it will be good for healthcare in the state, Nicholas said.
The typical fear among hospital and physician executives when two insurers merge is that it will decrease competitiveness and lead to the insurer applying pricing pressure to providers. But in this case, where a third not-for-profit insurer dominates—Boston-based Blue Cross and Blue Shield of Massachusetts—some may be welcoming the stronger competition, Nicholas said.
The merger was officially announced Jan. 25 in a joint statement between the two companies after a Boston Globe story broke the news that morning. Officials for both Harvard Pilgrim and Tufts did not return calls for additional comment.
The statement said the memorandum of understanding to explore the benefits of merging is a “first step in a long process of due diligence … before reaching a final merger decision, which is anticipated sometime in the next several months.” The potential benefits of a merger include: enhanced focus on outcomes and quality, reduced duplicate spending on the administrative systems needed to implement government mandates and creating efficiencies on technology investments, according to the statement.
“There is compelling reason to believe that a combined new organization has great potential to reduce costs, which will contribute to slowing the growth of escalating premiums while increasing the focus on improving healthcare quality in partnership with providers,” said James Roosevelt Jr., president and CEO of Tufts Health Plan.
Amy Whitcomb Slemmer, executive director for the patient advocacy group Health Care for All, Boston, said there are signs that combining the two companies may indeed help more than hurt. Both insurers are highly rated by their members, Slemmer said. And the leaders of the two companies, Roosevelt at Tufts and Eric Schultz, president and CEO of Harvard Pilgrim, are well-regarded in the industry, she said.
But Slemmer and others aren't assuming that a merger would go as outlined by the two companies. “We're going to pay close attention,” Slemmer said. She noted that the state Division of Insurance and the attorney general share responsibility in approving the deal, and that at least one public hearing on the matter will be held. The merger also must be cleared by the U.S. Justice Department, which in the past year has shown a keen interest in policing health insurance markets. (Oct. 25, 2010, p. 6)
Likewise, physicians in Massachusetts will be watching the deal closely as it progresses, said Dr. Alice Tolbert Coombs, president of the Massachusetts Medical Society, Waltham, a critical-care specialist at South Shore Hospital, South Weymouth, Mass., and an anesthesiologist with South Shore Anesthesia Associates, Weymouth. “One of the things we're always concerned about is market share,” Coombs said. When the No. 2 and No. 3 insurers in a market come together, it's something to pay attention to, she said.
Harvard Pilgrim is ranked No. 2 in the state and had 1.1 million members as of Sept. 30, while Tufts at No. 3 had 735,000 members as of the same time period. The two are similarly compared in terms of revenue (see chart). The combined companies would still be ranked behind Blue Cross Blue Shield's 2.9 million members.
The combined company should be in a better position to work under a global payments model under development in the state that would move away from fee-for-service reimbursement (July 27, 2009, p. 6), and under the payment and quality reforms taking place at the national level.
The Blues plan already is taking an active role in advancing new payment models, and on Jan. 21 announced promising first-year results for what it calls an alternative quality contract, or AQC, in which providers get global payments for patients plus quality incentives.
Meanwhile, Harvard Pilgrim and Tufts have received accolades nationally, having been rated No. 1 and 2 respectively in a ranking of HMOs released in October by Consumer Reports and the National Committee for Quality Assurance.
Governance for the merged company already has a rough outline. Under the memorandum of understanding signed by the two companies, for the first two years, Roosevelt would take the top spot of CEO, while Schultz would be president and chief operating officer. Barry Shemin, Harvard Pilgrim's chairman of the board would become chairman of the merged company and Davey Scoon, chairman of Tufts' board, would be vice chairman.
After the first two years, Roosevelt would become executive board chairman and Schultz would become CEO. Roosevelt was paid total compensation of $1.7 million in 2008, according to Tufts' Internal Revenue Service Form 990 for that year. Schultz just took on his position at Harvard Pilgrim in March, so his salary was not available on a Form 990. His predecessor, Charles Baker, was paid $1.8 million in 2008, according to the insurer's Form 990.
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