Highmark-Independence Merger Collapses Under Fear of Competition

Highmark and Independence Blue Cross, two Blue health-insurance plans in Pennsylvania that have sought to merge for almost two years, called off the deal today for a seemingly quirky reason: The state insurance commissioner would have forced the combined company to give up either the Blue Cross or Blue Shield trademark.

Of course, Highmark CEO Kenneth Melani and Independence CEO Joseph Frick want everyone to think they canned their merger out of high-minded principle and respect for their hard-earned brands. In reality, Highmark and Independence had to be much less concerned about relinquishing one of their trademarks than the possibility that a rival insurer might use a cast-off Blue name to compete with them statewide.

It’s almost as if Melani and Frick simply decided that holding 70 percent of the Pennsylvania health-insurance market simply wouldn’t have been enough to ensure the income and negotiating power they were clearly counting on if they also had to compete against another well-funded Blue. Highmark-IBC — or whatever it would have decided to call itself — would have been the nation’s third largest nonprofit health plan by membership and the sixth largest health-insurance company of any kind by revenue.

The decision had to hurt the execs on a personal level, too. Recall that the merger would have resulted in an almost $1 million annual salary increase for Melani, who was slated to helm the combined company, while Frick would have gotten to keep his $2.9 million paycheck as COO. Neat trick, that.

In a joint statement, Melani and Frick explained the merger’s collapse this way:

To address its concern about the combination’s impact on competition, the PID told us that we would have to relinquish the use of either the Blue Cross brand or the Blue Shield brand. Throughout the review process, we have stated repeatedly that we would not give up one of our brands. We have spent more than 70 years developing our brands’ value in our markets and they are an integral part of our corporate identities and reputation.

While we believe that the combination as originally proposed would have been of great benefit to all of our stakeholders, we concluded that giving up one of our brands would preclude the new company from delivering to our customers, communities, and the Commonwealth the full results we had projected.

In a backhanded sort of way, of course, the decision to call off the merger is a testament to the lingering power of the Blue name in healthcare — this despite the fact that many Blues plans are now for-profit subsidiares of WellPoint and that some nonprofit Blues seem eager to join them. (It’s entirely possible that the Highmark-IBC merger was also intended to improve the company’s negotiating leverage vis-a-vis WellPoint or a competitor had it decided to go the for-profit route itself.)

In the end, though, the deal’s collapse is probably a more important reminder that in the health-insurance market, an effective local or state monopoly is the real brass ring — and anything that might jeopardize that end state is devoutly to be feared. Even if it means kissing goodbye to $1 million a year.