Sales: $7.4 billion (1997)
SICs: 6411 Insurance Agents, Brokers, and Service
Highmark Inc. is the eighth largest health insurer in the nation, with annual revenues of over $7.4 billion. The company provides health care coverage in Pennsylvania and offers dental, medical, vision, life, casualty, and other health insurance to over 18 million people. The company operates under the trade name Highmark Blue Cross Blue Shield in the 20 counties of western Pennsylvania and under the name Pennsylvania Blue Shield in the rest of the state. With operating centers located in Camp Hill, near Harrisburg, as well as in Pittsburgh, Highmark was created in December 1996, with the merger of Blue Cross of Western Pennsylvania and Pennsylvania Blue Shield. Prior to the merger, Blue Cross covered only hospital stays, while Blue Shield covered physicians’ fees. While the company maintains that the Blues operate more efficiently as one health care provider, some critics have expressed concern that a company with so a great a market share may be focused on revenues more than on quality health care.
Blue Cross of Western Pennsylvania: 1937-96
While Pittsburgh was slowly recovering from the Great Depression in 1937, its hospitals were in trouble. Most were about half empty, and many of the patients couldn’t afford to pay the minimum $6 per day charge for hospital service. At that time, Blue Cross of Western Pennsylvania unveiled a prepaid hospital plan that would benefit both the hospitals and the people of Pittsburgh. The plan promised individuals 21 days of hospital service for a monthly premium of 75 cents. A spouse could be added to the plan for an additional 65 cents, and children could be added for 35 cents. Therefore, a worker could insure a large family for a total of $1.75 a month. The plan was originally called the Hospital Service Association of Pittsburgh and was chartered by the Alleghany County Court of Common Pleas on September 15, 1937. Coverage for the first subscribers became effective on January 1, 1938. Over 75,000 members were enrolled within the first year, and by 1941 enrollment had increased to 500,000.
In the 1940s, Blue Cross expanded the benefits offered in its original 21-day hospital contract to cover 50 percent of an additional 90 days of care. It also introduced “direct-pay” coverage for individuals who were self-employed or otherwise ineligible for participation in a group plan. Blue Cross also encouraged the development of the Medical Services Association of Pennsylvania to provide prepaid coverage for physician fees.
Blue Cross negotiated the first national Master Agreement with the United States Steel and the United Steelworkers of America in 1951. This agreement provided uniform Blue Cross and Blue Shield benefits to companies and unions whose operations extended across state lines.
Blue Cross’ goal was to provide quality health care to all Pennsylvanians. Unlike many other insurers, Blue Cross continued coverage to its subscribers after they retired. In the 1960s, Blue Cross made available a Senior Citizen Agreement to people over 65 who were not previously insured by Blue Cross.
By the 1970s, Blue Cross had introduced the first prepaid group practice in Western Pennsylvania, called the Centerville Health Plan, and was part of the Central Medical Health Services, the first health maintenance organization (HMO) in Pittsburgh. Over the years, Blue Cross began acquiring noninsurance businesses in addition to providing insurance coverage, and in 1991, the organization changed its name to Veritus Inc. to reflect the growing importance of its for-profit operations.
Pennsylvania Blue Shield: 1964-96
Pennsylvania Blue Shield was created in 1964 when the Medical Service Association of Pennsylvania (MSAP) adopted the Blue Shield name. The Pennsylvania Medical Society, in conjunction with the state of Pennsylvania, formed MSAP to provide medical insurance to the poor and indigent. MSAP borrowed $25,000 from the Pennsylvania Medical Society to help set up its operations and named Chauncey Palmer as its new president. Individuals paid 35 cents a month and families paid $1.75 a month to join MSAP, which initially covered mainly obstetrical and surgical procedures.
Enrollment declined in World War II as many members left the state to support the war. Arthur Daugherty replaced Palmer as president in 1945 and recruited new, larger accounts, including the United Mine Workers and the Congress of Industrial Organizations. In 1946, MSAP became a chapter of the national Blue Shield association, which was started that year by the medical societies.
MSAP recruited the 150,000 employees of United States Steel in 1951, which brought its total enrollment to more than 1.6 million. Despite the organization’s large client base, it had trouble keeping up with its payments to doctors and was forced to raise premiums. The state insurance commission disapproved of the high premiums and reminded MSAP of its social mission—to provide quality insurance to low-income households. The commission suggested that MSAP control costs rather than continue to raise premiums. In response, MSAP formed a utilization control unit the following year to help keep track of expenses.
In 1964, MSAP changed its name to Pennsylvania Blue Shield. Two years later, the organization began managing the federal government’s Medicare insurance plan for the state’s elderly and also started the 65-Special plan to supplement Medicare coverage. In the 1970s, the organization again fell behind in its payments to doctors. Rates were once again increased and expenses were scrutinized.
Pennsylvania Blue Shield faced serious competition in the 1980s from newly formed health maintenance organizations (HMOs) within the state. Blue Shield retaliated by creating its own HMO plans, some of which it owned jointly with Veritus.
Despite physicians’ protests and state regulators’ concerns, Pennsylvania Blue Shield merged with Veritus in 1996. The new company chose the name Highmark Inc. to emphasize its standards for high quality.
The 1996 Merger
The merger of Pennsylvania Blue Shield with Veritus, formerly Blue Cross of Western Pennsylvania, was highly controversial, giving Highmark a staggering 60 to 65 percent of the total market share in Western Pennsylvania. The approval of the merger by the state insurance commission on November 27, 1996 shocked those who opposed it. The approval was not without contingencies, however. Pennsylvania Insurance Commissioner Linda Kaiser required the companies to devote $65 million or 1.25 percent of their premium revenue to community service programs. Kaiser also stipulated that Highmark stay nonprofit for at least two years after its creation.
Although he approved the merger, State Attorney General Thomas Corbett, Jr., issued written comments expressing concerns that the merged company’s size might impede competition. His approval was also contingent upon Highmark providing continued coverage to the poor. In addition, Highmark also could not demand exclusivity from any hospital it contracted.
The newly merged Blues had a total enrollment of roughly 2.5 million people and dominated the market in Pittsburgh. Pittsburgh’s next largest insurer, Health America, had only 294,000 members. While Highmark brandished a great deal of power, its first year was not an easy one. The organization posted sizable losses in 1996 for its most popular product, the Select Blue health plan. To offset the losses, Highmark launched a plan to entice employers to offer Select Blue as the only point-of-service (POS) plan for employees. As an incentive, Highmark cut the premiums—too much.
Major Change and Competition in 1997
To compensate for the underperforming Select Blue, High-mark cut costs and expanded its dental and vision health care programs. Highmark maintained both of the former Blues’ headquarters—in Pittsburgh and Camp Hill—but it downsized its staff by 4.6 percent through early retirements. At Veritus 260 out of 3,600 employees accepted; at Blue Shield 300 out of 8,500 employees accepted.
Highmark also scaled back its Medicare claims processing business. The government divides the administration of the federally funded Medicare among many different insurance carriers, and prior to the merger, Pennsylvania Blue Shield was the nation’s largest Medicare carrier. However, Highmark found it necessary to cut back on its Medicare claims processing, since the federal government reduced its payment to administer these claims.
Highmark’s mission is to provide Pennsylvanians with access to affordable health care insurance regardless of age, health, or occupation.
The Blues had begun expanding their dental and vision programs before the merger. In 1996, Pennsylvania Blue Shield had purchased MIDA Dental Plans, Inc., based in Southfield, Michigan, while Pennsylvania Blue Shield had purchased Davis Vision, Inc. of Plainfield, New York, which insured approximately three million people, manufactured lenses, and owned an estimated 45 retail outlets. Highmark’s Clarity Vision Inc. was formed in 1997 to provide group customers with a complete package of vision products. Moreover, Highmark significantly increased its dental business when it contracted the families of active military personnel throughout the United States with one of its subsidiaries, United Concordia Companies, Inc. The military contract covered 1.8 million people and was valued at $1.7 billion over five years. The network created to service the contract included 45,000 dentists. United Concordia became the nation’s sixth-largest dental insurer.
Nineteen ninety-seven brought increased competition for Highmark. Specifically, the University of Pittsburgh Medical Center (UPMC) was rapidly acquiring hospitals in the Pittsburgh area mainly through full-asset mergers. By 1997, its scope included 16 hospitals, including three prestigious tertiary care hospitals, affiliations with 12 additional hospitals, and fiscal 1997 revenues of $2.4 billion. Highmark and UPMC had originally considered designing a product that would combine their vast resources, with Highmark as an insurer and UPMC as a provider. UPMC claimed that it couldn’t meet Highmark’s discount demands, however, so it became an insurance provider and a serious competitor.
To compete with UPMC’s programs, Highmark launched its Community Blue plan, a niche product for small employers. Community Blue offered subscribers a narrower choice of hospitals and doctors in exchange for lower premiums. The plan excluded all UPMC hospitals, except its Children’s Hospital. Highmark’s other managed care plans continued to offer a broad network of UPMC hospitals, however.
Physicians had mixed feelings about the competition between Highmark and UPMC. Some expressed concern that neither Highmark nor UPMC would raise rates for fear of losing market share, which meant that physicians would have to cut their own costs in order to participate in their programs. An even bigger concern, however, was that in the race to become the market leader the focus was shifting away from quality care and onto cost. “We have a totally cost-centered health care model,” explained surgeon Jon Lloyd, M.D. in an article in American Medical News. “Purchasers select plans based on cost, and plans select providers based on cost. The consumer is at the end of the food chain in Pittsburgh,” he asserted.
Legal Troubles and Damage Control in 1998
In 1998 Highmark agreed to pay the government $38.5 million to settle allegations that it had defrauded Medicare by overbilling the program between 1989 and 1996. United States Attorney David M. Barasch also announced that the government had accepted a plea agreement from Judith Krafsig-Kearney, a former corporate vice-president accused of helping to carry out the alleged scam.
Barasch maintained that Krafsig-Kearney and others at the company had manipulated what were to be random samples of processed claims to mislead auditors from the Health Care Financing Administration (HCFA) performing annual reviews. According to Barasch, Krafsig-Kearney and others had singled out claims they knew complied with HCFA standards and presented them as “random” samples. The settlement also covered accusations of fraud in Blue Shield’s failure to pursue payments from other companies insuring Medicare recipients, manually overriding computer payment safeguards, not conducting reviews of kidney disease treatments required by Medicare to determine if they were medically necessary, and failing to recover overpayments resulting from computer errors. Barasch remarked that Highmark had cooperated fully and admitted some of the violations on its own.
Legal problems continue to plague the company in the late 1990s. In July 1998, the Pennsylvania Society of Internal Medicine (PSIM) filed a complaint with the state insurance department stating that Highmark had violated the Unfair Insurance Practicing Act by exercising unfair influence on hospitals and participating doctors. Dr. Robert B. Sklaroff, president of the PSIM in 1998, asked both the Insurance Department and the State Attorney General’s office to investigate the situation. Highmark contended that the PSIM was opposing the merger in order to gain higher reimbursements for its members.
Nineteen-ninety-eight marked the third consecutive year that Highmark had to pay out more in claims than it collected in premiums. The shortfall, known as an underwriting loss, was $300 million in 1996, $154 million in 1997, and was estimated between $75 and $100 million in 1998. The narrowing loss reflected premium increases that Highmark implemented for many of its insurance products in 1998. Highmark’s 1997 underwriting losses were negated by interest income from investments and by the sale of its Keystone Easy HMO to Independence Blue Cross.
To deal with the negative publicity generated from premium increases and the Medicare suit, Highmark brought in John Brouse to serve as CEO. In an article in the Pittsburgh Business Times, Brouse expressed his hopes that people would view Highmark as a company that anticipates change and that is “compassionate,” and “exact and sharp” in its internal operations. He also wanted customers to feel that they received good value for the premiums they paid. “We’re not here to be the cheapest. We want people to feel they’re getting their money’s worth. We want customer loyalty and we have to earn that,” Brouse explained.
Brouse noted that Highmark was taking steps to ensure a positive bottom line in the future. He planned to save about $100 million in 1998 from cutting payments to hospitals and doctors and from better managing subscribers’ care. Using what the company referred to as disease-management techniques, Highmark identified subscribers with such diseases as diabetes and implemented programs to help them better manage their ailments. Brouse expected to gain an additional $98 million from cutting costs in Highmark’s core health care business.
Positive Reports in 1998 and 1999
As the company neared the end of the century, Brouse’s management seemed to be relieving some of what ailed High-mark. Standard and Poor’s awarded Highmark A+ credit ratings for its superior capitalization, excellent market position, and good liquidity. In addition, the National Committee on Quality Assurance (NCQA) awarded Highmark’s Keystone Health Plan West full, three-year accreditation, which it granted to health plans with excellent programs that demonstrated continuous quality improvement and met NCQA’s rigorous accreditation standards.
Highmark remained a dominant player in its traditional Pennsylvania markets. While its operating performance was still poor, it showed steady improvement as it moved toward the year 2000.
Highmark Blue Cross Blue Shield; Pennsylvania Blue Shield; Keystone Health Plan West, Inc.; United Concordia Companies, Inc.; HVHC, Inc.; Clarity Vision; HealthGuard of Lancaster; Trans-General Life and Casualty Group Inc.; Alliance Ventures Inc.; Insurer Physician Services Organization; Standard Property Corporation; Keystone Health Plan Central, Inc. (50%); Inter-County Hospitalization and Health Plans (50%); Health Benefits Management, Inc. (50%)
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____, “High Noon for the Old Guard,” American Medical News, August 17, 1998, p. 13.
—Tracey Vasil Biscontini