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Insurers say merger would cut health costs

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By Robert Weisman and Kay Lazar
Globe Staff / January 26, 2011

The leaders of Harvard Pilgrim Health Care and Tufts Health Plan said yesterday joining forces will give them the scale to expand across New England and beyond at a time when sweeping changes in the health care industry demand larger and more competitive players.

Tufts chief executive James Roosevelt Jr. and his Harvard Pilgrim counterpart, Eric H. Schultz, signed a memo of understanding to explore a merger and, in separate meetings with their employees, outlined how combining the state’s second- and third-largest health plans would help provide improved medical care at lower cost.

“It creates a better option for customers in Massachusetts and in the whole New England region," Schultz, 51, said. “There is value to growing and serving the entire Northeast, but always remembering Massachusetts is our home."

Schultz and Roosevelt spent the day briefing state business and government leaders, including Governor Deval Patrick and US Senator Scott Brown, on their plan to merge the companies.

Roosevelt, 65, said executives at both nonprofits have long debated whether a union of Watertown-based Tufts with Wellesley-based Harvard Pilgrim would make sense. Separately, they lack the size and resources to compete effectively in many areas with the state’s largest health insurer, Blue Cross Blue Shield of Massachusetts.

“Everyone in health care is reassessing the scene right now," Roosevelt said. “There are lots of questions about access and coverage. In that environment, our boards decided it was time to come back to the question of a merger."

As the parties negotiate in coming months, and even if a merger takes place, there will be no immediate changes for health insurance policyholders, Roosevelt and Schultz said.

Under the plan, Roosevelt would serve as chief executive and Schultz as president for two years. Then Schultz would take over as chief executive and Roosevelt would assume the job of executive chairman. A name for the new company hasn’t been decided.

Harvard Pilgrim and Tufts hope to reach a final agreement this spring. The deal would then have to be approved by attorneys general and insurance regulators in the states where the companies operate. The Justice Department, which reviews the antitrust implications of some mergers, may also have to sign off on the deal.

If Harvard Pilgrim and Tufts become a single company, Massachusetts would be left with just two dominant health insurers, both nonprofits. The number of health insurers in each state varies, but for-profit insurers are more common.

“We’ll certainly give [the merger] a very hard look,’’ said Barbara Anthony, the state undersecretary of consumer affairs and business regulations. “There will be a vigorous review of all the criteria."

Among the criteria regulators will consider are whether a merger would lessen competition and increase prices for customers.

Tufts is the largest seller of Medicare Advantage plans in New England, while Harvard Pilgrim is strong in such areas as insurance for students and the self-employed. Blending the two would create a “formidable competitor" to Blue Cross Blue Shield, said Steven J. Tringale, managing director of Hinckley Allen & Tringale, a Boston health care consulting firm. Together, they would have 1.7 million members in Massachusetts, New Hampshire, Maine, and Rhode Island, compared with 2.9 million for Blue Cross Blue Shield.

Not only would a merger boost their bargaining clout with hospitals and other health care providers — which themselves are expanding through mergers and clinical affiliations — but the new company could cut administrative costs, Tringale said.

Tufts has about 1,700 workers and Harvard Pilgrim employs 1,100. Employees yesterday were told there are no immediate plans to pare the workforce.

“The goal of combining our organizations is to grow over time," Roosevelt said. “No one should really be concerned with their jobs in the short term.’’

Still, major mergers usually lead to layoffs, as duplicated services — such as clerical work and other corporate operations — are consolidated to save money. In addition to reducing administrative expenses, Tringale said, the new company could more easily invest in the technology that will be needed in the coming era of “performance-based’’ medicine, where hospitals and doctors will be rewarded for how well they provide care and control expenses.

Tringale said the bigger-is-better mantra could raise concerns about the impact on smaller insurers and providers as well as employers and insured individuals. “One of the things policy makers and regulators are going to have to look at is what does it do to the marketplace,’’ he said.

Stuart H. Altman, professor of national health policy at Brandeis University in Waltham, said the merger is inevitable and a sign of what will happen nationally. The federal health care overhaul, he said, will force insurers to operate more efficiently.

For providers to offer better care at lower cost, Altman said, they will have to become larger and more integrated, and the trend is expected to accelerate with groups of hospitals and doctors merging to coordinate patient care and costs. “The insurance system sits on the other side and they are very nervous about these big health care delivery systems that can tell them what they want to pay," he said.

Altman said Massachusetts insurers are also anxious about a push by Republicans in Congress to allow consumers to buy insurance across state lines, which would create more competition.

Merger talks between Harvard Pilgrim and Tufts began last year with the chairmen of the two insurers’ boards, Barry Shemin at Harvard Pilgrim and Davey Scoon at Tufts. Roosevelt and Schultz followed with a series of conversations that culminated at the end of last year, they said.

At the employees meeting at Tufts yesterday, “there were no tears, there was no screaming, and there was a lot of agreement on how logical this is,’’ Roosevelt said. Harvard Pilgrim’s employees meeting, Schultz said, was characterized by “lots of excitement, lots of interest, lots of questions.’’

Robert Weisman can be reached at; Kay Lazar at

© Copyright 2011 Globe Newspaper Company.