STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE

 

 

 

March 28, 2000

 

 

Q. Please state your name and your position with Anthem.

A. My name is Larry Glasscock. I am the Chief Executive Officer of Anthem Insurance Companies, Inc ("Anthem").

Q. What will be the subject matter of your testimony?

A. My testimony will provide an overview of Anthem, its history and growth, recent trends and developments, the reasons why we entered into the proposed purchase of Blue Cross and Blue Shield of Maine ("BCBSME"), and how Anthem intends to continue the Blue Cross and Blue Shield tradition in Maine if this transaction is completed.

Q. Please describe Anthem’s origin and growth.

A. Anthem is an Indiana domiciled mutual insurance company that was incorporated in 1944 under the name Mutual Hospital Insurance, Inc., commonly referred to as Blue Cross of Indiana. In 1946, Mutual Medical Insurance, Inc., known as Blue Shield of Indiana, was also incorporated as an Indiana mutual insurance company. The two companies subsequently combined their operations under the name "Blue Cross and Blue Shield of Indiana". In 1985, the companies legally merged, forming Associated Insurance Companies, Inc. and continuing to provide Blue Cross and Blue Shield of Indiana coverage. In March 1996, Associated Insurance Companies, Inc. changed its name to Anthem Insurance Companies, Inc.

In the early 1990's, the Board of Directors of Anthem recognized the serious challenges facing single-state Blue Cross and Blue Shield Plans as the health insurance industry underwent consolidation into large regional and national competitors. We adopted a plan to expand into markets outside of Indiana by building on our Blue Cross and Blue Shield heritage. In furtherance of this plan, Anthem merged with Blue Cross and Blue Shield of Kentucky in 1993. Two years later, Community Mutual Blue Cross and Blue Shield, an Ohio-based plan, merged with Anthem. After these mergers, Anthem became a regional Blue Cross and Blue Shield operation that encompassed three states, and was the largest health insurance company in that market.

Anthem began an effort to create a second regional operation in 1997 by merging with Blue Cross and Blue Shield of Connecticut. In 1999, we purchased the assets of Blue Cross and Blue Shield of New Hampshire. We also completed last year an acquisition of Rocky Mountain Hospital & Medical Services, Inc., doing business as Blue Cross and Blue Shield of Colorado and Blue Cross and Blue Shield of Nevada.

Today, Anthem provides Blue Cross and Blue Shield coverage to approximately 6.2 million members in Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado and Nevada. It is one of the strongest Blue Plans in the country with approximately $1.6 billion in surplus. The following financial ratings by rating organizations confirm our financial strength: Standard & Poor's: A; A.M. Best: A-Excellent; Duff & Phelps: A+.

Further information about Anthem and its management is contained in the Form A Statement Regarding the Acquisition of Control of Domestic Insurers, dated September 15, 1999, as supplemented and amended (referred to as the "Form A"), which is incorporated in its entirety by reference herein.

Q. Please describe in more detail the developments in the health care insurance industry which led Anthem to expand and to consider BCBSME’s proposal to affiliate.

A. Health plans at the local, regional and national level have pursued affiliation and merger strategies to increase market share, achieve economies of scale, attract and retain qualified employees, and secure access to capital needed to protect against increased costs, competition and market cycles. These affiliations frequently bring greater choice to the customers in available products, network and service capabilities.

During the past five years in particular, there has been a significant national trend toward consolidation among health plans serving the health insurance market, averaging approximately 60 combinations a year. Since 1994, the mergers of more than 275 companies have affected more than 130 million health plan enrollees, according to Managed Care Acquisition Report, First Edition, published by Irving Levin Associates. The pace of mergers continued in 1999, with the announcement of 30 or so mergers. As a result, roughly 80% of the commercial health insurance market is now served by thirty companies. The six largest commercial competitors of Blue Cross Blue Shield Plans are approaching the membership of the entire Blue system and the market capitalization of these companies is over 150% of the surplus of the entire Blue system.

The combination of U.S.HealthCare, Aetna, NYLCare, and Prudential Health into one entity demonstrates the drive to achieve scale even among the largest companies in the market. The merger of Healthsource with CIGNA and the recently proposed purchase of Aetna/U.S.HealthCare by Wellpoint are further evidence of this trend toward large-scale health plans. In the Blue Cross and Blue Shield system, the number of independent plans was 128 in 1975 and is 49 today. The Blue Cross Blue Shield Association predicts further consolidation will occur in the coming years.

Q. What relevance do these developments have to BCBSME?

A. National mergers and the emergence of very large regional players have had a substantial impact on BCBSME and the regional health care market. BCBSME enjoys a significant market share in Maine, but overall it is quite small in comparison to the total membership and capitalization of some of its most significant competitors. The company must now compete with large plans like Aetna/U.S. Healthcare and Cigna/Healthsource, whose substantial reserves and member bases allow them to accept losses in particular markets areas in order to increase market share, which puts single-state Blue Plans at a disadvantage. A regional economic downturn can also devastate a local health plan, while one with operations in multiple areas can balance its risks. The marketplace domination of health benefits by large managed care companies has created a need to focus on financial strength to compete with those businesses.

Effective delivery of managed care also demands the development of new systems, programs, reports and communications that go far beyond the historical insurance roles of processing claims and adjudicating benefits. All of those developments – in addition to providing core business processes with state-of-the-art and efficient operating hardware and software – require capital. For a single-state Blue Cross company, joining with other entities in the Blue system so that investments in the future can be spread over a wider geographic and economic base is the most advantageous avenue to address these needs. That is equally true for BCBSME.

Q. What factors are important to successful operation of health insurance companies in the environment you have described?

A. Successful health care companies in this dynamic and challenging environment have these traits in common: they have a substantial membership and the geographic distribution required to negotiate competitive fee structures with health care professionals; their broad base of business allows a significant spread of administrative costs which helps keep their rates competitive; and they have the capability to provide multi-state employers with a strong product portfolio and delivery system to support it nationwide. It has become clear that only those companies with large capital resources and market share will succeed, and we intend to be one of them.

At the same time, we feel strongly that this key objective can and must be achieved while maintaining our focus on quality and primary commitment to the local markets and policyholders that we serve. Anthem seeks to strike this balance by providing coordinated regional and corporate support services and assistance to its subsidiaries, but leaving the day-to-day management and individual medical care decisions to managers within each local subsidiary.

The unprecedented changes occurring in the health care industry have made it increasingly difficult for small health insurers to compete. Marketplace pressures are driving health care companies harder than ever to deliver high-quality, affordable health care coverage to their policyholders. Compounding these challenges are cost factors involved in the delivery of health care. Health care costs are growing as new technologies, prescription drugs and surgical and medical treatments are becoming more sophisticated and expensive. That is as true in Maine as it is elsewhere. Similarly, as health expectations and outcomes improve, the demands for capital are increasing to support clinical programs that promote members’ health and the quality standards these programs must meet, such as accreditation by the National Committee for Quality Assurance. In addition, systems support continues to be a costly but vital component of any health insurance company.

We believe the lesson from these industry developments is that the ability to have sufficient membership, capital and efficient administration, as well as quality, competitively priced products that can be delivered across state lines, will determine success or failure of health insurance plans in the future.

Anthem believes there are significant operating advantages that can be obtained by creating a strong multi-regional Blue Cross and Blue Shield company. Underwriting cycles can be better managed, consolidated financial strength can be used to develop better products for policyholders, vendor costs can be reduced, and structural investments and fixed expenses (such as systems development and disease management costs) can be spread among a greater number of policyholders. All of these factors will help Anthem provide value for our members, and we expect to do so in Maine.

Q. Would you please describe Anthem’s operating philosophy?

A. Anthem's mission is to "improve the health of the people we serve." Our company seeks to identify health risks and prevent illness and to promote healthful lifestyles for our members and the communities we serve. We work to bring quality and efficiency to the delivery of care for our members. Anthem's vision is a world where people have the information, capability and support to optimize their health throughout their lifetimes - to transcend the "sick care" system of the past and create a true health system.

Q. Please describe the strategic objectives of Anthem.

A. Each of our strategic objectives is very straightforward. Anthem believes that in today's health care market, if you can't match the performance characteristics of your best competitors, you will slowly go out of business. Therefore, our first objective is to meet or exceed the performance characteristics of our best competitors. Anthem regularly compares its performance against its competitors across a broad spectrum of operational, financial and health care delivery measures. The results of these measurements become the basis for continually improving our performance.

Our second objective is to achieve the necessary scale and market share to compete effectively. I have already discussed the market forces driving the need to achieve the scale and market share necessary to be competitive. Our proposed acquisition of BCBSME is a direct reflection of our focus on this objective.

Our third strategic objective is to achieve a competitive edge through creating product value. Simply put, Anthem seeks to offer products which will deliver greater value than any other alternative for the same dollar spent.

Finally, Anthem seeks to be the "employer of choice" within our industry. Like our objective describing product value, Anthem intends to ensure that employees looking for opportunities in our industry will choose Anthem as the organization for which they most want to work based on such factors as professional growth and development opportunities, working conditions, communication levels and a respect for the contribution made by all associates.

Our focus on these objectives is ongoing, and our commitment to continuous improvement in our performance is firm. If this transaction is approved, we expect to promote these objectives through our operations in Maine as we already do elsewhere.

Q. Can you provide some examples of what Anthem has achieved in pursuing these objectives?

A. Our case management care programs enjoy accreditation by the NCQA, the industry standard for health plan quality. Our Connecticut HMO has been recognized as one of the country's best, and our Ohio coronary services program has been featured on the front page of the Wall Street Journal for its positive impact on member outcomes. Anthem’s (HEDIS) performance scores are generally above industry standards. Jim Parker describes additional recognition that Anthem has achieved in his testimony.

Q. How does Anthem organize itself to deliver services to its members?

A. Anthem believes very strongly in the axiom that health care is a local activity. Provider markets, consumer preferences and regulatory requirements all differ from state to state, and often within a state. With this recognition as its foundation, Anthem has created an operating model that emphasizes the local nature of our business.

There are four levels of activity within the Anthem organization, and each of them is described in some detail in the Form A to which reference is made. Local and state operations focus on activities that most directly impact our members. These activities include benefits design, sales and marketing, underwriting, provider contracting, network management, and medical management functions. Decisions related to each of these activities are made by Anthem managers at the local and state level. That would also be the case in Maine, if this transaction is completed.

Supporting local and state level management is a regional infrastructure and management team. Regional managers establish regional operating objectives and manage activities that support local operations. They also provide a more seamless administration across state lines for plans of employers with multi-state operations. Regional functions include those activities which are most likely to benefit from the economies of scale that can be created by performing them on a consolidated basis, such as claims processing, billing and data collection and analysis.

Anthem Health Plans of Maine would operate in Maine as part of the Anthem East region, which is under development. Our Connecticut and New Hampshire Blue Cross and Blue Shield Plans will be also included in the Anthem East region.

Shared Service functions are activities which are delivered on a standardized basis under the direction of a single corporate executive. Shared service functions include human resources, finance, information technology, legal and public affairs, and are performed by employees who are located throughout Anthem's service areas.

The final activity - Corporate functions - are limited in number and are generally performed at Anthem's headquarters. These include functions such as investment, management, payroll, treasury and compensation and benefits design.

Consistent with this approach, most of the administrative activities of Anthem BCBS’s business will continue to be managed and conducted out of BCBSME’s current facilities in Maine. Current employees of BCBSME will perform most of the day-to-day administrative activities that will support Anthem BCBS’ business.

Q. Could you comment in more detail on the plans for Anthem East?

A. As I noted Anthem is in the process of creating an integrated Blue Cross and Blue Shield regional operation in New England, which we refer to internally as "Anthem East." Anthem East will have operating capability and market strength that none of the current New England Blue Cross and Blue Shield plans enjoy today. One of the advantages of the proposed transaction will be to maintain and promote, within a New England regional model, a Maine based health plan that enjoys the strength of a strong regional organization. The Anthem East regional structure will create significant operating efficiencies which are addressed in more detail in the testimony of our Chief Financial Officer, Mike Smith.

As Anthem works to create a broader New England region to include its Connecticut and New Hampshire operations and the proposed acquisition of BCBSME, it is difficult to answer at this time many questions that relate to specific products or many other Maine operating issues. To the extent possible, however, Anthem's future plans for its operation of BCBSME are detailed in the business plan submitted to the Superintendent as part of Anthem’s Form A Application in this proceeding, and their ongoing development is described in the Anthem East planning documents which we have made available to the Superintendent and parties in this proceeding. Certain changes in the way each state-based Blue Cross and Blue Shield plan does business will take place as the new regional operating company is created. Within that framework, however, is Anthem's commitment to local decision-making concerning many key health plan activities.

Q. Does this conclude your testimony?

A. Yes.

CERTIFICATE OF SERVICE

The undersigned hereby certifies that on March 28, 2000, a copy of Anthem’s Prefiled Testimony of Larry Glasscock was served by electronic mail, overnight mail, or via hand delivery on each of the persons listed below.

Robert S. Frank, Esq.

Harvey & Frank

Two City center

P.O. Box 126

Portland, Maine 04112

e-mail: frank@harveyfrank.com

(Blue Cross/Blue Shield of Maine)

Judith Chamberlain, Esq.

State of Maine

Department of the Attorney General

6 State House Station

Augusta, Maine 04333-0006

e-mail: judy.chamberlain@state.me.us

(Bureau of Insurance)

William H. Laubenstein, Esq.

State of Maine

Department of the Attorney General

6 State House Station

Augusta, Maine 04333-0006

e-mail: bill.laubenstein@state.me.us

(Office of the Attorney General)

Joseph P. Ditre, Esq.

Consumer Health Law Program

One Weston Court, Level One

P.O. Box 2490

Augusta, Maine 04338-2490

e-mail: jditre@mainecahc.org

(Consumers for Affordable Health Care Foundation/Coalition)

Michele M. Garvin, Esq.

Ropes & Gray

One International Place

Boston, Massachusetts 02110-2624

e-mail: Mgarvin@Ropesgray.com

(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)

Bonnie Post

Executive Director of the Maine Ambulatory Care Coalition

P.O. Box 390

Manchester, Maine 04351

e-mail: bdpmacc@mint.net

(Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)

John Dieffenbacher-Krall

Executive Director

Maine People’s Alliance

192 State Street

Portland, Maine 04101

e-mail: MPA@gwi.net

(Maine People’s Alliance)

Gordon H. Smith, Esq.

Maine Medical Association

30 Association Drive

P.O. Box 190

Manchester, Maine 04351

e-mail: gsmith@ctel.net

(Thomas D. Hayward, M.D.,

Maroulla S. Gleaton, M.D.,

And the Maine Medical Association)

 

Donald E. Quigley, Esq.

General Counsel

465 Congress Street, Suite 600

Portland, Maine 04101-3537

e-mail: quigld@mail.mmc.org

(Maine Medical center)

 

Sandra L. Parker, Esq.

John Doyle, Jr., Esq.

Attorneys for MHA, Inc.

150 Capitol Street

Augusta, Maine 04330

e-mail: sparker@themha.org

jdoyle@preti.com

(MHA, Inc.)

Kellie P. Miller, M.S.

Executive Director

Maine Osteopathic Association

693 Western Avenue

Manchester, Maine 04351

e-mail: meosteo@mint.net

(Maine Osteopathic Association)

 

 

 

 

 

 

 

DATED: March 28, 2000

_____________________________

James B. Zimpritch, Esq.

Jeffrey M. White, Esq.

Catherine R. Connors, Esq.

PIERCE ATWOOD
One Monument Square

Portland, Maine 04101

(207) 791-1100

Attorneys for Anthem Insurance Companies, Inc.

 

 

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