The Blue Cross plans of Maryland and the District of Columbia announced yesterday that they have agreed to merge their operations, creating a nonprofit regional health insurer with the reach of its for-profit competitors.
Together, the plans will have 2 million subscribers -- 25 percent of the people in an area covering Maryland, the District of Columbia and a slice of Northern Virginia -- plus annual revenue of $3 billion and 5,000 employees.
No money will change hands.
In the short term, officials of both companies said, subscribers will notice no difference. But within a year, the companies are likely to begin to combine provider networks -- giving members a wider geographical choice of doctors and hospitals -- and perhaps product lines as well.
The consolidation will require approval from regulators in Maryland, Virginia and the District.
The Maryland and D.C. Blues join a national rush for Blue Cross plans, which have been merging, acquiring or converting to for-profit status at a dizzying clip. From 128 Blue Cross plans in 1975, mergers brought the number to 86 in 1985 and 61 today -- and the deal announced yesterday is the 10th pending consolidation.
The plans here are being surrounded by beefed-up, new-age Blues. Trigon, the central Virginia plan, is converting to for-profit status. The Pennsylvania and Western Pennsylvania plans are merging. And the Delaware Blue Cross plans are being acquired by the New Jersey Blues, which are merging with Anthem, a for-profit reincarnation of the Indiana Blues.
"Blues plans have been under a lot of pressure, particularly the for-profit managed care companies," said Iris Shaffer, a spokeswoman for the Blue Cross and Blue Shield Association. HMOs and other managed care plans have been gaining market share rapidly from old-line commercial insurers and from Blues plans.
"From a Blues world that was more than 100 indemnity insurers, they are becoming regional managed care companies," she said.
Competition in the Baltimore-Washington market already is regional managed care companies. Aetna-U.S. Healthcare, Prudential, NYLCare, United HealthCare and Kaiser Permanente operate plans that stretch from the Maryland-Pennsylvania line to Northern Virginia.
"With their service areas connected, they become more like the rest of us," said Elizabeth Misek, president of Prudential HealthCare, Mid-Atlantic. "This makes them a mid-Atlantic player; it makes them pretty formidable."
"Just within the state of Maryland, it is not uncommon for businesses to draw employees or have offices throughout the state," said Frank Kelly 3rd, president of Kelly-Chick and Associates, a Hunt Valley insurance broker. "Ideally, an employer would rather deal with one carrier who can meet all their needs," making a combined Maryland-D.C. Blue Cross plan a more attractive choice, he said.
Until now, Blue Cross Blue Shield of the National Capital Area has had exclusive rights to market Blue Cross Blue Shield insurance in Montgomery and Prince George's counties, the District and Northern Virginia. Blue Cross Blue Shield of Maryland has turf that covers the rest of the state and a small part of southern Delaware.
The combination here would be accomplished by creating a holding company, with a board composed of 12 members from && the Maryland Blues board and six from the National Capital board.
William L. Jews, chief executive officer of Maryland Blue Cross, will be president and CEO of the as yet unnamed holding company and chairman of the two plans, which will be subsidiaries. Larry C. Glasscock, CEO of National Capital Blue Cross, will be CEO of the subsidiaries and chief operating officer of the holding company.
Jews said "it's impossible to guarantee jobs" among the two companies' 5,000 employees, but if the companies grow as expected, they eventually may employ more people.
Jews and Glasscock said a transition team would be named soon to determine what functions can be combined.
The Maryland Blues shelved plans to create a for-profit subsidiary a little more than a year ago, after regulators and legislators raised questions. Jews said the new entity would consider other consolidations or changes, but in the short run, "We need to be committed to making the plan work."
As both plans considered their options for competing in a changed marketplace, each decided "the best way to realize both our dreams is to do that as a merged enterprise," Glasscock said. He said he and Jews had conducted most of the discussions one-on-one over several months.
One analyst said he doubts that companies as large as most Blue Cross plans could realize economies of scale by mergers. Douglas B. Sherlock, senior health care analyst at Sherlock Co., which advises institutional investors and publishes a newsletter on Blues transactions, said, "You still need to have X number of claims processors for every member, X number of customer relations people for every member."