Blue Cross explores options with N.Y. insurer

Health plan looks to be more competitive with for-profit firms

Blue Cross and Blue Shield of Massachusetts is in talks with Excellus BlueCross BlueShield of Rochester, N.Y., that could lead to a joint venture or a possible merger of the two health insurers, according to several people who have been briefed on the talks.

The discussions, which Blue Cross and Blue Shield of Massachusetts called preliminary, follow several low-key business deals the company has made with other Blue Cross health plans in the past two years.

Blue Cross vice president Jay McQuaide confirmed the two companies are talking, but said the focus is on finding another product line for the Massachusetts insurer to sell.

"We're limited in terms of how we can expand our medical population membership," said McQuaide. "So we're looking at opportunities to expand our product portfolio beyond our core products."

He said Excellus sells a long-term care insurance product that the Massachusetts insurer might want to offer. With a full suite of insurance products, Blue Cross-Blue Shield could be more competitive with for-profit national insurance companies such as Cigna and Aetna, McQuaide said.

"We have discussions on a regular basis with other not-for-profit Blue Cross plans about potential business opportunities," said McQuaide.

As to the possibility the discussions with Excellus might lead to a larger deal, he said, "They are very preliminary. We've had one or two meetings with them. To speculate on what else they might be would be very premature."

Blue Cross-Blue Shield, with about 3 million members in Massachusetts, controls about 60 percent of the market for commercial health insurance. Its nearest competitors are Harvard Pilgrim HealthCare, with about 1 million members, and Tufts Health Plan with about 700,000 members.

In February, Blue Cross and Blue Shield of Massachusetts and its counterparts from Arkansas, Florida, Hawaii, and Tennessee bought Life and Specialty Ventures LLC, a Little Rock, Ark., firm that sells life and disability insurance.

Blue Cross of Massachusetts and counterparts from six states also formed a holding company to acquire Med-Vantage Inc., a San Francisco firm that provides software for analyzing information about medical treatments.

Cleve Killingsworth Jr., chairman and chief executive of Blue Cross and Blue Shield of Massachusetts, has deep ties to the New York firm. He served as senior vice president of healthcare operations when it was known as Blue Cross-Blue Shield of Rochester.

A spokesman for Excellus declined to answer questions about the discussions.

Excellus has about 2 million members in upstate New York.

It is now part of a larger nonprofit holding company, Lifetime Healthcare Cos., which includes home care and nursing services.

In addition, its MedAmerica business provides long-term care insurance to about 100,000.

But Excellus has stumbled in recent years, according to its most recent annual report.

Although revenue from premiums increased 6.5 percent to $5.1 billion in 2007, net income fell 44 percent, to $84 million. The drop came despite a significant increase in investment income over the same period.

The possibility of a merger comes during a period of consolidation among Blue Cross insurance plans.

In 1996, there were 60 such plans; now, there are 39, according to the Blue Cross and Blue Shield Association, a national group which licenses the Blue Cross name.

Two Blue Cross plans in Pennsylvania, Highmark Blue Cross Blue Shield of Pittsburgh and Independence Blue Cross of Philadelphia, proposed merging in March 2007 and are still seeking regulatory approval.

Robert Laszewski, president of Health Policy and Strategy Associates, which consults to healthcare insurers, said there may be little benefit to the public if the Massachusetts insurer grows through an acquisition.

"Massachusetts already has an extraordinary balance of competition among health plans that are considered among the best in the country," he said.

In addition, Laszewski said, cost savings from combining the administrative functions of two insurance companies are minimal.

"There's real diminishing returns," he said. "Incremental gains past 2 or 3 million members have never proven out."

If Blue Cross and Blue Shield of Massachusetts really wanted to get into the long-term care insurance business, it could easily do so on its own, Laszewski said.

"The barriers to entry in these businesses are quite small," he said. "You can hire 15 people and be in the long-term care business."

Jeffrey Krasner can be reached at krasner@globe.com.