THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

2 big health plans may merge

Union of Tufts, Harvard Pilgrim would pose a stronger Mass. competitor to Blue Cross

By Robert Weisman and Kay Lazar
Globe Staff / January 25, 2011

E-mail this article

Invalid E-mail address
Invalid E-mail address

Sending your article

Your article has been sent.

Text size +

The state’s second- and third-largest health plans, Harvard Pilgrim Health Care and Tufts Health Plan, are set to tell their employees today that they are exploring a merger that would reshape the region’s health insurance landscape.

Harvard Pilgrim and Tufts are close to signing a memorandum of understanding that would combine their operations in four New England states and make them a stronger competitor to the market leader, Blue Cross Blue Shield of Massachusetts, in their home state, according to several people who have been briefed on the transaction. They asked not to be identified because they were not authorized to discuss the deal.

Consumer advocates said it is unclear how the insurers’ subscribers might be affected by the union, which would leave Massachusetts with only two major health companies.

“There has been tremendous value in having three strong locally based health plans in terms of choices for consumers,’’ said Nancy C. Turnbull, associate dean at the Harvard School of Public Health and a former deputy insurance commissioner. “But on the other hand, this could create a consolidated plan that could create a stronger competitor to Blue Cross and it could create a plan that has stronger leverage than either of them individually in negotiating with providers.’’

The memorandum is a preliminary step that will enable the two nonprofits to work together over the next few months to assess whether a merger makes sense. In particular, said the people familiar with the plan, they will seek to determine if a merger would better serve customers and hold down surging health care costs by paring administrative and technology expenses.

If the parties reach a definitive agreement, as expected, it would trigger a regulatory review that is likely to involve the attorneys general and insurance departments in the states where the companies do business, as well as the federal Department of Justice. That could take much of the year. Among issues likely to be considered by regulators would be the effect on consumers.

Harvard Pilgrim, based in Wellesley, is the larger of the two, with about 1 million members in Massachusetts, New Hampshire, and Maine, including 800,000 in Massachusetts. Tufts, based in Watertown, has about 730,000 members in Massachusetts and another 10,000 in Rhode Island. But executives of both companies are taking pains to characterize the potential transaction as a merger of equals.

Ellen Lutch Bender, a Boston health care consultant, questioned whether even insurers as large as Harvard Pilgrim and Tufts have the scale to remain independent in the current environment, with pressures mounting on medical insurers and providers to control costs.

“As stand-alones, [they] may be too small to be sustainable,’’ Bender said. “They are complementary organizations and it makes sense for them to explore coming together to be a competitive force in our market.’’

Heather Johnson, a spokeswoman for Governor Deval Patrick, said last night that the administration has not been told of the potential merger.

Under current plans, Tufts chief executive James Roosevelt Jr. would become chief executive of the new company for the first two years after a deal is completed, and Harvard Pilgrim chief executive Eric H. Schultz would be president and chief operating officer. Roosevelt and Schultz both declined to comment last night on the potential deal.

After two years, Schultz would take over as chief executive while Roosevelt would become executive chairman. Initially, Harvard Pilgrim chairman Barry Shemin would be chairman of the new company’s board and Tufts chairman Davey Scoon would be vice chairman of the combined board.

The parties haven’t determined the name of the new organization or how the alliance would affect Harvard Pilgrim and Tufts employees. Until a merger is approved by state and federal authorities, the two carriers would continue to compete with each other as well as with the state’s other health plans, including Boston-based Blue Cross Blue Shield and Fallon Community Health Plan of Worcester.

The merger plan comes at a time when major changes are being made in the delivery and payment of medical care.

Blue Cross, the state’s largest health plan with nearly 3 million members, has aggressively been staking out its position in the emerging world of global payments. Under that system, insurers have started putting medical care providers on budgets and giving them incentives to control costs and improve care, rather than being paid for individual doctor’s visits and procedures.

Partly in reaction to the pressure to switch from fee-for-service to global payments, several Massachusetts hospitals have combined operations, while others say they are seeking buyers.

“We obviously have the hospitals and physicians who have been consolidating in Massachusetts, so it’s not surprising that health plans would consider consolidation to try to achieve parity with provider groups,’’ Andrew Dreyfus, chief executive of Blue Cross Blue Shield, said last night. “One could argue this might benefit consumers by helping to drive more affordability. And that’s the test the community should ask: Does this contribute to our ability to provide more affordable care?’’

Robert Weisman can be reached at weisman@globe.com; Kay Lazar at klazar@globe.com.