Blues player Featured

8:00pm EDT August 30, 2004
Ken Melani limps into a conference room at Highmark Inc. on crutches, necessitated by an injury sustained playing basketball at a fund-raising event. The injured foot isn't too painful, Melani says, but he's beginning to feel some discomfort in his other leg as he favors his injured limb.

It's not unlike the dynamics of the health care system, it seems; shift something over here, and it creates a ripple over there. Reduce the pain in one part of the system, and it flares up somewhere else. Introduce a new technology, and instead of it replacing another, it's added to those already available.

Melani, president and CEO of Highmark Inc. since last fall, has seen the health care industry from almost every perspective, including his recent stint as a patient. Trained as a physician, he engaged in private practice and built a multispecialty medical group. Later, he headed a joint venture with a Pittsburgh hospital that developed a number of health care related business units.

In 1989, he took a job with Blue Cross of Western Pennsylvania, Highmark's predecessor, as corporate medical director. Later, he served as president of Keystone Health Plan West, Highmark's HMO.

Broad experience across the health care industry may be a critical requirement to lead the 12,000-employee company through the next decade or so of certain and, quite possibly, revolutionary change. With two dozen subsidiaries and affiliates that produced a combined $8.1 billion in revenue in 2003, Highmark is a key player not only in Western Pennsylvania but in other regions of the state and beyond.

It owns the Mountain State Blue Cross Blue Shield plan in West Virginia and holds ownership stakes in operating units with Blue Cross of Northeastern Pennsylvania and Independence Blue Cross, two other Blues plans in Pennsylvania.

Cover all bets

In the long term, Melani says, the only solution to controlling health care costs and achieving universal coverage may be a government-sponsored plan that makes some of the hard decisions about when certain types of care or procedures are appropriate. The private insurance marketplace can't do that, Melani contends.

When it comes to Highmark's strategy to prepare for the changes that could occur in the marketplace, it might be described as "cover all bets." With investments in vision and dental plans and a strong reinsurance business, Highmark has gone beyond basic health insurance products.

It has a $10 million investment as a limited partner in Birchmere Ventures, a venture fund that invests in biotech ventures. And it owns Medmark, a specialty pharmaceutical company that it says lowers the cost of selected drugs used in physician offices by as much as 20 percent.

Melani sees Highmark continuing in its role as a traditional Blue Cross plan, but strengthening and expanding its government business as well. Highmark already serves as a fiscal intermediary for Medicare, performing claims processing, customer service and provider relations functions for the government plan. A strategic alliance formed this year with Blue Cross of Northeastern Pennsylvania gives Highmark a minority interest in two of that plan's subsidiaries.

Highmark brings its IT capabilities to the relationship to handle claims processing and enrollment functions, clearly among its most valuable competencies should a nationalized health care plan come to fruition.

Size and geographic scope will be critical if Highmark is to be a player in a revamped health care system that shifts its financing mechanism from private insurance to a publicly funded scheme, Melani says.

"To do that, we're going to have to be a statewide organization, or at least look like a statewide organization," he says.

On the expense side, Highmark is attempting to rein in its costs in a number of ways, many involving the use of information technology to streamline processes. Some of its recent efforts include:

  • The introduction of BlueChoice, the nation's first Internet-based group health program offering benefit plan and selection tools online. It offers several Web-based enrollment services for employees and employers. Subscribers can order prescription refills, secure identification cards and view explanations of benefits documents.

  • The replacement of its entire billing system with a fully integrated accounts receivable capability.

  • Migration toward a more standardized product portfolio, with options that include plans with a range of co-payments and deductibles. The intent is to make it easier for members to understand their benefits while making plan administration more efficient.

  • The Generics First program, an initiative to encourage physicians to offer patients free samples of less expensive generic drugs.

The cost drivers

Despite its size, Highmark and other insurers face some particularly tough challenges. Pennsylvania has one of the largest over-65 populations in the United States -- more than 1.9 million people or 15.6 percent of its population -- second only to Florida. The aging baby boomer population will put even greater demands on the system in the future.

And there's more.

The rise in medical malpractice insurance premiums is pushing up costs. In 2002, medical malpractice claims in the state ranged between $1.2 billion to $1.5 billion, or $103 to $124 per person, compared to about $85 per person for the rest of the country, according to benefits consultant Tillinghast Towers Perrin.

Government mandates and regulations account for about 15 percent of health care costs. Between 2001 and 2002, mandates that expanded coverage of benefits and providers increased health insurance premiums by $10 billion, according to PricewaterhouseCoopers.

Nearly half of Pennsylvania's 185 acute care hospitals lost money in 2003, according to the Pennsylvania Health Care Cost Containment Council, an independent state agency that gathers financial and clinical quality data on health care topics. As financial pressures on providers grow, they attempt to recover the shortfall by seeking higher reimbursements from private insurance companies and public payers such as Medicare and Medicaid.

Unhealthy lifestyles are driving up costs as well, with a higher percentage of smokers among the state's residents -- 25 percent -- compared to 23 percent nationwide. And the legacy of our industrial past, says Melani, has increased the number of illnesses caused by environmental factors.

Pharmaceuticals comprise a growing portion of the health care bill. The U.S. Food & Drug Administration reports that 60 percent more prescriptions were filled in 2003 than a decade earlier. And each year, according to the Pennsylvania Health Care Cost Containment Council, roughly 15 percent of the 200 largest-selling pharmaceuticals are new drugs, often more expensive than the alternatives they replace.

The toll of technology

One of the biggest cost drivers is the use -- in some cases, overuse, Melani contends -- of medical technology, much of it coming in the last 10 years.

"We've had a huge explosion in technology, as we've had in every decade, but in this past decade, it's been phenomenal," say Melani.

Melani concedes that some technologies have significant benefits for patients, and in some cases, cost-saving effects, but too many offer little, if any, additional benefit over those already available. A new diagnostic test may supplement but not replace an existing one, thereby increasing costs.

New technologies are often safer and less invasive, which can increase the pool of patients who want to use them. Laparscopic gall bladder surgery, a procedure far less invasive and with less recovery time than the previous operation, was lauded in the early 1990s as a boon to patients. But the new method has increased the number of procedures performed as patients have become familiar its benefits.

A problem for Highmark and other insurers is that if Medicare approves the use of a device or drug, insurers have to fall in line and pay for them or face lawsuits that seek to force coverage.

Melani says he isn't against all new technology, just new technology that doesn't offer some significant improvement over what it purports to replace.

"My point is that the new technology should bring significant benefit, not just incremental benefit," says Melani.

And while the proliferation and duplication of medical technology poses problems, Melani contends information technology holds the promise of helping the health care system to reduce costs overall.

"I think we're going to have to focus a little bit and spend some money on infrastructure to cut down the waste we have in the system so we can get a better health care system in the future," he says. HOW TO REACH: Highmark Inc.,; Pennsylvania Health Care Cost Containment Council,