Blue Cross, Highmark paying agency's advisers

A hearing on the proposed Independence Blue Cross and Highmark Inc. merger took an unexpected twist in Harrisburg yesterday.

Instead of focusing on the merger, which would create the largest health insurer in the state, it was all about how much the Insurance Department's consultants were being paid - and, more surprising, who was paying them.

Independence Blue Cross, of Philadelphia, and Highmark, of Pittsburgh, are not only paying for their own consultants, but are also footing the bill for the department's consultants.

The Insurance Department will decide on the merger.

State Sen. Donald White, who called the hearing, said he was confused by the payment arrangement.

"This is almost like the fox guarding the chicken coop," said White, a Republican, who is chairman of the Senate's Insurance and Banking Committee. "I don't understand how we get an objective opinion when the burden is being paid by the parties that have a vested interest in this."

The consultants and acting Insurance Department chairman Joel Ario assured White that the arrangement was standard around the nation.

Martin Alderson Smith, senior managing director of the consultant Blackstone Group L.P., said Blackstone would earn $200,000 a month for 10 months, and $125,000 monthly after that from the insurance companies for advising the state. A final report would cost an additional $750,000.

James Langenfeld, director of LECG L.L.C., a California economic-consulting group, could not remember the exact amount, but LECG estimated that its services to the department would cost the insurers $725,000, according to an Insurance Department filing.

Smith and Langenfeld had been expected to testify on how they planned to analyze the merger.

Ario said that even though the insurers would foot the bill, they would have no influence on the consultants.

He and Smith described how some insurers seeking state approval for mergers were turned down and still had to pay. The insurers "got a result that they were distinctly unhappy with," Ario said.

He said the state had to have its own top-notch consultants to match Independence and Highmark's.

Still, he said, the fees raised his eyebrows. "It made me think maybe I'm in the wrong job here," he joked.

Go to http://go.philly.com/merger, a Pa. Insurance Department page, to register to comment at the public hearings on the proposed Independence Blue Cross/Highmark Inc. merger, to comment in writing, and to read documents filed in the merger request.

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