Battle of the Blues: round 2: three years after their separation, Highmark and Capital BlueCross are holding their own in a healthy--but spirited--competition.

Three years ago, the tug-of-war between Pennsylvania-based health insurers Highmark Inc. and Capital BlueCross ended in a split that ceased a 36-year-old joint operation. Today, as the two Blues plans venture out on different paths, they say they're both finding success standing on their own.

The dismantling of the agreement between High mark (then Pennsylvania Blue Shield) and Capital BlueCross occurred April 1, 2002. Capital BlueCross--the agent for the joint venture serving customers in central Pennsylvania and the Lehigh Valley and the party responsible for sales, marketing, customer service, hospital contracting and payment--said its board pursued a relationship with Highmark, but couldn't accept a transaction that would transfer assets out of the region to support Highmark's then existing national consolidator strategy. The board wanted to ensure that Capital BlueCross would remain a significant contributor to the economic vitality of the region. Highmark, which was responsible for paying physician bills, said it offered alternatives to a takeover but Capital BlueCross wasn't interested in the offers. As a result, about 1.4 million customers in 21 counties across Pennsylvania felt the initial aftermath of confusion from the split.

Today, the companies say that's all changed and customers are finding value in the competition created by the separation. Advertising is fueling that competition as each company tries to gain a greater market share of members across their regions.

A New Beginning

Since the split, Highmark has become what it says is the largest health insurer in the state, comprising more than 4 million members in 67 counties. Highmark also boasts another 20 million members enrolled in its three nationally operated subsidiaries: United Concordia, a dental subsidiary; Davis Vision, a vision plan; and Highmark Life and Casualty, which offers stop-loss, life, disability and workers' compensation coverage.

"In addition to growth, the separation has brought tremendous capabilities for us to build our large block of business in central Pennsylvania; said Michael Fiaschetti, senior vice president, mid-Atlantic region, for Highmark. It also helped the company leverage its investments in technology and wellness capabilities and bring a better product to the people in Central Pennsylvania and the Lehigh Valley, which includes the Allentown, Bethlehem and Easton region, he added.

Capital BlueCross is finding similar payoffs. The 67-year-old, Harrisburg, Pa.-based company said the separation hasn't changed its focus as a prepaid not-for-profit hospital plan. The company believes that it's now able to better serve the community, which covers 21 counties stretching from the Lehigh Valley to central Pennsylvania.

"Separation is never easy and finding ways to partner is always a good path," said Capital BlueCross President and Chief Executive Officer Anita M. Smith, "but since the partnership didn't work, then it was the right thing for Capital BlueCross to do to continue to bring value to this region." Since the split, she said, the company has become energized, enthusiastic, very focused and flexible. "When crisis comes, you define the character of your organization.... Our people defined their character, and it was their defining hour because they knew health care and were able to get the company up and to market, all the while retaining responsibility for the 1.4 million existing members. Our competitor only had to enter the market and build new business."

Members felt the brunt of the separation as well. Initially, many members were perplexed as to what the split would mean for their coverage, whether or not they had to change plans or what plan they should select. At that point, the companies had to put members' minds at ease.

It wasn't easy. "Most health plans only have to touch about 45% of their population in a given year because most retain and renew a lot of business annually. But we had to touch every single customer and member in our coverages because they had to make a choice between Capital BlueCross, Highmark and other competitors; Smith said. She credits the long hours, dedication and sacrifice of the company's staff during the two-year post-separation period for completing that monumental task.

In addition, Smith believes the severed ties temporarily opened the door for rising costs. "Whenever a large company comes apart in terms of a partnership, it opens the door for other competitors, so the downside was that health-care costs rose slightly because providers saw it as an opportunity to open the door to competition in pricing: Therefore, unit prices rose marginally and purchasing power was somewhat dispersed because "when you don't have the same volume purchasing power you had, it breaks it apart a bit; she said. "We had to find ways to address that market and bring value to the equation, and we believe both customers and members now see value through competition in this market."

Highmark also believes consumers are benefiting from the break-up. Consumers in these areas now have another alternative that offers them additional value, said Fiaschetti. "In the past, they only had one choice, and we were at the mercy of Capital BlueCross to be able to do some of these things, such as wellness, enhanced customer service and Internet capabilities. But now we can bring tremendous value to the region and do things we wouldn't have been able to do before."

In addition, enhanced competition benefited members through favorable health insurance premiums, said A.M. Best Co. analyst Christian Miles.

The Battling Blues

The former association to gain a greater market share of members in Pennsylvania has now been replaced with a heated battle between the two plans. A key strategy: advertising.

Motorists driving down the Pennsylvania roadways surrounding the state's capital region can view the competition between the two companies first hand. A stretch of miles of billboards showcase both Highmark and Capital BlueCross' drives to attract more members.

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But that's where the similarities in advertising end. Highmark's ads featuring the tagline, "Have a greater hand in your health," are designed to empower people and give them information, tools and support to improve their health and quality of risks, the company said. Capital BlueCross is finding success with its "Blue Man" advertising campaign that began soon after the companies' joint agreement dissolved.

Highmark reported early after the split that it picked up about 60% of the contracts it jointly shared with Capital BlueCross, but relied on advertising to gain an even bigger share. "We were more successful than we thought after the separation because prior to that we jointly underwrote the programs and Capital BlueCross was the marketing agent so they had all the sales relationships, said Highmark's Fiaschetti. When the advertising campaign began, the company hoped to attract 350,000 to 400,000 new members after three years, which Fiaschetti said would have allowed for the same amount of revenue as it had under the joint operating agreement. Today, however, it has surpassed 700,000 members and far exceeded its expectations for growth in the market.

"Fundamentally, we did it by selling value, which is popular with large and national accounts and fairly successful with the middle market sector," Fiaschetti said.

Capital BlueCross created its "Blue Man" ads, which feature a tiny blue-colored icon touting the company and its benefits, shortly after the separation to help bring the company quickly to market, along with establishing the personality of the company and its employees, said Smith. "Blue Man" continues to evolve today--touching the community, schools and businesses across central Pennsylvania and the Lehigh Valley. Today's ads incorporate the company's current message of simplicity around insurance. "At Capital BlueCross, we're not only walking the talk but then bringing it to life in our advertising. We all know that people think health care is never simple, so the more we can do to ease the process, the better it is for our customers,' said Smith. She hopes the ads will help members better understand insurance while letting them know the company is there for them during the most critical times in their lives.

On a Single Path

Both companies said they've learned many lessons along the way, and are making a place on their own.

Capital BlueCross said its biggest accomplishment since the separation has been its ability to deliver on its vision. "We've taken some risks and worked hard to try to see what we need to do about rising health-care costs and bring value to the communities we serve,' said Smith. In addition, the company measures everything it does." And when you measure, you see if you actually are delivering results, and if not, you can change your course and try again ... eventually you will fend the solution."

In addition, Smith said the company draws strength from serving its members. She recalled a story of a heart transplant patient who visited the company's headquarters after nearly 18 months of recovery. Upon his visit, Smith got on the company's public address system to call all the employees to the building's atrium to meet the gentleman. "Putting the face on the people we serve shows us why we are in health insurance--there is a person at the other end of this," she said. "Sometimes we tend to forget why it's a privilege to serve and that's what keeps us motivated."

Highmark also has made some changes in the past three years. It has differentiated itself from Capital BlueCross and its other competitors by removing referrals from all of its health benefit programs. "Because members don't need a referral to visit a specialist, it takes cost out of the system for everyone, in addition to removing the hassle," said Fiaschetti.

Giving back to the community has also become an integral part of both companies' operations. Highmark commits money and support to various social missions, such as its recently opened Caring Place for Children in Camp Hill, Pa., where grieving children who have lost a parent or sibling can find individuals to help them cope with their feelings, or its outreach to area schools through "Kid-Shape"--a pediatric weight management program. Also, Highmark said in 2003 it committed $81 million to hold down the cost or expand access to individual health-insurance programs for lower-income families, uninsured children or older adults.

Capital BlueCross also is giving a lot back to the community it serves. It supports efforts such as the United Way educational programs and agencies that serve victims of domestic violence, food banks, YMCA programs focused on inner-city youth, and disaster relief through local Red Cross chapters.

Onward Bound

Both companies are excited about the possibilities that lie ahead. And while neither has ruled out reconsidering a merger, they don't foresee one any time soon.

"Every business going forward will always look at the most prudent business structure to advance its business interests in the market" said Smith. "If that might entail partnerships in the future, those are things we'll always have to consider, but we have no plans of that at the moment"

Highmark agrees. "While we think that [reuniting] would be the best for everybody, we will now continue to focus on health improvement with members and in the community," said Fiaschetti.

Health care is in a wonderful time of transition, said Smith. "People say this isn't the time to be in health insurance, but I think it is. This is a time for an entrepreneurial spirit and innovation." Like Highmark, Capital BlueCross said it will continue to provide members new and improved products and services, such as consumer-directed products.

Also, new management at both companies since the split likely will continue to refocus the strategic directions the companies will take going forward. In 2003, Dr. Kenneth Melani replaced longtime executive John Brouse as Highmark's president and CEO. In 2004, Smith took over the president and CEO post from retiring James Mead.

But one question remains: Have the three years that have passed since the shattered relationship healed old wounds? "We try not to think about wounds because to me the competition is the competition and business is business,' said Capital BlueCross' Smith. "I find it personally disappointing if it gets personal."

"We want to lead with integrity so we think of the competition only from the aspect of whether they're doing anything better or if we could be doing something to even better serve our customers, members and providers," Smith said.

Key Points

* In April 2002, Highmark Inc. (then Pennsylvania Blue Shield) and Capital BlueCross ended their 36-year-old joint operation.

* Initially, consumers were confused about the separation, but now they are finding value in the competition it created.

* The two Blues plans are using advertising to differentiate themselves in the market.

* Neither company has ruled out a reunification, but neither foresees one any time soon.

Capital BlueCross

Headquarters: Harrisburg, Pa.

President and CEO: Anita M. Smith

Group members: About 1 million

Number of employees: 2,404

Marketplace: 21 counties in central Pennsylvania and the Lehigh Valley

Major products: Traditional indemnity, preferred provider organizations, point of service, Medicare supplemental and health maintenance organization (through Keystone Health Plan Central)

Financials: $2.5 billion in revenues in 2004

Web site: www.capbluecross.com

Highmark Inc.

Headquarters: Pittsburgh

CEO: Dr. Kenneth Melani

Group members: 4.4 million

Number of employees: About 11,000

Marketplace: Health insurance in Pennsylvania; dental, vision, life and disability nationwide

Major products: Health, dental and vision insurance, as well as group life and disability insurance; Highmark also administers Medicare Part A and Part B for Pennsylvania Medicare recipients.

Financials: $75.7 million in 2003 net income

Web site: www.highmark.com

Learn More

Capital BlueCross

A.M. Best Company #64554

Distribution: Captive sales force and brokers

Highmark Inc.

A.M. Best Company #64010

Distribution: Captive sales force, brokers, direct

For ratings and other financial strength information about these companies, visit www.ambest.com.