Harvard Prof Skeptical On HIP-GHI Merger; Stresses Need for Safeguards
By ARI PAUL
A possible conversion of the two health-insurance companies for most city workers into a single for-profit firm comes with benefits and drawbacks, and would need a tough watchdog, according to one business scholar.

REGINA HERZLINGER: Public may not benefit from deal.

Regina Herzlinger of the Harvard Business School, who is a senior fellow at the conservative Manhattan Institute, believed that there was a false intuition behind the drive to consolidate the Health Insurance Plan of Greater New York (HIP) and Group Health Incorporated (GHI), which has caused Mayor Bloomberg and a coalition of rank-and-file union members to urge the State Superintendent of Insurance to halt the merger.

Often Merger Raises Costs

"When these companies merge, the justification is the economy of scale, and insurance companies spend a lot on information technology, because they have millions and millions of transactions, and people who justify the merger say the costs will go down per person," she said in a phone interview. "But there's no evidence of that; in fact there's evidence of the contrary."

STANLEY ARONOWITZ: Should put members first.

The best example, she said, was that people assumed that if companies merge their information technology departments, it would increase efficiency and pass the savings on to the consumer, but in actuality, such mergers caused problems.

"It's like merging Windows' operating system with a Mac," she said, adding that a similar problem happened during the merger that resulted in UnitedWellpoint. "It's very difficult."

Mayor Bloomberg and the Coalition Against Privatization have fears that a for-profit conversation will translate into higher premiums and less coverage. But changing over from a non-profit was one aspect Ms. Herzlinger was keener on.

Stock Offering to Follow?

"The non-profit status means that you and I pay more taxes," she said, pointing out that such institutions are tax-exempt. "Furthermore, a more serious issue is if they want to get bigger or they want to upgrade their [information technology], we're talking about investments that frequently run around $100 million. Where is a non-profit going to get that money? A for-profit sells stock."

Ultimately, she agreed with the CAP's suspicion that a merger would limit options for public workers. The CAP has said that it fears city workers only having one option for health insurance, while Ms. Herzlinger said that any market benefits from multiple firms.

"You want to have a lot of suppliers," she said.

While some United Federation of Teachers and Transport Workers Union Local 100 members have spoken out against the merger, Municipal Labor Committee Chair and UFT President Randi Weingarten has raised questions about the possible merger and conversion but has not opposed it. The CAP suspects that unions are reluctant to oppose the deal because they may benefit financially from the firms' future for-profit status.

Reluctant to Disrupt Ties

City University of New York Professor and labor expert Stanley Aronowitz said that some unions have loyalty to GHI because it was originally the product of a coalition of unions and philanthropists.

"Lots of these people have relationships with various interests. Those relationships are sometimes personal and sometimes they're historical," he said. "They're reluctant to take them on."

But Mr. Aronowitz, who is also an activist with the Professional Staff Congress, believed that the possibility of unions benefiting from the merger and conversion was not a good-enough reason for them to support the move.

"They always get a cut, and what happens to the money a lot of members don't know," he said. "It reduces the options for its members, and why you would want to reduce options I don't know."

'Proceeds Should Benefit Public'

For Ms. Herzlinger, the plan to turn GHI and HIP into one corporation was something whose merits couldn't be definitively evaluated at this point. She said that if the state did approve the merger, it still had an opportunity to ensure that the public does not suffer adverse consequences. The CAP has argued that a conversion will divert money that should be going to coverage to administration and executive salaries.

"The proceeds of the sale should benefit the public," she said. "I'm not saying the mangers are not talented or honorable people, but in many of the best conversions the payouts have been huge."

But what really needs to be watched is the kind of foundation that for-profit enterprises typically create and fund with the revenues of the enterprise. If the conversion happens, the public should have a mechanism that they it sees the benefits of the foundation.

"It could be used frivolously," Ms. Herzlinger warned. "My bias is: use it for poor people, use it for sick people, use it for medical care."