2008-02-08 / Community

It's My Turn

The GHI-HIP Merger: Part I
By Edward Skyler, Deputy Mayor For Operations, City Of New York

Edward Skyler is the Deputy Mayor for Operations for New York City, working closely with Mayor Michael Bloomberg. The following is his testimony before the New York State Health Department concerning the proposed merger and privatization of GHI and HIP.

"Good morning Superintendent Dinallo, and thank you for the opportunity to appear before you this morning. My name is Edward Skyler, and I am the Deputy Mayor for Operations for the City of New York. On behalf of Mayor Bloomberg, I am here to testify today on the impact the proposed conversion of EmblemHealth, better known as HIP and GHI, to a for-profit corporation will have on the City of New York, its employees and other New Yorkers.

"The New York State Insurance Department must reject GHI and HIP's current proposal to convert to a for-profit company because the negative impact of a conversion on the City would be dramatic, severe and permanent. The City and other covered organizations already spend more than $4 billion annually in employee healthcare costs, most of which is paid to GHI and HIP. If GHI and HIP are granted for-profit status, they will quickly and substantially raise the rates they charge, and the City will have no choice but to pay for it.

"These rate increases will be inevitable because of the conversion and the anti-competitive merger of HIP and GHI that preceded it, a merger that the City is vigorously contesting in Court. The unlawful merger of HIP and GHI eliminated competition between these providers, who were created as non-profit entities for the express purpose of providing affordable healthcare to residents and employees of New York City. If the State permits the proposed conversion to happen without imposing stringent conditions on HIP and GHI, it will cause a fundamental and irrevocable shift in the allegiance and duties of the managements of HIP and GHI from the long-term health of the City's employees, to shareholders, whose only concern is profit.

"While the City would be forced to pay the increased healthcare costs that the merger and conversion would make possible and inevitable, none of the value of a conversion- which would presumably be realized through a public offering of HIP and GHI stock- would accrue to the City. Rather, the State, and a charitable foundation controlled by the State, would reap 100% of the benefit of the proposed conversion, leaving the City to pay for the substantial premium increases that would follow it. Given these patent inequities, the Superintendent must not allow this conversion to happen unless it is conditioned on the City both receiving its fair share of any public offering and being assured, through appropriate regulation, that there will be a meaningful cap on rate increases.

"GHI and HIP both have deep roots in New York City. GHI was formed in the City in the 1930s, and pioneered the provision of healthcare to working New Yorkers. HIP started operations in 1947 and was created by Mayor LaGuardia for the express purpose of providing affordable health insurance to New York City residents and City workers. For more than 60 years, GHI and HIP have fulfilled their notfor profit missions, and the value of these companies derives almost entirely from contributions made by the City and its employees over more than six decades.

"Due to this long-term investment, New York City is by far the largest contract holder with GHI and HIP, contributing approximately 60% of the total value of the merged company. Fully 93 percent of the City's workforce, more than 518,000 employees and retirees - cops, firefighters, nurses, doctors, teachers and librarians - choose either GHI or HIP for health coverage. And the City is bound by law to pay the HIP rate for 100% of City employees covered under a Cityfunded health plan.

"I'm sure the members of this committee are aware that healthcare costs have risen dramatically for the past several years. Between 2002 and 2008, the City's healthcare costs increased by approximately 67%, from $2.4 billion to $4 billion, an average of nearly 9% per year. Despite these cost increases, HIP and GHI remain far and away the most affordable healthcare plans available for City employees.

"But make no mistake, as a combined for-profit company, HIP and GHI will be compelled to impose much larger rate increases on all contract holders, and the City will be forced to pay the majority of those increases. After the conversion, HIP and GHI will be obligated to pay substantial corporate income taxes and State and MTA taxes on insurance premiums; these taxes alone would immediately increase operating costs by more than 2% of current premiums, or $67 million per year. These costs could be covered only by increasing rates on current contract-holders.

"Moreover, to maximize profits, HIP and GHI's would-be shareholders will demand that it charge at least as much as other private insurers. To get an idea of the magnitude of such increases, consider that the for-profit healthcare provider closest in price to HIP currently charges 24% more in premiums than HIP charges for health plans offered to City employees. We estimate that the City must pay an additional $32.9 million for every one percent increase in health insurance costs, so if rates increased by even half of this amount, it translates to approximately $400 million in additional healthcare costs every year.

"The fact that such increases would have to come out of the City's pockets would be irrelevant to shareholders, who would rightly expect the highest possible return on their investment. Given these realities, any claim that HIP and GHI's rates and historic pattern of rate increases would remain the same after a conversion simply defies common sense. Nor could purported 'efficiencies' or 'synergies' from a merger and conversion counterbalance the enormous pressures to raise rates that a conversion will unleash. "And keep in mind that none of this is happening in a vacuum. Last week, Mayor Bloomberg presented the City's financial plan for the next four fiscal years. It contains budget deficits of about $5 billion a year in Fiscal Years 2010, 2011 & 2012, driven largely by increases in uncontrollable costs, including Medicaid, pensions and fringe benefits. The City can ill afford to see its health care costs spiral out of control, and undermine our ability to balance the budget without slashing funding for crucial core services such as public safety and education.

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