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Eyewear deal fits Highmark's strategy

| Wednesday, May 3, 2006

When Italy's Luxottica, owner of American retail eyewear giants LensCrafters, Cole Vision and Pearle Vision, wouldn't allow customers to use Highmark Inc.'s vision coverage, the Pittsburgh-based insurance giant took action.

Highmark decided to get into the retail eyewear business itself, paying $305 million for Luxottica competitor Eye Care Centers of America. Announced Monday, the deal is slated to close within six months. And Highmark becomes the nation's third-largest retail eyewear chain.

"We'd been frozen out of Luxottica's network," Highmark CEO Ken Melani said yesterday. "The ECCA deal was just a continuation of what we've been doing the last three years."

One thing Highmark has been doing is making money. In 2005, the insurer's vision companies, United Concordia dental companies and its property and casualty insurance businesses combined for $70 million in net income, up 47 percent from 2004, and fully one-fifth of Highmark's net income for the year.

"He's been responsive to what the marketplace has needed, and he's left no doubt that he wants to play in the national market," David Lagnese, a benefits consultant in the Pittsburgh office of Towers Perrin, said of Melani's actions.

In the three years since he assumed Highmark command from the 31st floor of Fifth Avenue Place, Downtown, Melani -- trained as a physician -- has aggressively sought and secured new ways to make money over and above just being an insurance company, remaining Western Pennsylvania's dominant health insurer. Today, some 23 million individuals, one in 10 U.S. residents, are connected in some way to Highmark.

He's put together a number of partnerships with other "Blues," including Independence Blue Cross in Philadelphia, Northeastern Blue Cross in Wilkes-Barre, Louisiana Blue Cross and Blue Shield and Florida Blue Cross and Blue Shield. Partnerships can include packaging various insurance products the other Blues have no desire to develop expertise in.

United Concordia, Highmark's nationwide dental insurance product, certainly is a revenue generator. The company in 2005 was awarded its third-consecutive five-year pact with the U.S. Department of Defense to administer a dental plan covering 1.7 million members that will add $2.6 billion to Highmark's revenues. Total revenue in 2005 was $9.6 billion.

"While health insurance will continue to drive the company, it's good to have these other well-performing products to fall back on when insurance has a down period," said Tom Tomczyk, a health benefits consultant in the Pittsburgh office of Mercer Human Resource Consulting.

"If something becomes unprofitable, we have to get out -- we can't afford to stay with it," Melani said. "Every day you're examining your plan, looking at new products, new services."

Unlike many competitors, Melani has refused to relocate operations overseas in a money-saving move. Some 11,000 of Highmark's 12,700 employees are based in Pennsylvania.

"We will maintain our commitment to this community absolutely as long as we can," he said.

While Melani emphasized Highmark's long-standing mission to provide affordable care, the company makes money. Critics say a good chunk of that profit should be returned to members, but Melani said even if done, it only would be a one-time gift.

Being profitable allows Highmark to do other things, such as subsidize some of its coverages, offer its employees as volunteers for numerous community activities and be a strong supporter of various area projects.

"Highmark is the insurance carrier you love to hate," Tomczyk said. "It does do a lot for the community, subsidizes some coverages. It's not as much as some would like, but you can't please everyone."

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