West Penn Allegheny has its white knight. Highmark has a hospital system. And UPMC has a battle on its hands with what may soon become a more formidable competitor for the region's patients and health consumers.
On Tuesday, the boards that lead Highmark Inc. and West Penn Allegheny Health System unanimously approved a "capital partnership" in which the area's dominant health insurer will invest up to $475 million in the region's second-largest health network, including an upfront $50 million payment that will rescue Bloomfield's West Penn Hospital from what could have been imminent closure.
The takeover puts Highmark into the hospital business in a big way, remakes the local health care landscape and floats a life preserver to a hospital system that has been bleeding money, including a $22 million operating loss in the quarter ending March 31.
It also results in the departure of WPAHS's CEO of the last three years, Christopher Olivia.
Tuesday's board ratifications are just the beginning of the process; the two entities must still navigate regulatory approval requirements that will take months to sort out, although top officials sound confident they will prevail.
Executives from both Highmark and West Penn Allegheny called the partnership, negotiated over the last few months, "a historic transaction for Pittsburgh," one that will help maintain a viable option to the region's largest provider, the University of Pittsburgh Medical Center, which controls more than half of the hospital beds in the region and most of its physicians, too.
With the capital infusion, WPAHS also has access to funds to improve its physical facilities and market its services.
"They are well-capitalized, and we're not," said David L. McClenahan, WPAHS board chairman, speaking of Highmark. "That's putting it mildly."
In the decade since the collapse of the Allegheny Health Education and Research Foundation, whose bankruptcy eventually gave birth to the West Penn Allegheny Health System, WPAHS has been persistently starved for capital, he said.
WPAHS wanted to remain independent, but that was no longer an option financially, he said during a news conference Tuesday morning that outlined the deal.
Had the deal with Highmark or another investor not materialized, WPAHS was preparing a budget that would have included the autumn closure of West Penn Hospital. That hospital already closed its emergency room six months ago, resulting in 400 layoffs systemwide.
While the short-term goal of this acquisition is to preserve a "fragile" Pittsburgh hospital system, the long-term goal, said Highmark CEO and president Kenneth Melani, is the creation of a more efficient model of health care, one that is outcomes-based, with an "integrated delivery and financing system."
He said Highmark was impressed with WPAHS' cost structure, which he described as being at least 20 percent less than UPMC's per episode of care. WPAHS' number of full-time employees per occupied bed is also below the industry average.
"Health care services are becoming less affordable," Dr. Melani said. "It's important to have choice. It's important to have a second system. ... If this system doesn't prevail, you're going to be left with no choice, basically."
For Highmark, acquiring WPAHS means having an answer for what had become an increasingly acrimonious relationship with UPMC, with whom "any kind of collaboration stopped" five years ago, said Dr. Melani.
When the deal is finally consummated, Highmark will be able to appoint 60 percent of the WPAHS board for the first four years, then all of the board members thereafter, effectively putting it in control of the hospital system. (Mr. McClenahan and three other WPAHS board members, whose terms were to end Thursday, have recently agreed to continue serving on the board until 2014.)
Whether Highmark brings in additional expertise to help run the system, or to become part of the new provider networks and products being assembled by Highmark, is still up in the air. Dr. Melani said Highmark had had "high-level discussions" with Cleveland Clinic officials about working together, but it would be "extremely premature" to say they will lead to any formal arrangement.
"We have some concerns about the [clinic's] cost structure," he said, as well as questions about the Cleveland operation's resources and willingness to commit to any partnership. More promising is the possibility of joining forces on "specific clinical services," he said.
Asked if they are talking to health systems other than Cleveland Clinic, Dr. Melani replied, "They are the only ones I can talk about."
John Paul, former chief financial officer at UPMC, will be put in charge of Highmark's medical provider division, which will oversee the WPAHS operations. Dr. Melani and Mr. Paul were among those who hammered out the UPMC-Highmark agreement 10 years ago, the one set to expire next summer.
In a related move, WPAHS will be moving forward without Dr. Olivia, former president and CEO of West Penn Allegheny Health System, who stepped down from that position, effective Tuesday. He will take on a consulting position at Highmark.
With Dr. Olivia's departure, Dianne Dismukes has been named interim president and CEO. Ms. Dismukes last month was named executive vice president for hospital operations at WPAHS, succeeding Dawn Gideon.
"In a sense, his work here is done," Mr. McClenahan said.
Dr. Melani said that Dr. Olivia had been a transformative figure, and had paid the price for that. "He made really difficult changes. ... Anyone who makes those kind of changes, you burn some bridges," he said.
Following the signing of a "term sheet," Highmark "is immediately providing a $50 million grant to the WPAHS" to strengthen its West Penn and Forbes Regional hospitals "while assuring the continued delivery of quality medical services by the entire system," the companies said in a joint release.
Highmark is making "a total financial commitment of up to $475 million over four years, including $75 million to fund scholarships for students attending medical schools affiliated with WPAHS, and to support other health professional education programs," according to the morning's news release.
Earlier this month, Dr. Olivia announced that WPAHS would open a regional campus of Temple University's School of Medicine.
Throughout the day, Highmark and West Penn officials took some verbal jabs at UPMC, noting more than once, for example, that WPAHS is the only local hospital system currently offering live donor transplants, as a result of UPMC having suspended those operations last month after a patient received a kidney from a donor with hepatitis C.
Officials from Highmark and WPAHS (which are both nonprofits) also tried to draw a distinction between WPAHS and UPMC, saying UPMC is not behaving like a not-for-profit community asset in the way that it tries to "maximize revenue" and put WPAHS out of business.
Highmark and UPMC relations have frayed in recent months as negotiations over a new reimbursement contract are at an impasse, with Highmark contending that UPMC wants too much money and UPMC saying it cannot, and will not, sign a deal with an insurance company that is now partnered with a UPMC competitor.
Highmark and West Penn officials also questioned UPMC's business strategy and its growing provider network and health insurance business.
Chief medical officer Tony Farah said, "The issue of access has been a problem for 12 years" as West Penn Allegheny physicians could no longer see patients who had switched to the UPMC Health Plan, since the UPMC Health Plan offered access to all area hospitals and physicians except those under the WPAHS umbrella.
And Mr. McClenahan said UPMC's refusal to negotiate on the contract that expires next year could block southwestern Pennsylvanians from accessing key UPMC hospitals. "The people who control Presbyterian and Shadyside [hospitals] have decided that they have the right to cut off public access to those facilities, and they don't."
Highmark does have a contract for access to Children's Hospital of Pittsburgh of UPMC until 2022.
UPMC spokesman Paul Wood said the system favored choice and competition, which is why UPMC has signed new or enhanced existing contracts with insurers Aetna, Cigna, United HealthCare and HealthAmerica "to provide subscribers with more choice for health insurance."
That's also why UPMC is building its own hospital in Monroeville, less than two miles from West Penn Hospital Forbes Regional Campus, he said.
"If West Penn can't compete with that, then that's a sign of their own financial mismanagement."
Mr. Wood also questioned the new Highmark-West Penn Allegheny alliance.
"Where does the money for this come from? It comes from subscription premiums. You have to wonder if subscribers to Highmark are wondering if there would be a better use of their money, such as reducing premiums."
While the deal heightens tensions between Highmark ad UPMC, it would seem to eliminate those that existed between Highmark and West Penn Allegheny, which sued Highmark and UPMC in April 2009, accusing the two organizations in federal court of colluding to "destroy" WPAHS.
On Tuesday, the one-time rivals turned friends, with Dr. Melani saying, "We knew we were going to win the lawsuit," and Mr. McClenahan rolling his eyes jokingly at the suggestion.
"I think the lawsuit had its effect, and I'm not sorry that it was filed," Mr. McClenahan said.
The partnership's framework will be fleshed out over the coming two months, and the organizations hope it will be approved within six months.
Some aspects of the deal may need state approval.
"Ultimately, we expect the department will be one of the regulators that has a role in reviewing and approving the proposed arrangement between Highmark and West Penn," said Pennsylvania Insurance Department Commissioner Michael F. Consedine in a statement. "However, no formal agreement has yet been signed, and no filing has been submitted to the Department for its review."
Cathy Stoddart, staff nurse at Allegheny General Hospital and an SEIU member and union leader representing the system's 2,000-plus nurses, said the deal might prove beneficial for staff.
"I'm actually pretty excited," she said. "To have our system have money is something that hasn't happened in 11 years."
Highmark, she said, has agreed to fulfill the health system's pension obligations, a major concern for those WPAHS employees with defined benefit retirement plans.
Dr. Melani said that, going forward, unions would negotiate with the new Highmark-appointed board, which will be "walled off" from Highmark itself.
As for future reimbursement schedule between Highmark and West Penn Allegheny -- which would set the rates that Highmark pays for services and outcomes at WPAHS facilities -- "Highmark will do a contract with the [health] system based on what makes sense for Highmark subscribers and the system."
The system, however, will have to "survive on its own" and independently contract with other carriers, since Highmark would be forbidden from peeking at WPAHS's deals with other insurers, he said.