West Penn Allegheny cancels Highmark affiliation agreement

Saying that Highmark Inc. wanted it to restructure through bankruptcy, West Penn Allegheny Health System canceled the $475 million deal under which the insurer planned to acquire WPAHS.

WPAHS board chairman Jack Isherwood said in a written statement this morning that he considers bankruptcy a poor option for the health system's employees and customers.

"To us, bankruptcy is not the first option, it's the last option," he said.

WPAHS is actively looking for new partners and is willing to consider all types of companies -- another insurer, nonprofit, for-profit.

Senior management will remain in place, Mr. Isherwood said.

WPAHS accused Highmark of breaching the companies' affiliation agreement, adding that Highmark would not close the acquisition even if Pennsylvania's insurance department provided regulatory approval.

In a written statement, Highmark said it was not in breach of the affiliation agreement and continued to believe continuing with the acquisition was "in the best interests" of both companies.

"We have been working in good faith with WPAHS to move forward our proposed affiliation in a way that creates a strong foundation for success," according to Highmark's statement. "We believe that we have made substantial progress in this regard, especially in recent weeks."

According to WPAHS, its board met for eight hours yesterday and informed Highmark chief executive officer William Winkenwerder Jr. of its decision at 7:30 a.m. today.

In a statement earlier this afternoon, State Insurance Commissioner Michael Consedine said, "We are very concerned about today's announcements and events. Our primary focus is ensuring broad health care access for all the citizens of Western Pennsylvania. Both Highmark and WPAHS are important to the Pittsburgh community. The citizens they both serve and the jobs involved must be the highest priority."

Mr. Consedine said the department "had raised significant concerns to both Highmark and WPAHS about the WPAHS's projected deficit and inability to meet its bond obligations -- in both the short and longer term. However, the department did not ask nor require bankruptcy or restructuring of its debt. We urged the parties to work together to address these issues."

He added that Highmark's affiliation filing still is pending.

Dr. Winkenwerder first mentioned bankruptcy at a meeting Aug. 30, according to WPAHS, an option that was not part of their affiliation plan before that.

Highmark wanted WPAHS to enter bankruptcy, then the insurer would gauge market reaction and that of its bondholders to determine whether to proceed with the acquisition, according to WPAHS.

Mr. Isherwood said WPAHS suggested alternatives to bankruptcy, which were met with "tepid" interest.

The health system said its debt has not grown since the affiliation agreement's announcement other than a $100 million loan from Highmark, which was coupled with a $100 million grant. In finding Highmark in breach of the agreement, the loan also becomes a grant and does not have to be repaid, according to WPAHS.

"We're here to stay," WPAHS board member and former chairman David McClenahan said. "We don't know exactly what partner will come along because we have been prevented from looking at the market."

Under the proposed affiliation announced in June 2011, both Highmark and WPAHS would have come under a new nonprofit organization -- referred to by the temporary name "Ultimate Parent Entity" -- which Highmark officials have said would keep a wall between the insurance arm and the provider arms.

Highmark would not have been responsible for West Penn Allegheny's debt or pension obligations, they have said, nor would Highmark have steered its subscribers to West Penn Allegheny hospitals and clinics.

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963. First Published September 28, 2012 2:00 PM

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