In court, WPAHS's $200 million question

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On the surface, the proceedings in Common Pleas Judge Christine Ward's courtroom Thursday and Friday will address a simple question: Can Highmark Inc. rightfully block the West Penn Allegheny Health System from talking to other possible partners?

The judge's ruling, however, could pack a $200 million punch.

Last month, WPAHS board members said Highmark had breached the two parties' year-old affiliation agreement by insisting that the original terms no longer applied, and that WPAHS must file for bankruptcy to get relief from its near-$1 billion debt obligations. The West Penn Allegheny board members said they are now free to find other suitors.

Just as importantly in terms of deciding the fate of the region's second largest health system, the board also argued that a Highmark breach of the affiliation agreement meant the insurer's $200 million loan to West Penn Allegheny would revert to a grant, which the health system would not have to repay.

Highmark, for its part, believes there has been no breach and denies that it is insisting on a WPAHS bankruptcy. It has sued to prevent West Penn Allegheny from exploring an affiliation with another suitor; that's the issue before Judge Ward this week.

The stakes could not be higher for West Penn Allegheny.

If its arguments prevail, WPAHS can begin its courting of new partners, although, without the continuing cash infusions from Highmark, it is facing cutbacks in services and staff by the end of the current fiscal year on June 30. Few seem to like West Penn Allegheny's chances of finding a new partner by then.

And if Judge Ward rules in favor of Highmark, WPAHS may have little choice but to proceed with the affiliation agreement, which expires April 30.

It's not even a question of whether financially-strapped West Penn Allegheny could wait it out for six more months and then become a "free agent." If there's no breach, that $200 million "grant" becomes a loan again -- a loan that West Penn Allegheny cannot repay on its own without emptying its coffers.

By the end of October, WPAHS is due to release its fiscal year 2012 financial report, which will provide another update as to how well -- or, rather, how poorly -- the health system is performing. Through three quarters, the system had reported operating losses of $87.8 million against revenue of $1.18 billion.

"Assuming that West Penn Allegheny really wants to look elsewhere, and assuming they are forced to consummate this deal with Highmark, it's going to be really difficult to marry the two cultures," said James McTiernan of Triad, USA, a Downtown employee benefits consulting. "It would be difficult under the best of circumstances, and this makes it that much harder."

Ultimately, most observers believe a Highmark affiliation represents West Penn Allegheny's best, and maybe only, hope.

Highmark wants WPAHS to complete its vision for a full-service integrated health care delivery system. "It allows them to have more control over the cost and the care," said Mr. McTiernan. Losing that affiliation would not be disastrous for the insurer, he said, although it would mean "reshaping their product structure" so that it becomes more of an integrated insurance product rather than an integrated health care delivery network.

"They don't have to be in the health care provider business."

West Penn Allegheny, meanwhile, faces few options and the realization that time is short, a point that was underscored by an advertisement they planned to publish in today's Post-Gazette.

The ad is an open letter to Gov. Tom Corbett from 127 West Penn Hospital physicians and other staff, telling him that, "We need your help now in order to avoid a catastrophe."

The letter urges the governor to "demand that the Pennsylvania Insurance Department and the Boards of Highmark and WPAHS meet within two weeks in order to forge an affiliation agreement that will be satisfactory to all three parties."

It also notes that a WPAHS bankruptcy filing would make physician recruitment "very difficult" and would result in medical services being cut. "Without a viable WPAHS, the community will be left with a virtual monopoly that will limit patient access, increase insurance premiums, and destabilize the local economy."

A call to the governor's press office for comment Tuesday afternoon was not returned.

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963.


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