Highmark to pay doctors at WPAHS higher rates

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Over the next five years, West Penn Allegheny Health System's reimbursement rates from Highmark Inc. will rise by $50 million, meaning its hospitals and physicians will be paid more for the services they provide, according to new paperwork submitted to the state Insurance Department and made public Wednesday.

The extra $50 million had been offered to WPAHS last autumn, Highmark CEO William Winkenwerder testified in court, as a pot-sweetener that would help seal the merger agreement between the organizations.

But the new filings Wednesday reflect that the September offer has now been formalized in writing, as part of a revised affiliation agreement between the two Pittsburgh health giants.

The new contract terms were included in an amendment to Highmark's original takeover application, submitted to the state a week after the Pittsburgh insurer announced its deal to buy up part of WPAHS's junk debt.

The debt deal -- through which Highmark will pay more than $600 million, or 87.5 cents on the dollar, to reduce WPAHS's outstanding 2007 series bond debt balance of about $710 million -- was a key part of the larger takeover bid, which had stalled in recent months as the two parties haggled over the health system's debt load and a potential bankruptcy filing.

Highmark said in Wednesday filings that it has worked out a deal with a lender for secured financing to acquire the WPAHS bonds, and that "Highmark anticipates holding the bonds as investments for a period of up to three years until WPAHS completes a tax-exempt bond offering and buys back the bonds."

The debt-reduction deal, as well as the revised affiliation agreement revealed Wednesday, means the on-and-off marriage of Pennsylvania's largest insurer and Pittsburgh's second-largest health network is back on.

State approval may still take some time, even if the two sides have worked through some of the thornier issues.

The state Insurance Department, in acknowledging its receipt of the amendment Wednesday, noted Highmark's price tag for the WPAHS health system and the assembly of its own in-house health delivery and hospital system has grown to at least $1.6 billion -- and that's before Highmark figures out what to do with WPAHS's pension obligations.

"Both Highmark and West Penn have extraordinary track records in serving health consumers in Western Pennsylvania," Insurance Commissioner Michael Consedine said in a statement.

But, he added, "Given the considerable increase in the costs associated with this transaction and the numerous and significant changes proposed, the filing will require close scrutiny to assure that the department's review meets statutory standards."

The public comment period on the new insurance department filing will remain open for at least 30 days.

Highmark spokesman Aaron Billger said the new filing demonstrated the insurer's commitment to the merger and the creation of its "integrated delivery system," but he deferred specific questions about the deal until today.

Highmark and WPAHS first announced that they would join forces 19 months ago, in a deal that would put WPAHS and its hospitals under control of Highmark's new provider wing in exchange for hundreds of millions of dollars in new loans, cash and capital improvements.

The deal has not yet been blessed by the state because of its changing nature and because Highmark and WPAHS had been at loggerheads over how to reduce West Penn Allegheny's debt.

That conflict led WPAHS to announce in September that the affiliation had been "breached" and that it was seeking new financial partners. Allegheny County Common Pleas Judge Christine Ward blocked that move in a November ruling, steering Highmark and WPAHS back to the bargaining table.

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Bill Toland: btoland@post-gazette.com or 412-263-2625.


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