Pennsylvania approves Highmark-West Penn Allegheny Health System merger

New Allegheny Health Network hopes to compete with UPMC



West Penn Allegheny Health System is under new ownership, the Pittsburgh region has a newly named hospital network, and the nation may soon have a "vibrant" new model for treating patients, now that the state Department of Insurance has conditionally approved Highmark's acquisition of the financially ailing WPAHS.

The approval, issued Monday morning after nearly 18 months of vetting, puts West Penn Allegheny Health System under Highmark's control and lays the foundation for Highmark's plans to establish an integrated health care delivery system -- now being called the Allegheny Health Network -- to compete with, and be an alternative to, the regionally dominant UPMC.

PG VIDEO

"Today will be remembered, I have no doubt, as one of the most important and most notable [days] in our 75-year journey," said Highmark CEO William Winkenwerder Jr. The acquisition instantly makes Highmark Inc. one of the largest "integrated" health systems -- that is, a health insurer and a hospital system all in one -- in the country, he said.

Highmark, West Penn Allegheny Health System merger discussed

Highmark has a conditional agreement to affiliate with the West Penn Allegheny Health System. Officials from both organizations held a news conference to talk about the merger. (Video by Andrew Rush; 4/29/2013)

WPAHS, now that it is officially in the fold, will be part of Highmark's Allegheny Health Network, along with Jefferson Regional Medical Center in the South Hills, Saint Vincent Health System in Erie, and other provider units, including the newly named Allegheny Clinic, a physicians organization that will employ the system's physicians and specialists. Allegheny Health Network's nine-member governing board will have six representatives from Highmark and one each from WPAHS, Jefferson and Saint Vincent.

The state approval was a relief for Highmark, WPAHS and the health system's 11,000 employees.

"The community knew what was at stake if West Penn did not survive," Dr. Winkenwerder said.

J. Robert Baum, chairman of Highmark's board of directors, said "a level of uncertainty has been removed," which should give customers, business and -- most crucially -- physicians and clinics confidence in the financial viability of WPAHS, its new umbrella network, and its $15 billion parent, Highmark Inc.

Doctors "have been waiting to see what would happen," said Susan Manzi, chairwoman of WPAHS's Department of Medicine.

The wait is now over, and the state's insurance commissioner said Monday that the region would have suffered if the purchase hadn't been approved.

"The conclusion we came to was that, in a world without this transaction taking place," Pittsburgh's health care market was worse off, Insurance Commissioner Michael Consedine said Monday. "Having a viable West Penn [will] be a benefit to consumers."

With the agreement, Allegheny Health Network president and CEO John Paul said the organization will move ahead with a variety of planned or ongoing projects, such as the Wexford Medical Mall, improving the system's information technology capabilities, and building up West Penn Hospital's women's care, orthopedic and cardiac care services.

The West Penn Allegheny system, said Dr. Winkenwerder, "will not only survive, it will be revitalized."

What comes next?

One question that remains is what happens in 2015 when the contract between Highmark and UPMC is set to expire. In a statement Monday, UPMC spokeswoman Wendy Zellner said UPMC looks forward to competing with Highmark's emerging integrated delivery network.

"Highmark's ownership of a provider network introduces more complicated insurance choices for employers and consumers," she said. "We urge Highmark to immediately join with UPMC in preparing its subscribers for the transition that will take place on Dec. 31, 2014, when the UPMC-Highmark contract expires."

At Monday's briefing, Dr. Winkenwerder reiterated Highmark's hopes to establish a long-term contract with UPMC so its members will continue to have in-network access to UPMC physicians and facilities. But he refused to speculate about how Highmark might respond if there is no contract. "I'm not going there," he said.

Reaction from the governor's office to West Penn Allegheny's front-line staff was unanimously in favor of the affiliation. In a statement Monday, Gov. Tom Corbett said "the goals for the commonwealth are to improve health care access, quality and affordability. Today's decision is an important step toward making these goals a reality in Western Pennsylvania."

Cathy Stoddart, president of the Allegheny General Hospital nurses' bargaining unit of the Service Employees International Union, was "thrilled" the affiliation has been approved. "We feel like Highmark is the right partner for us. Now with Highmark and the way this new integrated delivery system is being built, I only see good things happening."

In approving the affiliation, the insurance department set out specific "key conditions," which, in the department's words, are designed to promote competition, keep Highmark on sound financial footing, protect community hospitals and "address the potential termination of the UPMC contract in 2015 by requiring disclosure and communications to patients and subscribers."

Highmark and WPAHS proposed the acquisition in early 2011, and by November had come to a formal affiliation agreement. The Department of Insurance spent the next year and a half examining the billion-dollar merger. Since then, Highmark also has purchased controlling stakes in Jefferson and Saint Vincent. (The Jefferson deal has closed, while the Saint Vincent deal should be competed soon.)

The Allegheny Health Network eventually will be operated as a single health network, similar to a UPMC, Highmark chief financial officer Nanette DeTurk said Monday. While WPAHS, Jefferson and Saint Vincent will keep their names, Highmark will report their financial performance collectively, rather than individually. But Highmark will continue to issue periodic updates on WPAHS's financial condition, she said.

Asked if he or his department felt pressured by today's "deadline" -- the date by which the original affiliation agreement between Highmark and WPAHS was set to expire, and the date when a debt reduction agreement between Highmark and WPAHS' bondholders was set to run out -- Mr. Consedine said he was not.

"We would not have issued that [approval] unless we were comfortable" with the merger, he said. As for the long review period, he said the affiliation was the most complex agreement the Insurance Department had reviewed in a long time, perhaps the last 25 years.

"In many ways, this was a more significant transaction than the Highmark-IBC deal," he said, speaking of Highmark's proposed wedding to its Philadelphia counterpart, Independence Blue Cross, a merger that was spiked by the department and called off by the two insurers.

This affiliation, Mr. Consedine said, changed materially along the way -- new hospitals were purchased, lawsuits were filed, a debt-reduction deal was struck -- and his department didn't get the "final" version of the affiliation agreement until this year. "There were a number of evolutions that we went through," he said.

'Conditional,' but final

Even though the approval is "conditional," it's more or less final, Mr. Consedine noted. The approval, in his eyes, gives the department broad leverage to step in to evaluate the financial and market consequences of the deal, but it couldn't kill the deal if Highmark failed to, or refused to, meet the conditions set forth Monday.

"As a lawyer, it's generally very difficult to unwind a transaction like this," he said. "Once the bell is rung, it's rung."

Some of the more notable conditions are:

• A clause limiting contracts between Highmark and other hospital networks -- WPAHS, as well as UPMC -- to five years. Any contract going longer than five years needs state approval.

• A prohibition on "exclusive" and "most-favored nation" contracts, which would prevent Highmark from treating WPAHS better than other area hospitals.

• A "firewall policy" keeping Highmark and WPAHS (and other hospitals in Highmark's provider wing) apart, and to prevent them from improperly sharing "competitively sensitive information."

• A "financial commitment" clause that prohibits Highmark Inc. from spending more than $250 million without first getting clearance from the state. The clause also requires state approval if any piece of spending puts Highmark's "risk-based capital" ratio below 525 percent. (Risk-based capital is a measure of the cash an insurer might need on hand to protect itself from insolvency in the face of unforeseen claims.)

• A provision that requires Highmark to take "corrective action" if patient levels at community hospitals dip by more than 10 percent in a given year. That clause was meant to satisfy those who worry that the only way Highmark can prop up WPAHS is by steering patients out of community hospitals and into WPAHS.

Dr. Winkenwerder said Monday that Highmark was comfortable with the conditions, with Mr. Baum noting that "we have the resources and certainly the knowledge to make this work."

On Monday, during a press event, several Highmark and WPAHS officials thanked the Insurance Department for the opportunity to "set a template for the country" when it comes to delivering more affordable, patient-centered care.

Few, though, had any illusions regarding the project ahead of them, particularly with regard to the resuscitation of WPAHS -- the system will need new physicians and tens of thousands of new patients if it hopes to stem the ongoing flood of red ink.

"The work of rebuilding and transformation is hard," WPAHS board chairman Jack Isherwood said.

To read the full Insurance Department approval order, visit: http://pgne.ws/kwF8k

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Bill Toland: btoland@post-gazette.com or 412-263-2625. Steve Twedt: stwedt@post-gazette.com or 412-263-1963. First Published April 29, 2013 2:00 PM


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