UPMC targets Harrisburg, central Pa. for next ambitious expansion
March 13, 2017 12:00 AM
UPMC is pursuing a deal to affiliate with Harrisburg-based PinnacleHealth System, a move that would give UPMC a foothold in central Pennsylvania, a market dominated by Blue Cross Blue Shield health insurance plans, including Downtown-based rival Highmark.
By Kris B. Mamula / Pittsburgh Post-Gazette
Health care giant UPMC would stare down an old rival on a new battlefield if the Downtown-based health system is successful in a big expansion into Central Pennsylvania.
UPMC is pursuing an ambitious deal to affiliate with Harrisburg-based PinnacleHealth System, according to two people familiar with the talks, giving UPMC entry into a Central Pennsylvania market dominated by Blue Cross Blue Shield health insurance plans, including Downtown-based rival Highmark.
“Let’s get engaged and let’s set the wedding date down the road a bit,” was how one person described UPMC’s PinnacleHealth strategy — a similar approach to one UPMC has used in acquiring other hospitals.
In a prepared statement, PinnacleHealth spokeswoman Kelly McCall said the system “and its board of directors continue to consider partnership models and strategic opportunities that would serve the best interests of our patients, local employers and other stakeholders.”
UPMC spokeswoman Gloria Kreps said the health care giant “is often approached and always open for opportunities to continue our mission of advancing world-class care wherever there is a need.”
The deal is still fluid, but work was underway to meet anticipated regulatory hurdles, according to people with knowledge of the transaction who asked to remain anonymous because they were not authorized to speak publicly about it.
Following a period of affiliation, UPMC would acquire Pinnacle’s three-hospital system, which has 636 beds and employs 6,200 people, with the possibility of picking up as many as four smaller hospitals, people familiar with the transaction said.
UPMC is a $14 billion nonprofit enterprise that operates more than 20 hospitals, which are concentrated in Western Pennsylvania.
PinnacleHealth has been negotiating with for-profit hospital chain Community Health Systems to acquire four smaller hospitals: Carlisle Regional Medical Center in Carlisle; Lancaster Regional Medical Center in Lancaster; Heart of Lancaster in Lititz; and Memorial Hospital in York, according to the people familiar with the deal. If successful, the four additional hospitals could become part of UPMC with its planned acquisition of PinnacleHealth.
Franklin, Tenn.-based Community Health Systems reported a loss of $1.6 billion on net operating revenue of $18.4 billion last year, according to company disclosures. CHS officials did not answer requests for comment.
The deal with PinnacleHealth would be the biggest of its kind for UPMC and a first for the Pittsburgh health system if it is consummated in its entirety. Typically, UPMC has acquired one hospital at a time.
In addition to clinical capacity, PinnacleHealth would give UPMC a launch pad for its growing health insurance product line. For the six months ending Dec. 31, UPMC insurance enrollment revenue generated $3.1 billion, 47 percent of the health system’s total $6.8 billion in operating revenue and up 9 percent from the same period in 2015, according to the most recent figures.
Rumors of UPMC’s proposed PinnacleHealth acquisition have been circulating in Central Pennsylvania in recent months, fueled in part by UPMC television commercials airing in the region.
The prospect of a UPMC-PinnacleHealth merger has also begun to concern self-insured employers, who are worried about the impact of consolidation and the potential for higher health care costs, said insurance broker Patrick Moran, president of Lancaster-based InGroup Associates Inc.
“Bigger systems buy smaller systems in the name of improved efficiencies, but that’s bull-hockey,” Mr. Moran said. “Hospital mergers are driving up health care costs.”
The acquisition of a hospital in Lebanon, Pa., in 2014 by a national chain, for example, resulted in hospital price increases ranging between 40 and 60 percent over two years, said Mr. Moran, who challenged the rate increases on behalf of self-insured clients.
UPMC has been reaching eastward from Pittsburgh, most recently by acquiring Williamsport-based Susquehanna Health in October.
Rumors of a UPMC-PinnacleHealth deal have also prompted calls to JRG Advisors’ sales office in Lemoyne, Pa., causing angst among clients and brokers, said Rick Galardini, who is chairman and CEO of the Pine-based insurance brokerage. Brokers are scrambling to be prepared for changes in the market.
“What does this do to the market products?” he said. “What does this mean? How do we prepare ourselves to advise consumers appropriately?”
If the deal goes through, the health system’s insurance arm, UPMC Health Plan, would be introduced into an intensely competitive market, brokers say. Highmark and rival Capital BlueCross control about 75 percent of the Central Pennsylvania market for health insurance, with Aetna controlling the balance.
A Capital spokeswoman declined to comment Friday.
People familiar with the UPMC-PinnacleHealth talks say UPMC would continue to honor the Blues insurance plans at newly acquired hospitals while developing its own products to sell in the region. It’s uncertain how the deal would affect Highmark’s relationship with PinnacleHealth.
Relations between UPMC and Highmark curdled in 2013 when Highmark received state approval to buy Pittsburgh hospital system Allegheny Health Network, competing directly with UPMC’s health care and insurance operations.
For Highmark members living in Central Pennsylvania, PinnacleHealth and Penn State Milton S. Hershey Medical Center facilities require the lowest out-of-pocket expenses for Highmark’s Alliance Flex Blue plan coverage, according to plan details. In addition, PinnacleHealth doctors receive Highmark bonuses for meeting quality of care metrics, which are among the highest among insurers.
Highmark spokesman Aaron Billger said the insurer would not comment on speculation.
The UPMC-PinnacleHealth deal emerged after a bruising effort to merge PinnacleHealth and Penn State Hershey Medical Center was dropped last year in the face of stiff opposition by state and federal regulators over antitrust concerns. PinnacleHealth CEO Michael Young, who had pressed for the merger, resigned from the system March 2.
Unlike big academic medical centers, smaller hospitals have been struggling financially, leaving an open question about whether it’s a good time to be shopping for hospitals, said Harold Miller, president and CEO of the Center for Healthcare Quality and Payment Reform, a Downtown-based consultant.
“Those hospitals are really getting whacked,” he said. “Is it a good time to be buying hospitals? Not sure, unless they’re part of a broader strategy.”
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