Highmark ponders takeover of West Penn Allegheny Health System

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The saber-rattling is getting louder by the day.

Highmark Inc. CEO Kenneth Melani said Thursday that his company would be open to a partnership with, or even an acquisition of, financially troubled West Penn Allegheny Health System, especially if the health insurer's contract negotiations with the University of Pittsburgh Medical Center continue to "break down."

Meanwhile, UPMC is already circulating a letter to its customer businesses, urging them to sign up with its sister insurer, UPMC Health Plan, or a larger national insurance provider because "given Highmark's decision to infuse subscriber money into the West Penn Allegheny Health System, there cannot be any reasonable prospect for a contract renewal between Highmark and UPMC," and Highmark customers are going to lose access to UPMC doctors and hospitals.

The communiques, both from Dr. Melani and UPMC, reflect the growing tension between the two largest Pittsburgh health care institutions, as the two jockey for customers and try to shape public opinion about the negotiations, which began last year and will affect the region's health care landscape for years to come.

A strong undercurrent to those negotiations is the fate of West Penn Allegheny, which lost $90 million last year and whose continued existence is key to Highmark's ability to haggle prices with UPMC.

Highmark is "very concerned about this," said David Lagnese, a senior health consultant at Towers Watson, a human resources firm with an office in Pittsburgh.

"Unless there is provider competition, it seems to me [Highmark would] have to accept whatever UPMC asks for."

On Thursday, at a breakfast meeting organized by the Pittsburgh Technology Council, Dr. Melani said that if UPMC insists on big, across-the-board increases in reimbursement rates -- the opening salvo was said to be a demand for a 20 percent cost increase -- Highmark has no choice but to bolster relationships with the region's other health care providers.

Dr. Melani was responding to questions about ongoing talks between West Penn and Highmark regarding a more robust collaboration between the insurer and the health care provider, and the state of negotiations with UPMC.

A 10-year reimbursement agreement between the two health care titans is due to expire in 2012, although Highmark's policyholders would continue to have in-network access to UPMC facilities through June 2013, according to a Highmark spokesman.

One possibility for Highmark might be a series of strategic investments among several providers, one that would allow West Penn Allegheny to align with other regional hospitals to better compete with UPMC.

Such investments, between insurer and provider, are not novel. Highmark made a $233 million investment in the new Children's Hospital, now part of the UPMC system, 10 years ago (though at the time Highmark called UPMC's demand for the investment "extortion"). Highmark also has an investment history with West Penn Allegheny, having made a $125 million loan to help rescue Allegheny General Hospital from its parent foundation's bankruptcy.

But Dr. Melani also said the nature of those talks with West Penn Allegheny, which has six hospitals in its system, could change should UPMC and Highmark not be able to play nice over the next 15 months. In that case, he said, Highmark might look to a larger scale investment or even a purchase.

Inside Highmark and out, employees, experts, health consultants and political observers agreed that talks with West Penn are one part posturing and one part born of a genuine concern over West Penn's fate.

"It's a little bit both" posturing and genuine, said James McTiernan, a one-time Highmark official who is now a principal with Triad USA, a Pittsburgh-based benefits consulting firm.

The last time the two companies negotiated a reimbursement pact -- an agreement on the rates that Highmark will pay UPMC doctors and hospitals for their services -- the negotiations played out in newspapers and in courtrooms for months.

Mr. McTiernan said the same can be expected this time around. But he also said Highmark is right to explore a more substantive foray into the provider -- meaning hospital and doctor -- side of the health care business.

"Someone that's both a provider and insurer may have an advantage in pricing, reporting [medical] loss ratios," he said.

And, after all, Highmark's chief rival already does it; UPMC Health Plan was created 15 years ago in part to give UPMC leverage in its 2001-02 negotiations with Highmark, and the insurance plan, while still dwarfed by Highmark's commercial market share, holds about 7 percent of the regional market.

UPMC wants more, if the letter sent out this week by the health system is any indication:

"You may have read some of the recent discussions in the media about Highmark's announced intention to transition into a payor-provider in direct competition with UPMC.

"Their decision fundamentally changes the region's health care system and represents a benefit for employers and subscribers alike. ... As a result, access to UPMC physicians and hospitals will only be available through UPMC Health Plan and a number of prestigious national insurers after our current contract with Highmark expires on June 30, 2012."

The letter was signed by Gregory Peaslee, a senior vice president at UPMC. UPMC spokesman Paul Wood said essentially the same thing in a statement Thursday: "Having announced its intention to compete with UPMC as a provider, there cannot be any reasonable prospect for a contract renewal between Highmark and UPMC. Highmark and UPMC have made business decisions which enhance choice and competition in the region. Negotiations are not the issue."

Highmark has tried providing care before, in a limited way: In 1996, one of its predecessors, Blue Cross of Western Pennsylvania, started hiring physicians in a bid to operate its own primary care centers across the county. Those clinics begat Highmark's HealthPLACE clinics, which focused on preventive care, flu shots and screenings.

The HealthPLACE clinics closed seven years ago.

On Thursday, Dr. Melani reminded listeners that Highmark operates for-profit vision care stores and dental units across the country, meaning it's already offering care.

"I'm in the provider business today," he said.

Dr. Melani spent much of his morning telling his audience that the country's current health care system is unsustainable and that American health consumers are paying too much to doctors and hospitals and getting too little in return -- especially when that care is benchmarked against outcomes in other countries.

He said consolidated health care networks such as UPMC have too much power in the current system, but he called UPMC a "valuable asset to the community ... We can still be in business with UPMC, and want to be in business with UPMC."

Mr. McTiernan, the Triad consultant, said that while the ongoing negotiations among Highmark, UPMC and West Penn are hugely important, and sure to be fraught with lots of emotional back-and-forth, the parties still have a lot of time to come to an agreement.

"I don't how they can live without each other, to be honest," he said.

And looking at the situation dispassionately -- as a business or credit analyst would -- it's too early to be concerned about the state of relations between Highmark and UPMC. Negotiations between hospital systems and insurers are a fact of life.

"With any large insurer, this is not an unusual occurrence -- especially if you are a dominant Blue," said Bridget Maehr, an analyst with A.M. Best Co., a New Jersey ratings agency. "They are used to handling this sort of thing."

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


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