Highmark deal would make it health care pioneer

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Set aside, for one moment, Highmark's ongoing contract dispute with UPMC and assume the health insurer's plan to acquire the West Penn Allegheny Health System gets all the regulatory approvals.

What happens then?

Drowned out by all the heated charges and countercharges is the fact that Highmark is breaking new ground -- none of the other 38 Blue Cross Blue Shield independent licensed companies across the U.S. has ever purchased a health system before, and experts are hard-pressed to remember a major U.S. insurer buying an entire health system anywhere.

"They are merging two different cultures -- one whose sole purpose is to minimize costs and one whose sole purpose is to provide more medical services," said James McTiernan, principal and co-founder of the Downtown employee benefits firm Triad USA.

"Obviously, if you're a health care provider you make your margin by providing services, and if you're an insurer you're making your margin by making the cost and the amount of service as low as you can. And therein lies the conflict."

But local health care consultant Jan Jennings, who knows and has spoken to many of the top Highmark officers, said he is optimistic that Highmark can make this work, primarily because of the people they have at the top.

"They have put at the tip of the spear for hospital operations Mr. John Paul, who is the former chief financial officer for UPMC," Mr. Jennings said. "I can tell you that operationally, financially and strategically he is an absolute genius."

He is also heartened that Highmark's president and CEO, Kenneth Melani, is a physician who did a residency at West Penn Hospital. "He has repeatedly drilled into the senior management of Highmark that, 'Look, we're going into a new business. This [Mr. Paul] is a guy you're going to have to listen to.'

"John Paul is going to be calling the shots. And he's probably the best-qualified single person Ken Melani could have reached out to to do this thing."

Highmark is not making Mr. Paul, who left UPMC in 2003, available for public comment as it is still in the early stages of putting together its provider strategy, spokesman Michael Weinstein said.

The insurer is expected to file its agreement to acquire the WPAHS with the Pennsylvania Insurance Department this week. The deal also will be reviewed by the state attorney general's office and the federal Internal Revenue Service.

Until Highmark reveals its overall plans, health care experts are left to speculate what they will do and what their chances of success are.

There are other models that combine provider and insurance services, including UPMC and its health plan and also Geisinger Health System in Central Pennsylvania.

But none of those mirrors what Highmark is doing, deciding a year ago that it had to intervene, as Dr. Melani said, "to ensure the continued vitality of the West Penn Allegheny Health System and maintaining provider choice in our community."

Without Highmark's $50 million grant to WPAHS last June, the health system would have posted a nearly $30 million loss in fiscal 2011. Looking at operations alone, WPAHS spent $51.8 million more caring for patients than it brought in from patient revenue.

The question is, will West Penn Allegheny's losses drag Highmark down, or will Highmark's statewide network -- in addition to its indemnity coverage, Highmark also offers health insurance coverage in 49 of Pennsylvania's 67 counties through a preferred provider organization -- make it a force to be reckoned with.

"Taking this on, you have the ability to manage the risk and manage a population's risk from the insurance side and then begin to coordinate the care through the health system arm," said Rick Gundling, a vice president with the Washington, D.C.-based Healthcare Financial Management Association, whose members include chief financial officers at both hospitals and insurers.

But others remain skeptical.

"This is a whole new line of business for them," said Robert J. Conroy, a health care attorney based in New Jersey who also works in Pennsylvania. "It's one thing to be successful as an insurer, and it's another to be successful at running a hospital.

"The question is, how long are they willing to stay the course while they figure out what it is to make this a more profitable model," he said. "I don't think they can pull it off, especially a company like Highmark, because it's very large and very bureaucratic and it's not entrepreneurial."

Mr. Conroy also thinks the timing is bad, given the uncertainties surrounding the still-evolving national health care reform. "Five years from now, no one can say with any certainty anything about what the health care market will look like. The only thing we can say is that it will be completely different."

But others see an opportunity for Highmark, that by combining the insurance and provider arms they are building a network along the lines of the accountable care organizations that would manage all of a patient's medical needs, as the health reform law calls for.

"I think you're going to see more of those type of relationships, with more carriers owning hospitals," said health benefits expert Tom Tomczyk of Buck Consultants, Downtown.

"I hope they can find the balance between providing the appropriate care at the appropriate price and being able to make the appropriate amount of revenue that they continue to stay in business."

And if that happens?

"Two years from now, when you get past the emotional issues [with the UPMC contract dispute], people are going to be forgetting about that," Mr. Tomczyk said, "and I think you may see more competition and maybe a higher quality of care in this community."

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


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