Pittsburgh health insurer Highmark Inc. added a major building block to its planned integrated health care delivery system with Tuesday's announcement of a "strategic partnership" with Jefferson Regional Medical Center that will infuse millions into the Jefferson Hills facility, while turning over control of Jefferson's board to Highmark.
The affiliation means there are just two fully independent inpatient, general acute hospitals remaining in Allegheny County that aren't part of a larger network -- St. Clair Hospital in Mt. Lebanon and Ohio Valley General Hospital in Kennedy.
As part of the agreement, Highmark will contribute $75 million to the Jefferson Regional Medical Center Foundation; will guarantee up to $200 million of Jefferson's long-term obligations, such as debts and pensions; and will commit to expansions of the hospital's emergency room and the ambulatory surgery suite in Bethel Park at an "undetermined" cost.
The partnership also includes plans to expand clinical services such as neurosurgery and gynecology.
Jefferson, a major health system in the South Hills, will be a part of all of Highmark's insurance products.
J. Robert Baum, Highmark board chairman and interim CEO, said at a Tuesday press briefing that the $75 million earmarked for the Jefferson foundation will come from $1 billion that Highmark set aside to build its provider organization.
Jefferson would retain control of how that $75 million is spent. The foundation supports the hospital's overall medical mission, with a special emphasis on community outreach and indigent care.
Jefferson Regional President and CEO John J. Dempster said board members voted unanimously Monday to approve the affiliation, which, pending state approval, would make the health system "the southern hub of the Highmark provider network."
Highmark and Jefferson, which hope to finalize the agreement by year end, need clearance from the state Attorney General and the Allegheny County Orphans' Court division. They will not have to go through the state Insurance Department a second time after Highmark did so in its acquisition of West Penn Allegheny Health System, the second largest health system in the region.
A year ago, Highmark officials announced plans to acquire financially ailing West Penn Allegheny Health System, which would serve as the flagship for the insurer's plans to create a regional healthcare delivery system. That deal is still under review by the state insurance department.
"We share a common vision to meet the healthcare needs of the southern region of Western Pennsylvania," Mr. Dempster said. "In order to remain strong, we needed a long-term, trusting partner."
Trust, he added, was a critical component to the Jefferson board's decision to turn over board control to Highmark. "None of us own these institutions. They're community assets," said Mr. Dempster. "We are absolutely OK with this structure."
Mr. Baum called the talks with Jefferson Regional, which began in earnest in February, a "refreshing negotiating experience" -- in contrast with the negotiations with UPMC to extend Highmark's contract with the region's largest health system, talks that eventually required intervention by the governor's office.
Jefferson, Mr. Baum said, will be a part of the relaunched Community Blue product network. Community Blue was a lower-cost, "very popular" Highmark insurance product that placed hospitals and providers into tiers, based on price and "favored-nation" contractual relationships. That new product could relaunch by the beginning of 2013.
Jefferson's current joint ventures with UPMC, including oncology care, are unaffected for now.
Jefferson Regional's chief medical officer, Richard Collins, said physicians will continue to refer patients to UPMC facilities if they believe that is in the best interest of patients. "We will never restrict our physicians from doing the right thing for our patients."
But Highmark's chairman, Mr. Baum, made it clear that they expect to attract patients into their network by providing high quality care at lower cost.
"Part of the integrated delivery system strategy involves using products and systems and information that will help us [keep] the institutions that we have within our structures full ... if that means that we're taking business from anybody, whether it's UPMC system or anyone, those structures will be used toward that end."
Asked for reaction to the Highmark-Jefferson pact, UPMC spokesman Paul Wood said, "UPMC welcomes a more competitive market among both health insurers and providers. This is a direct result of the coming expiration of UPMC's contract with Highmark, which will allow businesses and patients to enjoy the benefits that long-awaited competition will bring to the region."
Mr. Baum noted Highmark's cash "is not a rescue" but part of a growth strategy for both organizations.
He also said WPAHS and Jefferson Regional would essentially be "sister" entities on the new Highmark organizational chart. The two health systems will remain independently operated, but essentially under Highmark control.
Jefferson Regional Chief Financial Officer JoAnne Hahey said the South Hills health system has recorded $4.5 million earnings from operations for the first nine months of the current fiscal year, which ends June 30. The Pennsylvania Health Care Cost Containment Council reported Jefferson had $219 million in net patient revenue for fiscal 2011 that ended June 30.
John Paul, leader of Highmark's Integrated Delivery System and architect of the Jefferson affiliation, said the agreement does not include a sunset provision.
The only way for either party to back out would be if something "catastrophic" were discovered during the due diligence research period, he said.
Mr. Paul said the Pittsburgh health insurer's next step would be an intense focus on its planned outpatient clinics -- 10 of them, to be scattered throughout the region.
"We've been making a lot of inroads in" outpatient and clinical care, he said. "What's next is, you will be seeing [a] broad array of ambulatory sites, full-service, convenient locations throughout our region."
One is now certain to be built in Butler County. On May 31, Highmark, through an intermediary, acquired the rights to 25 acres in Cranberry for $8.96 million.
Included in the sales agreement was a restrictive covenant, which requires the property to used for a medical mall, a health care facility, an insurance company or as a corporate headquarters.
Construction is set to begin before June 1, 2014, as per the agreement. The property had been owned by Mine Safety Appliances and was purchased by Principo Advisers LLC.
Highmark is also targeting medical mall properties in Robinson, Washington and Fox Chapel, and has already acquired properties in Monroeville and Pine.
Besides the 373-bed main campus facility in Jefferson Hills, the Jefferson health system has outpatient centers in Baldwin, Bethel Park, Belle Vernon, Brentwood, Charleroi, Clairton, Homestead, Pleasant Hills, Squirrel Hill and Uniontown.
This past fiscal year, from July 2010 through June 2011, Jefferson saw more than 17,000 admissions, making it the fifth-largest hospital in Allegheny County in terms of patient traffic.