West Penn Allegheny Health System nixes deal with Highmark

Health system says it canceled $475 million merger because insurer wanted it to declare bankruptcy

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A sudden, deep fissure opened up between Pittsburgh insurer Highmark Inc. and West Penn Allegheny Health System on Friday, with the surprise announcement by West Penn's board that it had called off the merger of the two operations after more than a year of planning and a promised $475 million investment by the insurer.

In the aftermath of West Penn's decision to end the agreement, two equally divided camps quickly formed about who is at fault in the blowup, with one side accusing Highmark of skullduggery and the other questioning West Penn Allegheny's judgment in walking away from a financial savior.

At the core of the disagreement was what WPAHS officials describe as Highmark's recent insistence that West Penn Allegheny declare Chapter 11 bankruptcy to rid itself of a near-$1 billion debt obligation -- with no guarantee that Highmark would still go through with the deal after the filing.

The two health giants announced their affiliation agreement in November, with both sharing the common goal of stabilizing the West Penn Allegheny system and offer a high quality, lower cost alternative to UPMC for local consumers.

Before the two came together, WPAHS board members had all but decided they would be forced to close West Penn Hospital in Bloomfield as part of a major restructuring meant to stem ongoing losses.

Highmark has infused $200 million into WPAHS, half of it grants and half of it loans. WPAHS officials said Friday that the alleged affiliation breach by Highmark -- which Highmark disputes -- means the $100 million loan becomes a grant.

Both Highmark and WPAHS continued to express willingness to work with each other, notwithstanding the disagreement over a possible bankruptcy filing.

For those looking in from the outside, the apparent break-up has produced reactions ranging from puzzlement to anger.

Democratic state Sen. Jim Ferlo and state Rep. Dom Costa -- both of whom represent Bloomfield, where West Penn Hospital is located -- said Highmark on Friday morning was telling legislators that it wasn't the insurer's idea to push West Penn into bankruptcy, it was the state Insurance Commission's.

But just after the lunch hour, state Insurance Commissioner Michael Consedine's office put out a press release refuting that statement. The commission "raised significant concerns to both Highmark and WPAHS about the WPAHS's projected deficit and inability to meet its bond obligations -- in both the short and long term," the press release read, in part.

"However, the department did not ask nor require bankruptcy or restructuring of its debt. We urged the parties to work together to address these issues."

Whether it was Highmark's idea or the state's, Mr. Ferlo fears that it was all part of an elaborate maneuver by Highmark to get a better insurance deal with UPMC. "It looks to me like the entire process of them trying to buy West Penn was no more than a ruse to gain leverage with UPMC," he said. "I hope I'm wrong."

Last year, the proposed Highmark-WPAHS affiliation nearly derailed the renewal of a contract between Highmark and UPMC, as UPMC said the WPAHS deal made Highmark a competitor in the local provider market. The two sides agreed in May to extend their contract through 2014.

West Penn's folly?

Meanwhile, two local health care experts say it is folly on West Penn Allegheny's part to part ways with Highmark.

"In 42 years in this business, this is the dumbest decision I've ever heard of," said health consultant Jan Jennings, president and CEO of American Healthcare Solutions, Downtown.

Since announcing the planned deal with WPAHS, Highmark had spent money to acquire Jefferson Regional Health System; acquired Premier Medical Associates, the region's largest, independent, multispecialty physician group; and planned medical malls -- all with the idea that West Penn Allegheny would be the crown jewel in the insurer's plans for a new integrated care delivery system, he said.

"And what does West Penn Allegheny do? They spit in their face.

"What do you think the mood is going to be in the room when West Penn Allegheny is negotiating its next contract with Highmark? What are they going to do if Highmark says, 'We're not going to pay you more than we did in the past, and we may pay you less.' "

Stephen Foreman, associate professor of health care administration at Robert Morris University, has long said that West Penn Allegheny should go into bankruptcy and start over.

"It's something that gives you a bad name, sure. It's an admission of failure in a sense, but the process is on the books for a reason. And if you're looking at the choice between having your reputation not be as good and not being able to borrow money, as opposed to being gone. ..."

Mr. Jennings, too, said the health system should go into bankruptcy and wondered what Friday's developments mean for West Penn Allegheny's future, noting that finding another buyer will be challenging.

"There is no nonprofit that will have any interest in West Penn Allegheny, with $75 million in quarterly operating losses. A for-profit would likely be interested in buying, but I tell you what, they're probably taking them through Chapter 11 because they're carrying too much debt."

Bond rating agency speaks

West Penn Allegheny's announcement Friday morning did have one immediate effect. Late Friday afternoon, Fitch Ratings placed WPAHS on a negative rating watch, saying, "The failure of WPAHS to finalize the affiliation agreement with insurer Highmark would lead to downward rating pressure. Fitch is assessing the effect of the announcement and monitoring developments, and will take rating action as appropriate."

West Penn officials expressed optimism about finding a new partner, and that there is a market for a health system like West Penn Allegheny that offers high-quality, low-cost health care.

That may be, said Mr. Foreman, but time is not on its side.

"I would guess they have six months to a year before they have to go through bankruptcy, and they are not going to get a new affiliation who will give them a cash infusion. That kind of an arrangement takes longer to put together than they might have."

Democratic state Sen. Tim Solobay, whose district includes Canonsburg General Hospital, part of the WPAHS system, was supportive of the board's decision.

"It's kind of brassy of Highmark to try to force [WPAHS] into bankruptcy this late in the discussions," he said. "Bankruptcy causes a shadow of doubt for patients and employees; it's not good. Maybe Highmark was hoping to use it as a union-busting activity to throw out the existing bargaining agreements."

He added: "I'm very happy to see the board at West Penn had the sense to turn around and tell Highmark to take a leap."

WPAHS Board Chairman Jack Isherwood said at Friday's press briefing at the system's North Shore corporate offices that the board had proposed alternatives to bankruptcy "that we believe would result in stability and secure this system for the future."

The proposals, he said, "have been met with tepid interest and renewed emphasis on debt restructuring and bankruptcy."

He said the board also was troubled by Highmark's unwillingness to share its post-affiliation operating plan for West Penn Allegheny.

"After nearly a year, we have yet to receive a post-closing plan from Highmark with clear goals and implementation plans," he said, adding that board members believe they would violate their fiduciary duties if they signed over control to Highmark "without a clear plan in-hand to preserve it as a community asset."

Cathy Stoddart, local president for Service Employees International Union which represents nurses at three WPAHS hospitals including Allegheny General, said that while the announcement was a surprise, the big fear now is public reaction to the news.

"We don't want the public to be afraid," she said. "The last thing the public needs is the Chicken-Little thing, that the sky is falling.

"We just need to have discussions and not tear apart a great thing."

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963. Sean D. Hamill, David Templeton and Laura Olson contributed. First Published September 29, 2012 4:00 AM


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