Highmark Inc. officials want the West Penn Allegheny Health System to file for bankruptcy so it can shave $600 million off the $1.4 billion price tag for acquiring the region's second largest health system, WPAHS board members told the Post-Gazette on Wednesday, a proposition the board members called "unacceptable."
But there may have been the first hint of a thaw in the dispute, as WPAHS spokeswomen Kelly Sorice said that WPAHS board chairman Jack Isherwood called Highmark president and CEO William Winkenwerder later Wednesday afternoon and the two had had "a very cordial" phone conversation.
She said Mr. Isherwood "wanted it to be clear that WPAHS has no preconditions to meeting with Highmark and would like to resume talks as soon as possible" while Mr. Winkenwerder "expressed his desire to keep the lines of communication open."
WPAHS board members Daniel Brailer and Paul Dimmick said as recently as Tuesday that it appeared "nothing had really changed" in Highmark's position that West Penn Allegheny should file Chapter 11 bankruptcy before they finalize their affiliation.
While willing, even eager, to resume talks with Highmark, Mr. Dimmick said, "They have to come with a different plan that addresses our concerns and their concerns, because what they have proposed is unacceptable."
Although rumors of a West Penn Allegheny bankruptcy surfaced more than a year ago, the WPAHS board members said they were caught off guard when Mr. Winkenwerder met with their board for the first time on Aug. 30, outlining his vision for the pending affiliation before dropping a bombshell.
According to the WPAHS board members, Mr. Winkenwerder told them: "We believe there is too much debt and we believe the path forward is a restructuring of those bonds."
Over the ensuing four weeks, Highmark and WPAHS officials met six times in addition to exchanging dozens of phone calls, as West Penn Allegheny offered different proposals as alternatives to a bankruptcy.
"They summarily dismissed all the other alternatives," said Mr. Dimmick, formerly with Mellon Financial and who now runs a consulting business.
WPAHS has been laboring under debt obligations of nearly $1 billion, and Highmark already has committed another $475 million to stabilize and upgrade WPAHS facilities, for a total $1.4 billion investment. But Highmark wants that price tag reduced to $800 million, the board members revealed for the first time. The reduction would be achieved by having bond holders "take a haircut" and having the federal Pension Benefit Guaranty Corp. (PBGC) assume the payments for WPAHS employee pensions. The PBGC is an independent federal agency that guarantees defined-benefit pension plans that are unable to pay out benefits.
West Penn Allegheny's Mr. Isherwood made note of the Highmark stipulation on pensions at the Sept. 28 media briefing where he announced that Highmark had breached the affiliation agreement signed last November. "I urge you to Google the acronym PBGC," he said, "and draw your own conclusions about the federal government's ability to fulfill Highmark's vague assessment that current and future retirees will be protected."
Since then, the two sides have barely spoken, according to the board members. Mr. Isherwood and J. Robert Baum, Highmark board chairman, had previously called each other following meetings of their respective boards; that didn't happen after the Highmark meeting last week, they said.
In a statement released late Wednesday, Highmark spokesman Aaron Billger reiterated that "we continue to believe that the affiliation agreement with WPAHS remains in place."
"We urge WPAHS to change their position and disavow their claim of an affiliation breach, so that we can continue talks regarding a financial restructuring or an alternative proposal to address the Pennsylvania Insurance Department's concerns about the short-term and long-term financial condition of WPAHS," the statement read.
"It's these concerns that could cause the PID to not approve the transaction. Highmark is committed to closing the affiliation with WPAHS if and when the PID offers approval."
The West Penn Allegheny board members say the health system has met or exceeded performance projections, and that its debt has not grown since the affiliation agreement was signed. The only significant change, from their vantage point, was the appointment of Mr. Winkenwerder, who took the reins at Highmark in mid-July after former president and CEO Kenneth Melani was fired in early spring.
In the two weeks since West Penn Allegheny declared a breach in the affiliation agreement, there has been wide discussion, and disagreement, about the WPAHS board's decision, both within and outside WPAHS.
"There is this great anxiety," Mr. Brailer said. "We recognize it, we understand it and we're doing everything we can do to continue providing high quality, low cost care to patients, and to protect the pensions of all those who have worked here for many, many years."
Some critics say West Penn Allegheny would be foolish to walk away from the Highmark affiliation, given the health system's financial straits and what they believe are dim prospects for finding another suitor.
But during the three-day span between WPAHS declaring the breach, and a court order preventing West Penn Allegheny from soliciting other suitors, "we were pleased by the number and quality of requests" for information from outside entities, said Mr. Brailer.
Neither he nor Mr. Dimmick would provide details on the number of inquiries from possible suitors, or whether they were primarily from for-profit or not-for-profit organizations, and they cautioned that the initial contacts -- which they have not acted on -- may not have led to an affiliation. But they do believe the calls indicate a curiosity, if not interest, in the health system.
While the two acknowledged that recent developments have been a source of anxiety and uncertainty throughout the system, the board members believe employees and staff are still behind them.
Earlier this week, talk surfaced that some WPAHS physicians were unhappy with the board, but "I'm not hearing that that sentiment is widely held through the organization," said Jack Wilberger, chief of neurosurgery for WPAHS and one of four physician board members. Within his own department of 19 physicians, he said, "not one single physician has an issue with the decision that was made by the board."
Rather, Dr. Wilberger said, "one of our problems is that certain things are being done to stir the pot, so to speak," such as Highmark's invitation to meet with WPAHS physicians in a Green Tree hotel Wednesday night despite current impasse in the affiliation process.
"I can see no reason for that to be taking place at this particular time."
Steve Twedt: email@example.com or 412-263-1963. First Published October 11, 2012 4:00 AM