While Highmark wanted the West Penn Allegheny Health System to go through an organized bankruptcy to get out from under its near-$1 billion debt obligations, the insurer has always remained committed to finalizing its affiliation with the region's second largest health system, Highmark President and CEO William Winkenwerder Jr. said in court Thursday.
"I never said the deal was dead."
Dr. Winkenwerder testified for four hours Thursday before Common Pleas Judge Christine Ward, who will hear additional testimony from other witnesses today. Highmark is in court seeking to block West Penn Allegheny's bid to talk to other possible affiliation partners during the final six months of the affiliation agreement the two signed a year ago.
WPAHS maintains that Highmark breached that agreement by saying the affiliation agreement could not go forward in its original form and insisting that West Penn Allegheny enter into bankruptcy. WPAHS officials have countered that bankruptcy should be the last option, not the first.
Dr. Winkenwerder said that obtaining Pennsylvania Department of Insurance approval was the reason Highmark wanted West Penn Allegheny to undergo an organized restructuring.
While acknowledging that the insurance department did not require a bankruptcy filing, Dr. Winkenwerder said Highmark officials learned in late July that the department had sought bankruptcy legal counsel. State officials also had cautioned them against "throwing good money after bad," he said.
"We had very serious beliefs based on the feedback we received that we needed to address the issue of operational performance and indebtedness," he said. "It was my judgment that we would not get approval if we did not address the issues that they asked us to address."
He said he thought both sides were progressing toward an agreement when a letter arrived from West Penn Allegheny the morning of Sept. 28 saying it believed Highmark had breached the affiliation agreement. "I was very disappointed, and I was surprised, and I was a little bit upset," Dr. Winkenwerder said.
West Penn Allegheny officials have charged that Highmark is letting them wither away financially in order to bring the final purchase price down. Rather than filing for bankruptcy, and asking bondholders to take a $300 million to $400 million "haircut" on the value of their bonds, WPAHS wants to test the market to find out if there are others interested in partnering with it.
Dr. Winkenwerder did not support that idea, given the time and money Highmark has invested in propping West Penn Allegheny up, as well as other reasons. For one, he thought such a move might be interpreted by the community that Highmark was wavering in its commitment to the affiliation. For another, he added, "Our concern was that it would likely taken many months, potentially as long as a year, to negotiate between two new parties. That was a concern and, given their financial situation, I'm not sure there was time."
As if to underscore the health system's precarious financial state, Fitch Ratings on Thursday downgraded $737 million in West Penn Allegheny bonds from B+ to CCC, citing "the increased possibility of a debt restructuring, coupled with and arising from heightened uncertainty about the progress" of the Highmark affiliation.
West Penn Allegheny is expected to release its fiscal 2012 financial results early next week. For the first three quarters of the fiscal year, the system recorded an $87.8 million loss against $1.18 billion in revenue.
Highmark has committed $475 million to West Penn Allegheny as part of its plans to construct a $1 billion integrated health care delivery system to compete with UPMC. Dr. Winkenwerder, who took the helm at Highmark on July 17, said the affiliation remains his top priority.
He said Highmark offered West Penn Allegheny "significant financial incentives" to go through a structured reorganization, including $75 million in interim financing and accelerated payments on the remaining $275 million of the $475 million it had committed to WPAHS. He said the plan also would protect WPAHS employee pensions. Highmark also fronted WPAHS an additional $30 million unrestricted grant earlier this year.
While admitting that trust between the two "has been tested and frayed," Dr. Winkenwerder said he still believes a restructured bankruptcy is needed, both to gain state approval and to establish "a fiscal foundation for the future success of this entity."
Steve Twedt: email@example.com or 412-263-1963.