Former Highmark CEO testifies in court stand-off

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Former Highmark CEO Kenneth Melani, calling himself the "greatest champion" of the proposed merger between the health insurer and West Penn Allegheny Health System, testified Friday that even if WPAHS were to restructure its long-term bond debts via bankruptcy reorganization, the move wouldn't save enough money to rescue the flailing hospital network.

That's why, he said, that even though Highmark executives had been engaged in "high-level" discussion about the possibility of a West Penn Allegheny bankruptcy as early as November 2011 -- the same month the affiliation agreement between the two parties was signed -- Dr. Melani didn't believe bankruptcy was the ideal course for the health system.

Dr. Melani, fired April 1 after getting into a fight with his girlfriend's husband and now in arbitration with his old employer, testified during day two of the courtroom face-off between Highmark Inc. and West Penn Allegheny Health System.

At issue during the preliminary injunction hearing, which began Thursday before Allegheny County Common Pleas Judge Christine Ward, is whether Highmark "breached" its agreement with West Penn Allegheny by steering WPAHS toward bankruptcy and by declaring the November 2011 affiliation agreement "dead" and "history," words said to have been used by Highmark's current CEO William Winkenwerder Jr.

On Sept. 28, WPAHS announced it was walking away from the Highmark affiliation. Three days later, Highmark sued to prevent the health system from exiting the deal and seeking other investment partners.

West Penn Allegheny's debt service, Dr. Melani said, costs "only" $40 million a year. Even if debt restructuring were to cut that annual bondholder liability by half, it's a savings of just $20 million annually.

The debt, he said, "wasn't the biggest thing. ... Without volume, [WPAHS] wasn't going to survive, regardless of what we did about debt."

Though the injunction hearing is ostensibly about whether the affiliation agreement was "breached" by Highmark, much of the testimony from days one and two was about West Penn Allegheny's deteriorating financial condition and whether bankruptcy was the remedy preferred by Highmark and the state Department of Insurance.

WPAHS's lawyers tried to make the case that, over the course of 2012, Highmark had made a series of decisions damaging to the health system's finances and patient volumes, including the insurer's decision to extend its contract with the region's largest health system, UPMC, through 2014.

But Highmark chief financial officer Nanette DeTurk, in response to questioning from Highmark's legal counsel, noted there is no language in the 2011 affiliation agreement that prevents the insurer from contracting with other hospitals, including UPMC.

Highmark's attorneys, by playing pre-recorded deposition testimony from Chicago investment banker Andrew Turnbull, argued WPAHS was searching for "potential alternative suitors" even before it declared the affiliation in breach -- suggesting, in effect, that West Penn was making its own preparations for life after Highmark even before Sept. 28.

Highmark counsel Daniel Booker, an attorney with Reed Smith, also suggested the WPAHS board's decision to walk away was merely a strategic "bargaining chip" meant to give West Penn Allegheny leverage over Highmark when the two returned to the negotiating table.

WPAHS board member Daniel Brailer disagreed with that characterization and said that the break-up could be pinned on Dr. Winkenwerder, not the West Penn Allegheny board.

Dr. Winkenwerder, in declaring the Highmark-WPAHS affiliation "history" at a Sept. 27 meeting, was "definitive, and there was no moving back," Mr. Brailer said.

The hearing is scheduled to resume Thursday with additional testimony from Keith Ghezzi, WPAHS's interim CEO.

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Bill Toland: or 412-263-2625.


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