It's a game of chicken with billion-dollar stakes, and it got underway Friday.
Will the Pennsylvania Insurance Department approve the proposed $1.2 billion acquisition of the financially distressed West Penn Allegheny Health System by Pittsburgh insurer Highmark Inc. in the next three weeks?
Will the tentative agreement between Highmark, WPAHS and the health system's debt-holders -- an agreement that would see the insurer buy up $710 million of WPAHS debt at 87.5 cents on the dollar -- expire April 30?
Will the parties arrive at a short-term extension to the tender agreement, as well as the affiliation agreement that binds the insurer with the hospital system?
Or will Highmark's proposed acquisition of WPAHS go up in flames come May -- and, with it, the health system itself, plunged into another bankruptcy after bondholders demand repayment of their loans?
All are possible outcomes, though some are more probable than others.
"I wouldn't assume it's a hard deadline," said Jim McTiernan, benefits analyst with Pittsburgh-based Triad USA, a division of Arthur J. Gallagher & Co. "If you didn't want West Penn Allegheny to be the hub [of Highmark's hospital wing], you wouldn't have invested all of this money."
April 30 is the end-date of the affiliation agreement between Highmark and West Penn Allegheny. As a result, the same deadline applies to the agreement among Highmark, West Penn Allegheny and the bondholders.
In other words, Highmark and WPAHS hope to close the deal by April 30, and to do that, they need the blessing of the state Insurance Department.
In order for the debt buyout agreement to close by that deadline, Highmark must publicly offer to buy the remaining WPAHS debt -- that is, the 24 percent or so of the series 2007A bond debt that isn't held by "major" bondholders. That's called launching the tender, and it has to be done at least 20 days before the deal closes, which is why Highmark announced its "offer to purchase" Friday afternoon.
The offer essentially sets the bond buyback plan in motion. The major bondholders -- the ones that agreed to the 87.5-cents-on-the-dollar deal back in January -- will, in return, formally offer their bonds to Highmark.
But even now that the tender deal has been launched, the Insurance Department may not act, given that as recently as March 29 Highmark was still submitting voluminous responses to a variety of informational requests from the state. It takes time to review that material and if the department is still in the information-gathering stage, the staff might not be ready to render a decision.
The good news, from Highmark's perspective, is that its homework seems to be finished.
"We have finalized all of the Pennsylvania Insurance Department requests for information," Highmark spokesman Aaron Billger said. "We are optimistic about deadlines being met and will continue to work collaboratively with the Insurance Department and bondholders in the weeks ahead to finalize the affiliation by the April 30 deadline, which has been in place since the deal was struck in 2011."
Translation: The department has known about this deadline all along, and should be working toward it.
But to date, the Insurance Department has set no timetable for its decision on the merger first proposed in spring 2011 and cemented later that year. The department is examining whether the money being spent by Highmark will compromise its ability, and responsibility, as a health insurer to pay the claims of its customers.
"This involves the ongoing analysis of substantive information and research," said Rosanne Placey, spokeswoman for the Insurance Department. The department and Insurance Commissioner Michael Consedine are also waiting on consultants to complete a review of the deal, she said.
Working in Highmark's favor, politically, is that Mr. Consedine's boss, Gov. Tom Corbett, may not want WPAHS to further disintegrate on his watch, putting at risk the local ownership of the hospital system and its thousands of jobs.
Mr. Corbett is on record saying he wants the Highmark-WPAHS deal to move forward. "We need health care choice and competition in Western Pennsylvania."
But what if April 30 comes and goes without a peep from Harrisburg?
Scenario No. 1: Highmark walks away from the deal, unwinding the affiliation, leaving WPAHS to fend for itself and giving the health system $50 million in immediate divorce fees. WPAHS would have seven days to come up with a new game plan, and after that bondholders would be free to "exercise remedies" on its debt.
That remedy would probably involve a forced bankruptcy, since West Penn Allegheny admitted last month that it had defaulted on its debt obligations. At the time, the bondholders couldn't demand repayment because when they agreed to the deal in January, they also agreed to a forbearance that postponed their ability to "call" the debt until April 30.
The "walk-away" scenario is the least likely, given the money Highmark has already spent on the deal -- and given that the insurer wants WPAHS to be the urban centerpiece of its under-development hospital and health provider wing.
"My guess is they would they would extend it," said Stephen Foreman, associate professor of health care administration at Robert Morris University. "I can't see it would be in anybody's interest to walk away from it at this point."
Scenario No. 2: Highmark asks the bondholders who agreed to the haircut in January if they are interested in extending the tentative tender deal. They could say no, they could say yes -- and they could say yes, but how much is it worth to Highmark to have that happen?
The bondholders could then ask Highmark to increase its 87.5 percent (or roughly $621 million, plus another $18 million or so in interest) offer on the $710 million in WPAHS bond debt. If Highmark and the bondholders agree on an extension, and perhaps a new dollar figure, the clock again starts ticking -- for a month.
After May 31, WPAHS gets a seat at the negotiating table. West Penn Allegheny has already agreed to an automatic monthlong extension of its affiliation agreement with Highmark as part of a deal signed Jan. 22.
But once that "outside close date" passes, the health system has to give its consent on further amendments to the bond deal, or extensions to the affiliation agreement with Highmark.
At that point, WPAHS, Highmark, the bondholders, their trustee and perhaps representatives of the Insurance Department would have to sit down and discuss what comes next.
And the Insurance Department would need to clearly articulate "what do you need to know that you don't already know?" Mr. Foreman said. "They've had enough time to study it."
Bill Toland: firstname.lastname@example.org or 412-263-2625. First Published April 7, 2013 4:00 AM