Highmark-WPAHS pact details

Insurer will make $400 million investment in the hospital system

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Highmark Inc. released a redacted affiliation agreement with West Penn Allegheny Health System on Thursday, providing the public with details of the pact that, if approved, would unite the region's dominant insurer with its No. 2 hospital system.

The 416-page agreement describes the terms of a $400 million investment by Highmark in West Penn, consisting of a $50 million payment made in June, $100 million in the form of half grant and half loan made in early November, and promised loans of $50 million payment next year, and $100 million in each of 2013 and 2014.

The term sheet for the loans was redacted, but the available text makes clear that there are many strings attached. By the end of this year, Highmark and West Penn have to craft a joint implementation plan describing how the November payment, and the 2012 payment, will be spent.

If West Penn defaults on its agreement with Highmark, it could be subject to faster, or immediate, repayment of the loans. West Penn could also be forced to transform the loans from unsecured debts to secured loans.

If the marriage of the two is nixed through no fault of West Penn, the hospital system doesn't have to repay the debt.

If West Penn makes money in 2013 and 2014, the loans for those years can be reduced by the amount of its positive cash flow.

West Penn remains the owner of all of its assets and keeps the obligation for all of its debts but comes under the oversight and governance of the newly created Ultimate Parent Entity of the insurer and hospital system. The UPE's board of directors is Highmark CEO Kenneth R. Melani, developer David M. Matter, insurance executive David J. Malone, Dr. David A. Blandino, Robert J. Baum, Joseph C. Guyaux and Victor A. Roque.

Highmark also committed in the agreement to pay $75 million to create an endowment for the new merged entity.

The pact awaits state approval, and West Penn needs to get consent from private parties with which it has contracts. The identities of those private parties, along with a list of government agencies that have to sign off, were redacted from the released agreement. If West Penn tries, but fails, to get the consents, the agreement says it will "continue to cooperate [with Highmark] in any reasonable agreement."

West Penn agreed in the pact to drop Highmark from a 2009 lawsuit it filed in U.S. District Court claiming that the insurer and UPMC had conspired to stifle competition. That move prompted UPMC to argue in court that the suit is now moot, a contention now being considered by District Judge Arthur J. Schwab.

The affiliation agreement was filed under seal in that case, and the Pittsburgh Post-Gazette intervened with a motion to make the pact public. Judge Schwab hasn't ruled on that motion.

The Post-Gazette has argued in court filings that the agreement is important to the provision of healthcare in the region and should be made available to the public without redactions.

The redacted agreement is available at: www.highmark.com/hmk2/about/newsroom/2011/hmwp/Affiliation_Agreement_Exhibits_and_Schedules_redacted.pdf .

Rich Lord: rlord@post-gazette.com or 412-263-1542.


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