West Penn Allegheny doesn't control destiny in wake of Highmark-UPMC contract

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While Highmark subscribers may be breathing easier now that Highmark and UPMC have extended their contract to 2015, you might forgive some folks at West Penn Allegheny Health System for still feeling apprehensive.

On Thursday, Highmark Board Chairman and Acting CEO J. Robert Baum sent a letter to all West Penn Allegheny staff members saying "Highmark remains totally committed to the partnership that we've established with the West Penn Allegheny Health System."

But between Highmark's search for a new CEO, West Penn Allegheny's continuing financial losses and a sooner-than-expected showdown between West Penn's Forbes Regional Hospital and the new UPMC East Hospital in Monroeville, the future of West Penn Allegheny in its current form looks far from certain.

"If I were a West Penn Allegheny employee, I think I'd be a little uneasy," said Lorin M. Lacy, principal for the health and productivity group at Buck Consultants, Downtown.

The concerns start at the top.

Sometime in the coming weeks, Highmark's board of directors will name a new CEO "who may or may not share the same strategic vision that [former CEO] Ken Melani had," said health consultant Jan Jennings, president and CEO of American Healthcare Solutions, Downtown.

"Any new CEO is going to put his or her fingerprint on the strategic direction of the organization, and the organization is going to change. How is that going to affect West Penn Allegheny? The answer is unknown. Nobody has a clue."

Dr. Melani, fired by Highmark after his affair with a Highmark employee erupted in an April 1 physical altercation with the husband of his mistress, often spoke about his personal history with and commitment to West Penn Hospital, where he trained.

Mr. Jennings wonders if the new CEO will share that commitment, or will ask, "Don't we have someplace else to put this money?"

The problem for WPAHS, said Steve Foreman, an associate professor of health administration and economics at Robert Morris University, is that it does not control its own destiny. Highmark may say today that it's committed to the health system, he said. But that could change in coming years if West Penn Allegheny continues to require more and more cash infusions.

"If what Highmark is doing for West Penn Allegheny in any way makes Highmark weaker, that's not good for Highmark and it's not part of Highmark's mission."

Part of Highmark's immediate mission, though, is finding more customers for WPAHS hospitals. To that end, Highmark will soon be able to introduce -- as a result of its pact with UPMC -- new, lower-cost products that steer patients away from UPMC hospitals, the insurer said.

"The Highmark-UPMC mediation agreement gives Highmark the flexibility to offer products that are competitive in the marketplace under the name Community Blue," according to Highmark spokesman Michael Weinstein. Community Blue was a popular plan, "supported by a network of hospitals that included West Penn Allegheny Health System facilities and other community hospitals," that was scuttled as a result of the last UPMC-Highmark pact, signed in 2002.

West Penn Allegheny is only part -- albeit a big part -- of Highmark's ambitious plans to build a new quality, low-cost provider network, an initiative that cannot fully get under way until Highmark's affiliation with West Penn Allegheny completes regulatory review.

Mr. Lacy said Highmark officials said they were lobbying legislators for a five-year contract extension to give them enough time to get WPAHS on stable financial footing. In the end, they got less than half that time, putting added pressure to turn things around quickly at West Penn Allegheny.

That won't be an easy task.

West Penn Allegheny's financial troubles have been well documented: It lost $34.1 million in the final three months of 2011, with patient volume and revenue still in decline. As of Dec. 31, its pension plan was underfunded by $220 million. Its next quarterly financial report is expected this week.

Mr. Jennings said he believes "the best strategy" would be for West Penn Allegheny to file for bankruptcy to get out from under those obligations, a move Dr. Melani had publicly eschewed but one a new CEO might consider.

"It wouldn't be the first time it'd been done, and it wouldn't be the first time it'd been done successfully," said Mr. Jennings.

Unfortunately for West Penn, parts of the new UPMC-Highmark extension agreement will not help return it to profitability.

WPAHS' Forbes Regional Hospital will now be facing direct competition with UPMC East when that hospital opens in Monroeville this summer. Without the contract extension, Highmark said UPMC East would have been considered out-of-network for its subscribers.

And, with Highmark agreeing to higher reimbursement rates for UPMC, the historically more favorable rates Highmark has paid UPMC hospitals will continue to 2015. That may help WPAHS market itself as a high-quality, lower-cost alternative to UPMC, but it also means it will continue to lose ground to UPMC financially.

WPAHS spokeswoman Kelly Sorice puts the Highmark-UPMC contract expansion in a positive light, saying it "gives Highmark ample time to wind down its relationship with UPMC without disrupting patient care. It also gives WPAHS more time to work with Highmark to recruit more physicians who want to join our system and continue to build up our hospitals as the cornerstone of Highmark's differentiated health care delivery network."

The difference in reimbursement rates is temporary, she said, and they had anticipated that Forbes Regional, now undergoing a $20 million renovation, would be competing with UPMC East.

"UPMC East appears to be a beautiful facility, but Forbes is simply a more capable hospital, offering numerous services that UPMC will not in the eastern suburbs. While there may be some initial volume decline as patients try the new facility, we are confident that 'capable' will eventually beat 'pretty' in the east."

But, at least in the short run, said Mr. Lacy, competing with UPMC East so soon "cannot help in terms of trying to really build Forbes back up to a major facility. That's certainly going to hurt them."

Highmark has committed $475 million in grants and loans to supporting West Penn Allegheny, but the grand plan to build West Penn Allegheny into a vibrant and financially viable health system still awaits state regulatory approval that may not come until late summer or early fall.

"Absolutely it can be turned around," said Mr. Jennings. But whether that happens depends on how quickly Highmark can put its new network in place and how committed it remains to a health system that still swims in red ink.

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963. First Published May 6, 2012 3:00 PM


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