Doctor, UPMC to part ways over his deals with Highmark

Hospital system considered medical director's real estate purchases for insurer to be a conflict

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Longtime Monroeville urologist and developer Frank Costa surely realized how dangerous it would be to walk into the crossfire between partners Highmark and West Penn Allegheny Health System and rival UPMC.

And yet, last month, after he had agreed to help Highmark Inc. buy up property in Pittsburgh's suburbs where the insurer is preparing to build a series of outpatient centers and medical malls -- even as Highmark awaits government approval of its takeover of WPAHS -- Dr. Costa became one of the most notable casualties of this ongoing health care war.

Dr. Costa tried to conceal his involvement in the development of sites in Pine and Monroeville, leaving his name off documents, running the sales through shell firms listing his wife, Mary Ellen, as general partner, and using his business attorney, Severin Russo, as the named agent.

But UPMC got wind of the deals, and last month he was told that because of the conflict, he was being removed from his post as UPMC's medical director and administrator of its ambulatory surgical center in Monroeville, effective July 30.

Dr. Costa would not respond to requests for comment, but the deals were seen by UPMC as disloyal, given Dr. Costa's 16-year affiliation with UPMC. In a statement, UPMC spokesman Paul Wood would only say of Dr. Costa that "we mutually agreed that we are going in different directions and decided to end the relationship." Highmark, meanwhile, declined to confirm what, if any, relationship it has with Dr. Costa, saying that "we are not commenting on personnel-related questions." Other sources confirmed Dr. Costa's role in the land deals, however.

The deals reveal not only how heightened the competition between the region's two biggest health care players has become, with UPMC quick to react when one of its own tries to work side deals with Highmark, but also how fast Highmark is hoping to move to create the regional clinic network -- including planned sites in Robinson, Cranberry, Washington and Fox Chapel -- that it proposed just a few months ago, in conjunction with its planned takeover of WPAHS.

The deals also provide a window into Highmark's larger provider strategy, as the company has spent the last eight months quietly launching a variety of service- and supplier-related companies, meant to serve WPAHS, as well as any other regional clients it can find.

John Paul, Highmark's top man in creation of the new provider network, said the goal is clear: "The infrastructure we're building is aimed at cost, quality and access, and trying to ensure that every community has quality health care."

Providing to the providers

Highmark's stealth property investments represent just a few of the many moves made over the last year by Pittsburgh's dominant health insurer as it organizes not only its provider network but also its network of ancillary support companies.

The ongoing effort is yet another illustration of Highmark's continuing transformation into a fully vertical, fully integrated health services company, one that provides health insurance as well as health care, sells eyeglasses as well as orthopedic devices, runs physicians' clinics as well as health information exchanges. And the strategy is being carried out even though Highmark has yet to receive state approval of its acquisition of WPAHS.

Is that a potential problem?

"All these companies would hopefully be viable without West Penn Allegheny," said Jim McTiernan, principal with Triad USA benefits brokerage and a former Highmark executive. "It's not necessarily putting the cart before the horse."

Most of Highmark's newest additions are housed under a subsidiary holding company, known as HMPG Inc., which was formed in September. Highmark has earmarked as much as $100 million to help create this company and seed HMPG's subsidiary companies, according to financial statements.

As of the end of 2011, Highmark had already extended $66 million in credit to these subsidiaries, $54 million of which was outstanding as of Dec. 31.

The HMPG Inc. umbrella covers, as of this year, HMPG Properties North LLC, Physician Landing Zone PC, Promedix LLC, Lake Erie Medical Group PC, ProtoCo and others, according to filings with the state Insurance Department. A snapshot of what those firms do:

• HMPG Properties, incorporated in November, manages Highmark's land acquisition subsidiaries, known as Optimus 28, Silver Rain and Osiris.

• Physician Landing Zone is the name for Highmark's new physicians organization, the umbrella group that will employ Highmark- and WPAHS-acquired physicians. Also created in November, it currently houses Orthopedic Associates of Pittsburgh and the Arthritis & Rheumatic Disease Associates.

• Promedix was formed by Highmark in November. It is connected to ProMed Xchange, the trade name of Highmark's new physician-facing practice management group, and it will "distribute, develop and implement support products" for doctors.

• ProtoCo, formerly known as Trinity Supply Chain, officially opened for business in April, Highmark announced last week; it employs about 50 and is "a collection of three distinct companies." Those companies are ProtoCo PPI and ProtoCo Supply Chain Partners, which handle group purchasing and supply and chain management, and HMPG Pharmacy, a prescription distribution company. ProtoCo will handle purchasing for WPAHS, and it also has contracts with Saint Vincent Health Center in Erie and the West Virginia United Health System.

• Lake Erie Medical Group is a hospital physicians practice in Erie that is affiliated with the Saint Vincent Health Center, created by Highmark to serve physicians in the Erie area, where rival UPMC already owns a hospital, UPMC Hamot. Several Highmark sources confirmed that Highmark has discussed the acquisition of Saint Vincent Health Center, a 427-bed hospital that serves the Erie market as well as Ohio and New York.

• Earlier this year, in a Department of Insurance filing, Highmark revealed it had created a controlling, "sole ownership" stake in a group called Silver Rain Management. Silver Rain, a West Virginia-based company that has an affiliate in Washington County, is the holding company that operates the MedExpress Urgent Care clinic properties. Highmark acquired its stake in that firm in 2011.

• Finally, in that same filing, Highmark revealed its controlling stake in a firm called Optimus 28, one of the companies Highmark and Dr. Costa have been using to bundle properties for the eventual chain of clinics.

Curtis Rooney, president of the Healthcare Supply Chain Association, said Highmark is smart to develop its supply chain and clinical management networks at an early stage. "This will allow them to drive those prices down," and Highmark's movement on its new stable of provider-related companies "shows a terrific amount of confidence" that the WPAHS deal will be OK'd, Mr. Rooney said.

The Paul-Costa connection

Mr. Paul is the head of Highmark's new provider and "integrated delivery" division, and one the most powerful executives in the company. And yet, when he came to work for Highmark a year ago, he signed on as a "consultant" to the company, instead of a Highmark employee.

The reason for that, according to multiple Highmark sources, is so that Mr. Paul may remain involved in various side companies, ventures and partnerships, without running afoul of any Highmark employee conflict-of-interest rules. Mr. Paul owns, or has stakes in, several Pennsylvania companies, including Coordinated Care Network, a Monroeville pharmacy coordinator and case manager that services certain federal health centers.

Mr. Paul insists all of his companies are legitimate enterprises that don't conflict with his work at Highmark -- though Coordinated Care Network has done some business with a Highmark subsidiary. "I would never work as hard as I have for Highmark only to have some side deals that would ruin what I've worked on," he said.

Except for Coordinated Care Network, all of Mr. Paul's Pennsylvania companies -- generally real estate and consulting firms -- were formed in the last three years. His business relationship with Dr. Costa, however, goes back much further.

Mr. Paul and Dr. Costa knew each other for years but became friends after UPMC bought the Monroeville outpatient surgery center owned by Dr. Costa and his partners for $20 million -- a deal orchestrated by Mr. Paul while he was at UPMC. At the time, it was a controversial purchase. UPMC had been attempting to set up in Monroeville for years. But the state, at the time, required hospitals to acquire a "certificate of need" to open new facilities -- something UPMC couldn't acquire because Monroeville already had Forbes Regional Hospital.

UPMC found a way around that rule, though, by buying Dr. Costa and his partners' practice, which had obtained its own certificate of need, giving UPMC its first big outpost in Monroeville.

In 2003, UPMC also paid Dr. Costa and his partners $7.6 million to buy the building the practice is housed in. The surgical center, at 125 Daugherty Drive, is now known as UPMC's Monroeville Medical Center and sits almost directly across Mosside Boulevard from UPMC East, the system's newest hospital.

It was Mr. Paul who last year asked Dr. Costa to act as Highmark's property bundler, anonymously buying up property in specific suburban locations where Highmark hoped to open new WPAHS surgical centers or medical malls, typically not far from an existing UPMC facility.

One source familiar with the Highmark property acquisitions said Dr. Costa is not Highmark's exclusive property bundler for the six medical malls that are planned, but that he is one of the company's most effective. "You guys have to take Frank out of the 'doctor' box," the source said. "He's been pretty successful at acquiring good pieces of property."

Highmark uses intermediary bundlers and buyers to hide the ultimate buyer from the sellers and property owners: "Having separate real estate purchasing entities is a common practice by large organizations in order to protect the organization from real estate sellers, who may inflate prices," Mr. Billger said.

Using Optimus 28 Management LLC as the named buyer, Dr. Costa targeted property for a medical mall location in Pine, off of Perry Highway near Wallace Road. Between Nov. 15 and Feb. 10, Optimus 28 spent $10.35 million to buy 36 acres from Stonewood East Partners and North Way Christian Church.

While acquiring the property for Highmark, Dr. Costa also made a purchase of his own in Pine, paying $4.2 million to buy an existing office building adjacent to the 36 acres. He used a company called Wexminster Ltd., which lists the address of Dr. Costa's urological practice in Monroeville and has Dr. Costa's wife as its sole member and general partner.

Dr. Costa recently completed a second deal for Highmark, more than doubling his money in just two years on the sale of a parcel of land just down the road from his urological practice in Monroeville. And last week one of his companies, Lilly Holdings LP, sold a 4.5-acre parcel at 4121 Monroeville Blvd., for $2.635 million to Osiris Properties, the HMPG subsidiary. Lilly Holdings, which again lists Mary Ellen Costa as the controlling officer, bought the property just two years ago for $1.25 million from the Syms clothing retailer, which went bankrupt in 2010.

Lynette McKinney, Monroeville's municipal manager, said Tuesday she was aware that Dr. Costa bought the property two years ago, but she hadn't yet heard that Highmark was the new owner and "no one has officially come and sat down and gone through the official meeting process yet." And while none of the other four locations has been secured yet, sources say Highmark has targeted land in Robinson, Cranberry, Washington and Fox Chapel.

"I hope we are getting one of them, because we could sure use one," said Rick Urbano, chairman of Robinson's planning commission.

neigh_city - region - businessnews

Sean D. Hamill: or 412-263-2579. Bill Toland: or 412-263-2625. First Published May 9, 2012 12:00 AM


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