Highmark-WPAHS dealings complicated by bankruptcy scenario
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A little more than a year ago, Quincy Medical Center in Quincy, Mass., filed to reorganize its finances in Chapter 11 bankruptcy while, in nearly the same motion, it sought court approval of its sale to Steward Health Care System, a for-profit health system that has been buying hospitals in that region.
In 2010, Sumner Regional Health System in Tennessee filed for bankruptcy as a prelude to its sale to the for-profit LifePoint Hospitals Inc. of Brentwood, Tenn.
So Highmark Inc.'s suggestion -- its demand, as far as West Penn Allegheny Health System is concerned -- that WPAHS file for bankruptcy would not be the first time a hospital or health system went that route on its way to an unencumbered purchase by another party.
"The issue from the buyer's side is that they would prefer everything to be cleaned up before they get their hands on it, and a buyer of assets out of bankruptcy can get very clean title," said Downtown bankruptcy attorney Robert S. Bernstein.
The process can eliminate all claims, liens and encumbrances, he added, "and deliver to the buyer exactly what they purchased with very little risk."
But that doesn't mean that bankruptcy is as simple as erasing debt like so much chalk on a chalkboard.
"It's rare that it works out as you thought it would work out," Mr. Bernstein said. "Everybody who has a stake -- creditors, municipalities, regulatory bodies -- gets to participate in the case and try to push its particular agenda. You're never quite sure how it is going to turn out."
David Samuel has seen what can happen.
Mr. Samuel was chief financial officer for the West Penn Health System when it purchased four local hospitals -- Allegheny General, Forbes Regional, Canonsburg and Allegheny Valley -- following the 1998 bankruptcy of the Allegheny Health and Education Research Foundation.
"It is a very protracted process and during that protracted process, a lot of bad stuff happens," Mr. Samuel said in a recent phone interview. "During that time, there's a lot of uncertainty in the organization, so your really talented employees and physicians who have other opportunities are going to say, 'I don't want to deal with this. I'm going.'
"We lost a lot of really talented middle managers, and those are the people who run the hospital day to day. It took us a long time to build that core management structure again."
That damage occurred largely out of public view, but plenty more showed up in the ledgers, he said. "As soon as you file for bankruptcy, all of your vendors who are normally paid in 30 days, or 90 days, all of a sudden want to be paid in advance or at the time of delivery. It just puts a huge cash burden on the organization."
Then there's the fighting among creditors, he said, "trying to recover every dime they can. It just becomes a free-for-all."
The filing itself isn't cheap -- West Penn Allegheny officials estimate the legal and restricting fees could be $50 million to $100 million.
More importantly, though, "is all this uncertainty creates concern in the eyes of the patients and the physicians," said Mr. Samuel, who retired in 2008. "West Penn Allegheny would not compromise patient safety, but that's not necessarily the perception of the patients who are going there."
There are, of course, unique features to the current Highmark-West Penn Allegheny situation. Highmark already has invested a total of $200 million in grants and loans to West Penn Allegheny as part of a total $475 million commitment to the health system, and it has budgeted $1 billion to build its own provider network with WPAHS as the crown jewel.
In a statement, Highmark officials reiterated Friday that they still want to finalize the affiliation.
"Highmark has strived to work collaboratively with WPAHS and has suggested the development of a mutually agreed upon restructuring of WPAHS' obligations that significantly improves the health system's financial condition and creates a strong foundation for success in the long term and protects the pensions of all WPAHS employees," wrote spokesman Aaron Billger.
But interim West Penn Allegheny President and CEO Keith Ghezzi, who made the rounds to the various WPAHS facilities last week for town hall meetings, said he has found strong support for the board's unanimous decision to declare that Highmark had breached the affiliation agreement and to begin a search for other partners.
"Any uncertainty creates a little bit of anxiety, but I think the employees appreciate that the board deliberated very carefully when it made this decision, and that they're trying to act in the best interests of employees," he said.
SEIU Healthcare, which represents nurses at several West Penn Allegheny hospitals, published a letter Sunday in the Post-Gazette opposing "any effort to force our health system into a bankruptcy that could threaten quality care, employees' pensions and union contracts," while adding that it is equally concerned that a collapse of the Highmark affiliation could lead to the sale of WPAHS to a for-profit corporation.
Dr. Ghezzi, an emergency physician by training who came to Pittsburgh as part of an interim management team, seemed heartened by a statement from Highmark last week that stated that "Highmark is open to considering alternative WPAHS proposals [to bankruptcy] that would sustain the system's long-term financial status" and meet state approval.
The comment was part of a Highmark statement made after it filed for a temporary restraining order Tuesday to prevent West Penn Allegheny from looking for other suitors, and Dr. Ghezzi sees that as a softening of its previous position in which, he said, all roads appeared to lead to bankruptcy.
Bankruptcy destroys value, he said, and he hopes that Highmark officials will once again see "the original value that they saw [when the affiliation agreement was signed in November] of a system that offers high quality care at a significantly lower cost."
First Published October 8, 2012 12:00 am