State eyes West Penn Allegheny Health System's $1 billion debt in Highmark deal
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Officials at Highmark Inc. have submitted documents to the state attorney general regarding the Pittsburgh insurer's planned acquisition of the West Penn Allegheny Health System and the system's $1 billion-plus debt in bond and pension obligations.
Since the June 28 announcement that Highmark intended to buy West Penn Allegheny, officials for both organizations have been working out details behind closed doors and without public comment.
But Steve Foreman, associate professor of health administration and economics at Robert Morris University, says West Penn Allegheny's $800 million bond debt may have to be addressed before the purchase is completed.
"If I were doing this deal, I would put West Penn Allegheny through bankruptcy and get rid of that debt," he said.
What's more, he added, Highmark may have little choice.
Based on actions taken by attorneys general in other states in which a nonprofit entity tried to change its organizational structure, he said, the attorney general's office may consider Highmark's bountiful reserves a "community asset" -- money that should be used to further Highmark's core mission of providing insurance and moderating premium costs for local residents, rather than pulling a health system out from under a mountain of debt.
"Can they take money from their health insurance operation and invest it in a hospital?" Mr. Foreman asked. "If I were the judge on this case, I'm not sure how I would rule."
"The goal and the responsibility for the office of the attorney general is to review the transaction to ensure that charitable contributions and charitable assets are safeguarded," said attorney general spokesman Nils Frederiksen, who declined to give specifics about the submitted material.
While Attorney General Linda Kelly could raise objections to any part of the proposed deal, final approval or disapproval "for any matter that involves structural change to a charitable nonprofit" would be decided in Orphan's Court, Mr. Frederiksen said.
The planned purchase will also be reviewed by state insurance and state health departments, although both offices said Wednesday that they had not received any paperwork from Highmark yet.
Highmark spokesman Michael Weinstein, who confirmed that the insurer had sent a term sheet and some financial information to the attorney general's office, said flatly Wednesday that the insurer was not considering a bankruptcy filing for West Penn Allegheny.
"We are involved in the transaction to preserve provider choice and maintain an important community asset, and are hopeful for a speedy approval of the transaction once we have a definitive agreement."
WPAHS spokeswoman Kelly Sorice echoed that sentiment. "West Penn Allegheny's discussions with Highmark have never included a mention of bankruptcy. On the contrary, our talks have been focused on our mutual goal to reinvigorate West Penn Allegheny's hospitals and programs to better serve our communities."
While it's hard to predict how state officials may view the Highmark-West Penn Allegheny deal, there are precedents for both state intervention and using bankruptcy to retire debt prior to a hospital acquisition.
In 1977, California's attorney general stepped in and stopped plans by nuns to close Queen of Angels Hospital in Los Angeles and to use proceeds from a hospital lease to open up a network of free community health clinics because that would mean abandoning its primary charitable purpose of operating a hospital.
And this past June, Quincy Medical Center in Massachusetts filed for Chapter 11 bankruptcy just days before its acquisition by the for-profit Steward Health Care System.
The move was meant to allow it to restructure its $56 million in bonds.
Both of those cases involved the threatened closing of a hospital, whereas Highmark's acquisition would save one -- West Penn Allegheny officials said they would have had to close West Penn Hospital in Bloomfield had Highmark not stepped in.
"Philosophically, that helps them, but I'm not sure it exempts them," said Mr. Foreman, who is also an attorney and former hospital administrator.
"The sticking point in my mind is: Are they free to make a bad investment in a business that is not being run efficiently?"
Joseph Friedman, a Downtown attorney who heads the health insurance and managed care practice for Thorp Reed & Armstrong, said Wednesday that West Penn Allegheny's bond debt was more likely to be an issue with the Pennsylvania Insurance Department, which will want to make sure Highmark does not deplete its reserve "for purposes outside of its mission as a health insurance company."
As for a possible bankruptcy filing, Mr. Friedman said: "Certainly they have the legal right and ability to file for bankruptcy. It would be a bold and daring maneuver, but events could spin out of control if they do that. The bondholders would not stand idly by."
With $3.7 billion in reserves, Highmark has the wherewithal to both cover West Penn Allegheny's bond debt and offer badly needed financial support.
The region's second largest health system is expected to record an operating loss in excess of $60 million for the fiscal year that ended June 30 and it's also facing a $253.8 million pension debt, which it could carry over or freeze in the event of a bankruptcy.
At the time they announced their "capital partnership," Highmark officials said they would invest up to $475 million in the West Penn Allegheny system, including an immediate $50 million payment.
"If I'm Highmark and I'm going to make an investment in this entity, I'm going to stand behind it," said Mr. Foreman. "But why should I take on that debt to do it?"
First Published August 11, 2011 12:00 am