West Penn Allegheny Health System, Highmark deal unraveled gradually
West Penn Allegheny Health System officials say they were startled when, at an Aug. 30 meeting, Highmark president and CEO William Winkenwerder Jr. and his staff told them they wanted the health system to file for bankruptcy.
The two parties had signed an affiliation agreement last November, with both sides saying they were committed to stabilizing and preserving the region's second-largest health system as it labored under nearly $1 billion in debt obligations.
Since May 2011, Highmark had infused $400 million, half in loans and half in grants, to help WPAHS reopen West Penn's emergency department in Bloomfield and renovate Forbes Regional in Monroeville, where it is competing with the newly opened UPMC East hospital.
The two sides seemed to be on the same page last April, too, when the state Department of Insurance held a daylong public hearing on the proposed affiliation. West Penn Allegheny's debt obligations had stabilized, operating income was starting to come around, federal agencies had signed off on the partnership and state approval could come at any time.
Now Highmark wanted them to file for Chapter 11 bankruptcy.
What had changed, they wondered?
A lot, it turns out, starting with the biggest change of all, the one in Highmark's top office.
Before he was fired in April -- following the fallout of what became a public altercation with his girlfriend's husband -- Highmark CEO Kenneth Melani had steadfastly rejected any notion of a West Penn Allegheny bankruptcy as too destructive and disruptive to patients, staff and the community.
Dr. Melani felt a strong personal connection to the West Penn Allegheny system and particularly West Penn Hospital, where he had done a medical residency.
But he was also well-connected in the local medical community; he knew the players and he had relationships with physicians that put him in an excellent position to recruit doctors at a time when UPMC and WPAHS were aggressively buying physician practices.
Dr. Melani's departure also marked the beginning of an eventful, if not tumultuous, six months for Highmark:
In May, Highmark and UPMC agreed to extend their contract through 2014, which had the near-immediate effect of opening up UPMC's new hospital in Monroeville to Highmark subscribers while reducing traffic at WPAHS's nearby Forbes Regional Hospital.
In early June, Highmark named physician William Winkenwerder Jr., who served as U.S. assistant secretary of defense for health affairs during the Bush administration, as its new president and CEO.
Dr. Winkenwerder, who founded a health-care consultancy after leaving the Pentagon, came with extensive and varied health care experience -- and an outsider's perspective on the economic ramifications of affiliating with West Penn Allegheny, with its near-$1 billion debt obligations.
Eight days later, Highmark announced its acquisition of Jefferson Regional Medical Center in Jefferson Hills, committing $75 million to the Jefferson foundation. Highmark touted the partnership as a key milepost in its plans for building a regional integrated delivery network, one meant to hold its own against UPMC.
Meanwhile, the planned affiliation with West Penn Allegheny -- which would be the centerpiece of the Highmark network -- seemed to lag, with little apparent progress in getting the necessary state approvals.
Last spring, the consensus seemed to be that the deal would close in the fall, perhaps by the end of September. Before Friday's bombshell announcement, the thinking was that approval wouldn't come before year's end, if then.
Insurance department officials had been clear all along that they intended to move deliberately, and each major change at Highmark -- the reopening of West Penn Hospital's emergency department in February, the UPMC contract extension, bringing Dr. Winkenwerder on board, the Jefferson acquisition -- added a new wrinkle that the state needed to consider in its analysis.
In the end, Dr. Winkenwerder, who didn't officially begin his position at Highmark until mid-July, decided in less than two months that West Penn Allegheny posed too much of a financial liability to Highmark's finances without a Chapter 11 filing to restructure its debt.
"Dr. Winkenwerder and his team have been crystal clear in their position that if they assume the fiscal burdens of West Penn Allegheny Health System, they will put Highmark's financial portfolio, and ultimately, their subscribers, at risk," Mr. Isherwood said at Friday's briefing at the WPAHS corporate offices on the North Shore.
"The only way out, in their analysis, is to put the patients, nurses, physicians and suppliers of the West Penn Allegheny Health System at risk through debt restructuring and bankruptcy."
Highmark officials have not confirmed Mr. Isherwood's account and, in fact, released a statement that "Highmark continues to believe that an affiliation between Highmark and WPAHS is in the best interests of both parties, and more importantly of the entire community -- the physicians and employees of WPAHS, Highmark plan members, employers, and all parties."
Now, between the disruption from Dr. Melani's departure and lost time finalizing the affiliation with West Penn Allegheny, it may be too late.
Some may wonder why West Penn Allegheny, floating in a sea of red ink in a leaky lifeboat, would be choosy about who saves it.
It may have only months to identify a new affiliation partner.
But the broken affiliation also causes major problems for Highmark and its plans to build a regional health provider network. Without WPAHS, Highmark may be unable to offer its subscribers access in its own provider network to the highest level of care.
Whether the Highmark-WPAHS separation is permanent or a temporary setback, Friday's developments seem unlikely to thaw relations between Highmark and UPMC.
Even without West Penn Allegheny, Highmark was well on the way to building its network, evidenced by the acquisitions of Jefferson Regional in Jefferson Hills, Premier Medical Associates in Monroeville and a growing number of properties, particularly in the North Hills.
UPMC said it does not negotiate with competitors, and Highmark is still very much a competitor -- even if one now that's missing its centerpiece.
First Published September 30, 2012 12:00 am