Highmark acquisition praised in hearing

| Wednesday, April 18, 2012

Labor leaders, lawmakers, local politicians and others called for quick approval of Highmark Inc.'s proposed $475 million acquisition of West Penn Allegheny Health System during a public hearing on Tuesday before state Insurance Commissioner Michael Consedine.

Even the handful of insurance industry speakers who were critical of Highmark and its dominance of the region's health insurance market were nonetheless positive on the deal's potential to increase competition for medical services in Western Pennsylvania.

"The city of Pittsburgh applauds Highmark in its plan to save West Penn Allegheny," Mayor Luke Ravenstahl said. "We believe it is a great idea that should receive a vote of confidence from the Commonwealth."

The acquisition will save about 11,000 jobs at the struggling hospital network, create a viable competitor to UPMC, the region's dominant health system, and help reduce health care costs, said Leo Gerard, president of the United Steelworkers.

"If this alliance doesn't go through I would not want the only health care delivery system to be UPMC," he said.

The state Insurance Department sponsored the hearing, at the Westin Convention Center Hotel, Downtown, as part of Consedine's decision-making process. Consedine has not set a deadline to issue a decision, but Highmark Chairman and acting CEO Robert Baum said yesterday he thinks it will come in October.

Meanwhile, competing health insurers think the acquisition could enhance competition among carriers and medical providers, but only if the deal is approved by the state with conditions that break Highmark's dominance in the market, the president of Aetna Inc. in Pennsylvania testified.

"Insurers must have access at fair rates," Aetna's Patrick Young said. "Highmark's acquisition can be very positive for Western Pennsylvania if the right consumer protections are put in place."

Young asked that West Penn Allegheny and Highmark, a non-profit, be required to extend the same reimbursement rates to all insurers. Last year, for-profit insurers Aetna, Cigna Corp., HealthAmerica and United Healthcare began competing in the market with full access to UPMC, the region's largest hospital system and West Penn's main competitor.

The comments were echoed by Samuel Marshall, president of trade group Insurance Federation of Pennsylvania, and David Fields, CEO of HealthAmerica in Pennsylvania.

Fields said the current contracts between UPMC and Highmark, which are set to expire on June 30, 2013, should not be extended.

"Any action to extend the contract would have a harmful impact on competition," Fields said. "It should not be continued."

Meanwhile, Consedine questioned Highmark executives on how the deal might affect the company's financial solvency.

Consedine said he's heard concerns that West Penn Allegheny could become a "money pit," and asked how confident Highmark is that the $475 million it has committed will be enough to save the system.

"We're very confident in the plan we put in place," said Deborah Rice, Highmark's senior vice president for health services.

Baum also noted that Highmark is not assuming responsibility for West Penn Allegheny's $750 million in bond debt and $250 million in pension liability, a feature of the acquisition agreement that protects Highmark's $4.1 billion in cash reserves.

"I think the Insurance Department is doing its job of asking the hard questions," said Neil Bisno, president of SEIU Healthcare Pennsylvania, a labor union representing about 2,000 West Penn Allegheny employees.

"I'm very confident ... that the commissioner will ultimately approve this transaction," he said.

Department regulators are tasked with examining a range of potential implications, including how combining a health insurance company with a hospital network could increase or decrease competition, the deal's affect on health insurance costs, Highmark's financial solvency or if it would violate state laws.

In June, Highmark, the state's largest insurer, announced its plan to buy financially struggling West Penn Allegheny. In November, the Insurance Department began reviewing the deal.

The transaction also needs approvals from the state Attorney General's Office and Allegheny County Orphan's Court.

The Justice Department last week said it had closed an antitrust investigation of the acquisition, stating that it would not reduce competition for health insurance or medical services in Western Pennsylvania. The IRS has signed off on the creation of a new non-profit parent organization for Highmark and West Penn Allegheny.

Highmark is seeking to create an integrated health system, anchored by the five-hospital West Penn Allegheny, to compete with UPMC, the region's dominant hospital system with 19 hospitals and 3,200 doctors. In addition to the $475 million in acquisition costs, Highmark also plans to spend $500 million on the provider network of outpatient medical centers, physician practices and urgent care facilities.

Since Highmark announced its intention to buy West Penn Allegheny, UPMC has refused to negotiate new reimbursement contracts. Without new contracts, Highmark members will have to pay higher out-of-network costs to access UPMC hospitals.

In addition to pushing for new contracts with UPMC and keeping West Penn Allegheny afloat, Highmark is searching for a new CEO. The company fired former CEO Ken Melani on April 1 after police charged him with assault and trespassing for fighting with the husband of his mistress. Melani struck a deal with prosecutors to drop the charges if he completes counseling.

Highmark is conducting both a nationwide and internal search for its next CEO, acting CEO Baum told reporters during a break in the hearing.

Baum declined to provide specifics on the company's search to replace Melani, but said, "Hospital experience would be a plus."

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