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CEO: Highmark offered West Penn Allegheny extra $125M to file for bankruptcy

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Thursday, Oct. 25, 2012, 1:36 p.m.
 

Highmark Inc. offered West Penn Allegheny Health System $125 million as a sweetener to get the struggling hospital system to enter a structured bankruptcy, the health insurer's CEO testified in court on Thursday.

William Winkenwerder said those incentives and others show that despite West Penn Allegheny's rapidly deteriorating financial situation, Highmark was committed to getting approval from the state Insurance Department and completing the acquisition of the system.

Highmark believed the department was unlikely to approve a merger of the two organizations without a deal to reduce West Penn Allegheny's nearly $1 billion debt, he said.

“They had concerns that Highmark should not throw good money after bad,” Winkenwerder said. The Insurance Department, which has been reviewing the deal since November, must approve it.

In September, Highmark offered West Penn Allegheny $75 million in interim financing, $50 million in additional reimbursements and said it would accelerate payment of $275 million remaining from their original $475 million acquisition agreement.

In exchange, Highmark and West Penn Allegheny would approach the hospital system's largest creditors and ask them to cut in half the $750 million they are owed, Winkenwerder said during more than two hours of testimony in Allegheny County court.

Highmark filed suit Oct. 1 after West Penn Allegheny declared the insurer had breached their agreement. The lawsuit seeks to prevent the health system from talking to other buyers.

West Penn Allegheny officials have alleged that Highmark is holding the hospital system hostage to a “no-shop” clause in their agreement and has no intention to complete the deal. Winkenwerder denied those charges under cross-examination by West Penn Allegheny's attorneys.

Attorneys for Highmark called all their witnesses on Thursday. West Penn Allegheny attorneys will call witnesses on Friday. Common Pleas Judge Christine Ward extended the proceeding through Monday.

Highmark Chief Financial Officer Nanette DeTurk testified for the first time about additional ways the insurer has worked to prop up the hospital system's finances.

She said Highmark gave West Penn Allegheny a $30 million grant in April to keep it from defaulting on its bond debt, advanced it $25 million for improvements at West Penn Hospital in Bloomfield and Forbes Regional Hospital in Monroeville, is paying the health system's advertising bills to the tune of about $10 million a year, and offered to convert a $100 million loan to a grant.

DeTurk said West Penn Allegheny posted an operating loss of about $97 million for the financial year that ended June 30. The health system is expected to release its results for the year next week. It posted an operating loss of $51.8 million in the previous financial year.

Winkenwerder also said Highmark offered to make whole any underfunded West Penn Allegheny pensions if the federal Pension Benefit Guaranty Corp. took over the retirement funds. A West Penn Allegheny attorney said the pension benefits would be frozen, and workers would be unable to cash out their benefits in one lump sum.

Fitch Ratings on Thursday downgraded West Penn Allegheny's credit rating further into junk status because of “the increased possibility of a debt restructuring, coupled with and arising from heightened uncertainty about the progress of WPAHS's affiliation with insurer Highmark.”

Highmark called as a witness Leo Gerard, international president of the United Steelworkers union, who testified that his union has been involved in many bankruptcy proceedings. A structured bankruptcy, in which all the stakeholders agree to a debt-reduction plan ahead of time, is much better than a traditional Chapter 11 bankruptcy, which Gerard described as a “free for all.”

In an unstructured bankruptcy, “the wrong people get the haircut,” Gerard said, referring to union-represented workers. “The bondholders usually get the best deal.”

The USW does not represent any workers at West Penn Allegheny facilities.

The state Attorney General's office attempted to intervene in the lawsuit to push Highmark and West Penn Allegheny back together and on the path toward approval of the merger. In a court filing, the Attorney General said the office was acting on behalf of people who have a lot to lose if the deal falls apart, including the possibility of thousands of jobs at West Penn Allegheny, the reduction in health care choice in the Pittsburgh market, and substantial money that nonprofit Highmark invested into the health system.

Ward denied the Attorney General's request until the office makes additional filings in the case.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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