CEO: Highmark offered West Penn Allegheny extra $125M to file for bankruptcy
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 email@example.com.
Add Alex Nixon to your Google+ circles.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- PPG to buy Westmoreland Supply paint store chain
- Large-scale batteries are integral in shift to renewable energy
- Duquesne University business center helping Hispanic startups
- Open enrollment puts varied impact of health care law back in focus
- Mortgage in reach despite few dings
- Plastics, tech sectors crucial to cracker plants
- Augmented reality frees gaming from TV
- Hackers rip into heart of open-source software
- Energy Spotlight: Steve Anthos
- EDMC loses $664M; executives receive six-figure bonuses
- Without pipelines, gas can’t get to demand