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Bankruptcy for West Penn Allegheny considered early on, Melani testifies

Former Highmark CEO Dr. Kenneth Melani, seen here in a photo from February, said Friday that high-level discussions about a West Penn Allegheny Health System bankruptcy occurred in November 2011, the same month the state’s largest health insurer signed a $475 million deal to acquire the struggling hospital system. AP photo

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Friday, Oct. 26, 2012, 1:50 p.m.
 

Former Highmark Inc. CEO Ken Melani said on Friday that executives began discussing bankruptcy for West Penn Allegheny Health System in November 2011, when the state's largest health insurer signed a $475 million deal to acquire the struggling hospital system.

Melani, whom Highmark fired April 1 as a result of a fistfight with the husband of his girlfriend, testified during a court hearing on Highmark's lawsuit against West Penn Allegheny.

The health system on Sept. 28 accused Highmark of breaching their agreement by demanding bankruptcy, and it wants to seek another buyer. Highmark's lawsuit, filed Oct. 1 in Common Pleas court, asks the court to prevent West Penn Allegheny from doing so.

An adviser to the system's bondholders testified that a number of potential buyers might consider acquiring the hospital network. The system has $1.5 billion in annual revenue, said Martin Cohen, an adviser to UMB Bank, the trustee for investors holding West Penn Allegheny's $750 million in bond debt.

“You take all that together, and there are people in the market that would have an interest,” Cohen said.

West Penn Allegheny board member Dan Brailer, who is vice president of investor relations for Wesco International Inc., testified that between Sept. 28 and Oct. 1, the health system and an investment bank it had hired received “several calls” from companies wanting information about the possibility of buying it.

“We were pleased about the number and quality of requests from outside entities,” Brailer said.

West Penn Allegheny, the region's second-largest hospital system behind UPMC, has nearly $1 billion in combined bond debt and pension liability, and continues to experience operational losses.

Melani, who said he is arbitrating his dismissal with Highmark, testified under subpoena by West Penn Allegheny. He said a structured bankruptcy was one option that Highmark explored to improve the health system's financial performance.

Melani did not push the idea because he knew the hospital system's board strongly opposed it.

“I thought it was something we should look at and explore,” Melani said. “But when I left, we did not have enough information to say it was something we should do.”

West Penn Allegheny's debt payments are about $40 million yearly, not the biggest driver of its losses, Melani said. More important were finding ways to drive patients into the system's hospitals.

Melani answered questions calmly and precisely. He said West Penn Allegheny could be close to “break-even” status in its operation if Highmark were to pay it rates comparable to those it pays UPMC.

A reimbursement contract that Highmark reached with UPMC in May worsened West Penn Allegheny's finances, he said. The Highmark money is one reason UPMC has greater resources to recruit patients and physicians, Melani said.

With UPMC in Highmark's network through the end of 2014, the insurer's members have less incentive to switch from UPMC doctors and hospitals to those affiliated with West Penn Allegheny, especially in Monroeville where UPMC built a hospital about a mile from West Penn Allegheny's Forbes Regional Hospital.

The hearing, before Allegheny County Judge Christine Ward, will continue on Thursday.

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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