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Highmark to pay off $635M in West Penn Allegheny debt

| Wednesday, Jan. 16, 2013, 4:33 p.m.

Highmark Inc. will pay West Penn Allegheny Health System's bondholders about $635 million in cash in a deal that advances a long-stalled plan by the health insurer to acquire the troubled hospital network.

The deal, which gives bondholders 87.5 percent of the $726 million they're owed, assures the pensions of West Penn Allegheny employees will be “protected,” Highmark said on Wednesday.

“Paramount to our affiliation with West Penn Allegheny is preserving competition and choice in health care providers for the entire community,” Highmark CEO William Winkenwerder said in a statement.

The agreement — first reported by the Tribune-Review last week — prevents the region's No. 2 hospital network from entering federal bankruptcy protection. Paying off the outstanding bond debt takes the liability off West Penn Allegheny's books and frees up about $50 million a year that previously went to pay off the debt.

West Penn Allegheny's board of directors voted unanimously on Wednesday to go through with Highmark's acquisition, according to a source with knowledge of the meeting who was not authorized to speak publicly.

West Penn Chairman Jack Isherwood, who worked behind the scenes to avert a potentially chaotic bankruptcy, said later in a statement that it was a “terrific step.”

In September, the West Penn board voted to pull out of the deal, alleging that Highmark breached their agreement by demanding that the system restructure through bankruptcy.

“We are pleased that West Penn Allegheny, our bondholders and Highmark have reached this important milestone to help further our pending affiliation with Highmark,” Isherwood said in Highmark's statement.

Highmark, the state's largest health insurance company, is trying to buy West Penn Allegheny's five hospitals and make them the centerpiece of a new regional health system that can compete with UPMC, the largest health system in Western Pennsylvania.

The Pennsylvania Insurance Department still must approve the acquisition. Reducing West Penn Allegheny's debt is viewed as key to winning that approval since the department had expressed concerns about the debt and ongoing losses.

Insurance Department spokeswoman Rosanne Placey said Highmark must submit a new filing to reflect the debt restructuring before the department can approve the deal.

Highmark and West Penn Allegheny originally agreed to an acquisition valued at $475 million in November 2011, which did not include Highmark assuming responsibility for West Penn Allegheny's $1 billion in debt and pension obligations.

While the bond debt will be discharged by Highmark, it remained unclear how West Penn Allegheny's pensions, underfunded by about $280 million, would be protected.

Highmark spokesman Aaron Billger declined to answer any questions about the deal.

The insurer had previously recommended that the federal Pension Benefit Guaranty Corp. take over the health system's pensions. West Penn Allegheny spokesman Dan Laurent said that would not happen, but he declined to comment further.

Nurses at West Penn Allegheny's flagship, Allegheny General Hospital in the North Side, cheered the deal.

“We couldn't be happier,” said Cathy Stoddard, a registered nurse and president of the SEIU Healthcare Pennsylvania union local at Allegheny General. “We were so worried about the pension and losing the senior staff. Those worries are away from us.”

Martin Gaynor, a professor of economics at Carnegie Mellon University, said the deal is important to provide a viable alternative to a dominant UPMC.

“It's good that Highmark and West Penn reached a deal, but West Penn Allegheny needs to be fiscally responsible and return to financial health,” Gaynor said.

The system reported a $112.5 million operating loss in its most recent financial year, more than double that of the previous year.

“They can't continue to lose millions and millions of dollars,” Gaynor said.

Stephen Foreman, an associate professor of health care administration at Robert Morris University, said bondholders are getting much more money than if the system had gone into bankruptcy, where they could have stood to lose 50 cents on the dollar.

“It's a great deal for bondholders, but I'm skeptical that it's good for anyone else,” Foreman said.

The deal brings into question why Highmark maintains about $4 billion in reserves, Foreman said. Foreman contends that money belongs to Highmark members who are paying for the deal with their health insurance premiums.

“Somebody ought to look at this,” he said. “The question is and always has been for Highmark and other nonprofits: ‘Who owns them?' I think they belong to the people of Western Pennsylvania.”

Alex Nixon and Luis Fábregas are Trib Total Media staff writers. Nixon can be reached at 412-320-7928 orábregas can be reached at 412-320-7998 or

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