Highmark's cost for acquiring West Penn Allegheny jumps to $1.16B, filing shows

| Wednesday, Jan. 23, 2013, 4:42 p.m.

Highmark Inc. will spend $1.16 billion to rescue West Penn Allegheny Health System, the insurer told state regulators on Wednesday.

The price jumped significantly above the $475 million Highmark committed to the nearly bankrupt health system in 2011 because the insurer last week agreed to buy out bondholders who are owed $726 million for 87.5 cents on the dollar, or about $635 million.

Highmark, the state's largest health insurance company, also agreed to pay West Penn Allegheny $10 million a year for five years in the form of higher reimbursements for providing medical services to its members.

The deal sweeteners occur after about two months of negotiations between the organizations to repair their long-sought marriage — the key to Highmark's plans to establish a regional health system to compete against UPMC, the largest hospital network in Western Pennsylvania.

But at least $900 million of the total appears to be in the form of loans from Highmark to West Penn Allegheny, according to documents Highmark filed with the state Department of Insurance, which is reviewing Highmark's plans.

Although Highmark will buy West Penn Allegheny's bonds, it will hold the debt on its books for up to three years until the health system can issue a new round of tax-exempt bonds and repurchase the debt from Highmark. West Penn Allegheny would not be required to pay interest on the bonds while Highmark owns them.

And $300 million of the $475 million remains as loans under terms of the original deal, though Highmark agreed to cut West Penn Allegheny's interest payments as long as its finances are weak.

Highmark officials declined to comment, but CEO William Winkenwerder was scheduled to discuss the new deal with reporters on Thursday.

“Given the considerable increase in the costs associated with this transaction and the numerous and significant changes proposed, the filing will require close scrutiny to assure that the department's review meets statutory standards,” state Insurance Commissioner Michael Consedine said in a statement. “We will continue to work as quickly as possible to review the transaction through a process that is transparent and provides an appropriate opportunity for public input and comment.”

A $75 million grant from Highmark that was supposed to fund a new medical school at West Penn Allegheny will be used to make $24.6 million in bond debt payments until Highmark buys the bonds, and to make a $9 million payment to West Penn Allegheny's underfunded pension plans. West Penn Allegheny will be able to spend the remainder as it wants.

The documents Highmark submitted to the Insurance Department, known as an amended “Form A” filing, bring some closure to a tumultuous four-month period in which Highmark's deal to acquire West Penn Allegheny nearly fell apart.

West Penn Allegheny at the end of September declared Highmark in breach of the original acquisition agreement, alleging that the insurer tried to force the health system into bankruptcy. Highmark sued to keep West Penn Allegheny from talking to other potential buyers, and in November an Allegheny County judge ruled in Highmark's favor.

During a hearing in the lawsuit, Winkenwerder testified that Insurance Department officials said they had significant concerns with West Penn Allegheny's high levels of debt, including the bonds and about $280 million in unfunded pension liability.

The new deal between Highmark and West Penn Allegheny, detailed in the amended Form A, was negotiated to alleviate those concerns.

The documents don't address the underfunded pension plans.

In fact, the documents state that “Highmark has no additional obligation to provide funding or to assume any liabilities of WPAHS and its affiliates.”

In a letter to Highmark on Wednesday, the Insurance Department highlights that Highmark's new financial commitment “does not include any funds for West Penn's pension obligations.”

The letter also states that the department won't issue a decision before the end of a 30-day public comment period or before its consultants have completed their review of the deal, which could take up to 10 weeks.

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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