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Moody's may downgrade Highmark's credit rating

| Friday, Jan. 25, 2013, 12:01 a.m.

Rating agency Moody's Investors Service wasn't impressed with Highmark Inc.'s plan to pay $635 million for West Penn Allegheny Health System's bond debt.

Moody's said on Thursday that it was reviewing “for downgrade” Highmark's credit and financial strength ratings, because the additional debt could weaken Pennsylvania's largest health insurer.

“The current proposed transaction increases Highmark's investment in WPAHS from $475 million to over $1 billion, creating a concentrated network investment that reduces its ability to pursue other investments and limits its flexibility with respect to its commitment to WPAHS,” Moody's analyst Steven Zaharuk said.

Meanwhile, a local health care expert praised Highmark's plan to use a bank loan to buy the bonds rather than raiding its more than $4 billion in surplus that the insurer holds in reserve from the premiums of its insurance customers.

“I like that they went out and borrowed to buy the bonds instead of using their reserves,” said Stephen Foreman, associate professor of health care administration at Robert Morris University. “I think that's a good deal.”

While Foreman said he is skeptical that Highmark will turnaround West Penn Allegheny, he hopes that the insurer is successful, because it will be good for Pittsburgh health care consumers.

“To preserve West Penn Allegheny for the community is great. And if they (Highmark) can run it and make it work, then you've got value added,” he said.

But Highmark has to figure out how to reduce the system's costs, which is no easy task, he said. “If West Penn was that low cost and efficient, it wouldn't be in the mess it's in.”

The Moody's action and Foreman's comments occurred a day after Highmark filed documents with the state Insurance Department detailing terms of its new deal to acquire West Penn Allegheny. The department is reviewing the deal, which has grown to nearly $1.2 billion.

The cost rose significantly because Highmark will buy West Penn Allegheny's $726 million in bond debt at a discount of 87.5 cents on the dollar. It had previously committed $475 million to the deal.

Highmark CEO William Winkenwerder also offered comments on the deal Thursday in a conference call with reporters. He said the new filing with the Insurance Department would “help pave the way for approval of the affiliation” between Highmark and West Penn Allegheny.

While the biggest portion of the nearly bankrupt health system's debt will be removed with the bond deal, its $280 million in unfunded pension liability remains.

Winkenwerder said he is confident the health system's finances will become strong enough that it will cover the pension liability without funds from Highmark.

“West Penn will retain responsibility for the pension funds,” Winkenwerder said. “We believe that the projected financial results (for the system) are sufficient to fund their pensions.”

In the new documents, Highmark predicts that its new health system, anchored by the five hospitals of West Penn Allegheny, but also including Jefferson Regional Medical Center in Jefferson Hills, St. Vincent Health System in Erie, a network of physicians and medical malls, will become profitable next year.

It forecasts the health system losing $58.9 million this year, followed by positive earnings of $3 million in 2014, $185.8 million in 2015, and $129.5 million in 2016, according to the documents filed with the state.

Key to achieving that result will be increasing the number of patients being treated at West Penn Allegheny by 20,000 a year, Winkenwerder said. That would return the system's patient volume to levels it had in 2008 and 2009.

The predictions were constructed on the assumption that rival health system UPMC, the largest hospital network in Western Pennsylvania, will not be “in network” for Highmark members after 2014, Winkenwerder said. If Highmark members cannot go to UPMC hospitals or see UPMC doctors, they would have to shift to West Penn Allegheny hospitals and doctors for medical treatment, unless they switch health insurers.

But Winkenwerder also said that Highmark wants to extend its contract with UPMC beyond the end of 2014.

“We want to work together with all the providers in the community,” he said.

UPMC spokesman Paul Wood said the region's dominant health system isn't interested in a new contract with Highmark.

“For the revitalization of West Penn Allegheny, Highmark appropriately assumed there will not be a contract beyond 2014,” Wood said. “Nothing has changed.”

While UPMC risks losing significant patient volume once Highmark members are out-of-network, it is banking on consumers switching to its in-house insurance division, UPMC Health Plan, or one of four national insurance companies that offer full access to UPMC.

“We have UPMC Health Plan that provides consumers in-network access,” Wood said. “And there's the four nationals that also provide in-network access ... UPMC is fine.”

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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