West Penn Allegheny says Highmark deal is over
By Luis Fábregas and Alex Nixon
Published: Friday, Sept. 28, 2012, 9:30 a.m.
West Penn Allegheny Health System began the hunt for a new financial partner by abruptly dumping insurer Highmark Inc. on Friday, shattering months of negotiations and stunning the health care community.
The $475 million deal between the region's second-largest hospital network and the state's largest health insurer collapsed as West Penn Allegheny officials said Highmark demanded that the system declare bankruptcy.
“Bankruptcy is not the first option; it is the last option,” Jack Isherwood, West Penn Allegheny's board chairman, said in the system's North Side headquarters. “Our impending marriage is over because Highmark is demanding new terms that will alter the course of the West Penn Allegheny Health System in ways far afield from our agreed-to strategic vision.”
Highmark immediately denied West Penn Allegheny's claim that it had breached the affiliation agreement signed on Nov. 1. The hospital system's move stunned some Highmark executives, according to sources who asked not to be named. The insurer did not make top officials available for comment.
“Highmark continues to believe that an affiliation between Highmark and WPAHS is in the best interests of both parties, and more importantly of the entire community,” said a Highmark statement released as West Penn Allegheny officials conducted a news briefing.
West Penn Allegheny leaders said the money-losing system needs a partner. A “no-shop” clause in the Highmark agreement until Friday prevented officials from considering other partnerships.
System leaders expressed optimism that they could find a partner but would not say how long it might survive without financial help. David McClenahan, a board member and former board chairman of West Penn Allegheny, said the system should be attractive because its cost structure allows it to provide care at costs “20 to 30 percent below UPMC,” the region's largest hospital system.
“We have enough operating cash,” McClenahan said.
The system's liabilities, however, total nearly $1 billion.
Highmark gave West Penn Allegheny $100 million in grants and $100 million in loans from the total it committed toward rescuing the health system. The grants do not have to be repaid. West Penn Allegheny officials said the agreement with Highmark was that the loans would convert to grants that don't need repayment if Highmark broke the agreement.
The system is expected to continue losing money during the next two years, according to a forecast Highmark submitted last month to the state Department of Insurance. West Penn Allegheny lost $180 million from operations in three previous financial years. In the past five years, it experienced a 26 percent decline in admissions and a 23 percent drop in surgeries.
Officials declined to name potential partners. Jan Jennings, a health care consultant, said he can think of no nonprofits that would be interested in rescuing West Penn Allegheny and taking on dominant UPMC.
“It is the dumbest, most reckless abandonment of fiduciary responsibility I have ever seen,” said Jennings, president of American Healthcare Solutions, Downtown. “I don't think anybody from out of town sees West Penn Allegheny as some kind of crown jewel. I just think it's a big mistake.”
Jennings said the system might work if assumed by a for-profit hospital chain, which lack presence in Western Pennsylvania. Among potential for-profit suitors is Community Health Systems Inc., which in July acquired Memorial Health Systems in York. Another for-profit that might consider moving to Western Pennsylvania, Jennings said, is HCA, which operates 163 hospitals and 110 free-standing surgery centers in 20 states and England.
The Tribune-Review could not reach officials at those chains, both based in Nashville.
West Penn Allegheny's sudden break from Highmark drew a passionate, concerned response from legislators and community leaders, many of whom spent months lobbying for swift approval of the deal by the state's Insurance Department and other regulators.
State Sen. Don White, R-Indiana, questioned West Penn Allegheny's ability to find a buyer that would not require bankruptcy or other restructuring to deal with the system's debt and pension obligations.
“We have a great interest in preserving those jobs,” White said of the 12,000 people who work for West Penn Allegheny's five hospitals and other medical facilities. “But I'm not convinced that we need all those hospitals.”
White, chairman of the Senate Banking and Insurance Committee, said he wonders whether the deal truly is dead.
“Is this a spat or a divorce?” he asked.
Some West Penn Allegheny employees, who learned the news from emails and meetings with administrators, expressed shock.
“Am I going to have to look for a new job?” asked a registered nurse who declined to give her name for fear of reprimand. “There was a sense of safety with Highmark. They have money. We thought, ‘Great, we're going to survive.' ”
West Penn Allegheny officials did not rule out returning to the negotiating table with Highmark. But they made it clear that their dissatisfaction goes beyond Highmark's bankruptcy strategy. Isherwood said executives had expectations that Highmark “would produce an operating plan for the next phase of our partnership.” Though the insurer improved some of West Penn Allegheny's facilities and recruited physicians, it was not enough, he said.
“After nearly a year, we have yet to receive a post-closing plan from Highmark with clear goals and implementation plans,” Isherwood said.
He suggested Highmark could limit the need for ongoing capital payments to the system by giving “a reasonable rate increase to West Penn Allegheny Health System, such as the one Highmark recently gave to UPMC.” Highmark in May agreed to give UPMC rate increases to bring them in line with rates it pays to other insurers.
Sen. Jim Ferlo, D-Highland Park, who successfully lobbied to reopen the emergency department of West Penn Hospital in Bloomfield, said he was “gravely disappointed” by the breakdown of the agreement.
“West Penn has been an honest broker in this process, is an important community asset, and is a vibrant health system whose survival is instrumental if the Pittsburgh region is to have a competitive and vigorous health care market,” Ferlo said.
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