By Alex Nixon  and Luis Fábregas

Published: Saturday, September 29, 2012, 12:01 a.m.
Updated: Saturday, September 29, 2012

West Penn Allegheny Health System was the linchpin in insurer Highmark Inc.'s plan to build a $1 billion health system rivaling UPMC's dominant network of hospitals and doctors.

Without West Penn Allegheny's five hospitals and hundreds of doctors, Highmark's network would be missing a major component, experts said.

“If they're really going to compete, they need replacement hospital beds,” said Stephen Foreman, a professor of health care economics at Robert Morris University. “It's not really an integrated system without hospitals.”

Financially troubled West Penn Allegheny last year expressed gratitude when insurer Highmark pledged $475 million to save it, but on Friday, the system shocked the Pittsburgh community by announcing it would search for another partner because Highmark breached their agreement.

Highmark officials declined to comment beyond a written statement that said the insurer would “continue to pursue efforts that are in the best interests of the broader community.”

But as part of its review of the deal, the state Insurance Department had asked Highmark what it would do if the planned affiliation fell apart.

In a filing last month, Highmark said it would still spend $1 billion on its new health system.

“Funds that remain to be spent on WPAHS are assumed to be redirected to other activities that will provide Highmark with the opportunity, albeit a lesser opportunity, to lower the cost of care in the inpatient and outpatient settings,” the insurer said.

Highmark acknowledged its earnings would fall and it would “have fewer policyholders/subscribers by 2016” without West Penn Allegheny and the ability to provide “a more highly differentiated product in the market.”

The department, which began reviewing the deal in November, said Highmark's request for approval remains pending.

Highmark's move to acquire West Penn Allegheny had far-reaching financial consequences for the state's largest health insurer. The proposed deal drove a wedge between it and UPMC, which intends to end reimbursement contracts with Highmark at the start of 2015. That could drive Highmark's customers to other insurers with full access to UPMC.

“I don't think UPMC is going to sit there and welcome Highmark back with open arms. UPMC has said all along there will be no long-term contract with Highmark as long as they're in the provider business,” said state Sen. Don White, R-Indiana, who was instrumental in negotiating extended contracts between the two.

Highmark committed hundreds of millions of dollars toward buying physician practices and building outpatient clinics to support West Penn Allegheny's hospitals. It struck a deal worth up to $375 million to take control of Jefferson Regional Medical Center to provide a hospital anchor for the network in Pittsburgh's South Hills.

“You talk about getting hosed,” said Jan Jennings, CEO of American Healthcare Solutions, a Downtown consulting firm. “Highmark has discharged significant cash from its reserves for something that's never going to happen. What could be any worse?”

Although Highmark could continue with its plan, it would have difficulty in offering a workable alternative to UPMC's 19 hospitals in Western Pennsylvania without the specialized services that hospitals provide, such as emergency departments, operating rooms and beds.

“They need hospitals at the end of the chain,” Foreman said.

Jefferson Regional Medical Center issued a statement noting that the situation does not affect its planned affiliation with Highmark.

“We do not anticipate any change in course as we continue to move forward in obtaining the regulatory approvals needed to finalize our affiliation with Highmark,” the statement said.

Alex Nixon and Luis Fabregas are staff writers for Trib Total Media. Nixon can be reached at 412-320-7928 or anixon@tribweb.com. Fabregas can be reached at 412-320-7998 or lfabregas@tribweb.com.

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