Highmark wasn't committed to merger, West Penn Allegheny board member testifies
By Alex Nixon
Published: Friday, Nov. 2, 2012, 2:44 p.m.
West Penn Allegheny Health System's board of directors were sure by early September that Highmark Inc. had abandoned its original $475 million acquisition deal, a longtime board member testified on Friday.
And even if the state Insurance Department approved Highmark's purchase of the financially troubled hospital system after a bankruptcy proceeding, Highmark executives had made it clear they still might not close the deal, said David McClenahan, a partner at Downtown law firm K&L Gates and a West Penn Allegheny board member since 2000.
Those impressions, which Highmark has denied, left West Penn Allegheny's board with no choice but to declare the health insurer in breach of their agreement, because, McClenahan said: “We went from having a deal with Highmark to having no deal.”
“What Highmark wanted was an option,” he said, to take West Penn through bankruptcy to knock $600 million to $700 million off its about $1 billion in debt and pension liability before deciding if it still wanted to follow through on the year-old deal.
McClenahan testified in Allegheny County Court of Common Pleas on the final day of a four-day hearing on Highmark's request to block West Penn from talking to other potential buyers.
“That was a big problem for me,” McClenahan said.
On Sept. 27, West Penn's 18-member board met for about eight hours before voting unanimously that Highmark had broken their deal, giving West Penn the chance to find a better deal with a different buyer and hopefully avoid bankruptcy, McClenahan said.
The region's second-largest hospital system has about three to six months before it runs out of cash and enters a “free-fall bankruptcy,” he said.
“We have enough operating cash to test the market, to find out what else is out there, including Highmark,” he said.
The system this week reported a $112.5 million operating loss for its financial year ended June 30, more than double the loss in the previous year.
On cross-examination, a Highmark attorney questioned why McClenahan or anyone else from West Penn's board never told Highmark's leaders that they believed the insurer had broken the deal.
“Don't you think we could have avoided all of these hearings and all of this litigation and the time that's gone into it?” attorney Daniel Booker said.
McClenahan responded that they acted based on the belief that Highmark was not going to change its position that a bankruptcy was absolutely necessary.
Highmark CEO William Winkenwerder, who joined the state's largest health insurer in July, said after the hearing that if he had known that West Penn believed Highmark had broken the deal it might have changed things. But in a brief interview on Friday he declined to comment further on how it could have made a difference.
Highmark intends to make West Penn and its five hospitals the centerpiece of a new $1 billion health system that can compete with UPMC, the region's dominant hospital system.
“Highmark remains confident of the outcome of these hearings and optimistic that we will have an affiliation agreement with West Penn Allegheny that gains approval from the Pennsylvania Insurance Department,” Winkenwerder said.
Cathy Stoddard, president of the union that represents more than 2,000 West Penn Allegheny nurses and service workers, said after the hearing that she was frustrated with the time and money wasted by the lawsuit as the system bleeds money.
“We always get the advice in our negotiations to keep talking,” she said. “They're not taking their advice.”
In an effort to broker a deal to keep Highmark and West Penn together, the state Attorney General's office this week intervened in the case and asked Judge Christine Ward to suspend the lawsuit.
“West Penn's refusal to cooperate in exploring its debt restructuring and ensuing breach of contract claims are now causing unreasonable delays and consuming scarce charitable resources on the substantial costs and expenses of litigation,” the AG's office said in a filing.
It proposed to Ward that she order West Penn and Highmark to take 90 days to complete information requests from the state Insurance Department so the department can issue a ruling on the deal. Further, Highmark would reimburse West Penn its financial losses over those 90 days if the department disapproves the deal, giving West Penn “the degree of certainty it needs to go forward” with Highmark.
Ward will issue a decision some time after taking post-hearing briefs on Wednesday.
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or firstname.lastname@example.org.
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