Cash isn't cure-all for Highmark

Luis Fábregas
| Monday, March 18, 2013, 10:29 a.m.

Phew! That was a close one for West Penn Allegheny Health System.

There must have been lots of uncorked champagne bottles this week after the region's moribund health system and its would-be parent, Highmark Inc., announced a crucial agreement to pay its jittery bondholders.

You could almost hear the collective sigh of relief from West Penn's 12,000 employees.

The deal will pay bondholders about $635 million instead of the $726 million they were owed. That's reason enough to throw a party. Hands down, a great deal for a health system on the brink of bankruptcy.

Let's make something clear, though: The West Penn Allegheny saga is far from over. The money Highmark will pay West Penn bondholders to complete its acquisition is not a cure-all. Highmark needs to inject a lot more than cash into this tattered organization to bring it back to life.

It needs to worry about resuscitating an organization that bled $112.5 million in operational losses during the past fiscal year alone. Those losses aren't going to stop simply because the bondholders took a 12.5 percent shaving from the money they're owed.

Highmark is taking a leap of faith into the provider side of health care after years as the region's dominant health insurer.

It faces a formidable task of succeeding during a time when health care no longer is about filling inpatient beds and the emphasis has shifted to outpatient care. It faces the formidable task of convincing physicians in high-end specialties that West Penn is the health system of the future, the place where they ought to work.

It faces the formidable task of boosting surgical caseload, which has dropped at warp speed. And it must cut costs to keep them in line with shrinking reimbursements.

A fifth-grader can figure out that, to acquire West Penn Allegheny, Highmark will end up paying much more than the $475 million it agreed to pay in November 2011. Back then, no one talked about Highmark becoming responsible for West Penn's bond debt and pension obligations.

Who's going to pay for all this? Could it be Highmark's members? That's a fair question, when you consider Highmark has amassed about $4 billion in reserves while its members continue to pay increasing premiums.

In October, Highmark told the state Insurance Department it plans to increase by about 10 percent the rates on small businesses that renew policies. The insurer said the increase has nothing to do with its plan to build a health care system.

The nonprofit Highmark has declined to say from where the money to pay bondholders would come. If it doesn't use its reserves to leverage financing from banks, it certainly could tap that money.

One thing's for sure: the money won't come from a tree at Highmark's Downtown headquarters. What Highmark should assure is that members aren't paying more in order to front this expensive deal.

I can't tell you how many times Highmark leaders have said that money in reserve is necessary to protect providers and customers. “Should something go wrong, we can still pay that bill for you,” former Highmark CEO Ken Melani told me in 2002 when UPMC complained about its excessive reserves.

Let's just hope all the money doesn't go down the West Penn Allegheny drain.

Luis Fábregas is a staff writer for Trib Total Media. He can be reached at 412-320-7998 or

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