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Highmark poised to buy West Penn

Luis Fábregas
| Saturday, June 25, 2011

Highmark Inc. is expected to announce as early as next week that it will acquire financially troubled West Penn Allegheny Health System for about $500 million and assume full control over the region's second-largest hospital network, the Tribune-Review has learned.

West Penn Allegheny will become a subsidiary of Highmark, which will assume about $1 billion in liabilities from the health system, including pension plan obligations of more than $250 million, sources told the newspaper.

The unprecedented buyout will set the stage for an all-out battle between Highmark, the state's largest health insurer with more than 3 million members in Western Pennsylvania alone, and juggernaut UPMC, the region's largest health care provider with the most hospital beds and doctors under contract and its own insurance plan.

The rivals will compete head-to-head for subscribers and patients, who likely will be forced to choose between the two.

"It might be a good thing, but it's going to drive a wedge into the community," said Jan Jennings, president of the Downtown consulting firm American Healthcare Solutions. "There is confusion in this community that is absolutely unnecessary."

UPMC owns 19 hospitals in Western Pennsylvania and one in Italy. It posted operating revenue of $8 billion in 2010. UPMC halted contract negotiations with Highmark in early May when word of talks between the insurer and West Penn Allegheny became public.

The contract between UPMC and Highmark expires June 30, 2012. Without it, Highmark members will not have access to most UPMC hospitals unless they pay out-of-network fees.

UPMC spokesman Paul Wood told the Trib this week that the health system plans no further talks with Highmark, whose leaders have criticized UPMC for allegedly asking for a 40 percent increase in its $2 billion commercial contracts.

"The discussions broke off before any numbers were talked about," said Wood, who added that UPMC charged increases of only 2.5 percent annually to Highmark in recent years.

To prepare for a break with Highmark, UPMC in recent months aligned itself with four national insurance carriers that had little or no presence in Western Pennsylvania. Its health insurer, the UPMC Health Plan, has grown steadily and has more than 1.5 million members.

An announcement about the Highmark-West Penn Allegheny alliance could be made as early as Monday, after a meeting of West Penn Allegheny's board of directors.

It is unclear whether Highmark will attach its name to the system. West Penn Allegheny officials in the past said they planned to change the name.

Spokespeople at Highmark and West Penn Allegheny declined comment. Before their union is sealed, the two organizations must complete a definitive agreement and go through regulatory hurdles, including approval from the Pennsylvania insurance commissioner.

State Sen. Jim Ferlo, D-Highland Park, told the Trib this month that Insurance Commissioner Michael Consedine agreed to hold a public question-and-answer session in Pittsburgh if the Highmark plan to acquire West Penn Allegheny moves forward.

The management and leadership of West Penn Allegheny, which employs more than 13,000, rests in the hands of the West Penn board, although Highmark could make changes to the health system's top management team once the buyout is final. Board Chair David L. McClenahan did not return a call for comment.

Highmark is still talking with The Cleveland Clinic and other out-of-state providers about potential partnerships, but those negotiations will not be part of the buyout, the Trib has learned. The insurer reached out to nationally known providers, such as Johns Hopkins Hospital in Baltimore, about potential collaborations.

West Penn Allegheny posted operating losses of more than $48 million during the first nine months of the 2011 fiscal year, which ends June 30. Its financial woes include $90 million in losses over the past two years that prompted the consolidation of Pittsburgh flagships Allegheny General Hospital in the North Side and West Penn Hospital in Bloomfield.

West Penn Hospital shut down its emergency department and moved many services to Allegheny General.

The integration of those two hospitals led to more than $15 million in restructuring costs, including severance packages and consulting fees during the first three quarters of fiscal 2011, according to the health system's latest financial report.

In addition to those hospitals, the health system includes Allegheny Valley Hospital in Natrona Heights, Forbes Regional Hospital in Monroeville and Canonsburg General Hospital. The former Suburban General Hospital in Bellevue -- now Allegheny General Suburban campus -- is an outpatient care facility with no inpatient beds.

Financial turmoil is not new at West Penn Allegheny, which rose from the ashes of the bankrupt Allegheny Health Education and Research Foundation. AHERF included physician practices, a university in Philadelphia and several of the West Penn Allegheny hospitals. The $1.3 billion bankruptcy in 1998 became the largest failure of a nonprofit organization in the United States.

It is not the first time that Highmark, whose profit last year surged 146 percent to $462.5 million, bailed out West Penn Allegheny. During the past 10 years, the insurer provided a $125 million loan, which West Penn Allegheny repaid, and $50 million in grants.

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