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Federal investigators take look at Highmark's acquisition plans

| Sunday, Feb. 19, 2012

Federal investigators are scrutinizing the proposed acquisition of West Penn Allegheny Health System by Highmark Inc. to determine if it violates antitrust laws, according to documents the Tribune-Review obtained on Saturday.

U.S. Department of Justice officials are seeking documents related to the acquisition as part of their investigation into potential violations of the Sherman and Clayton acts, antitrust laws that prohibit corporations from engaging in anti-competitive behaviors such as merging to create a monopoly and price fixing.

Notices describing the investigation mark the first time that federal authorities have acknowledged they are delving into potential antitrust violations that, if proved, could slow or derail plans by Highmark, the state's largest health insurer, to acquire struggling West Penn Allegheny in a $475 million deal.

A Highmark source said the insurer is confident the investigation will raise no objections to its acquisition. Highmark expects the investigation to conclude as early as next month.

Dan Laurent, a West Penn Allegheny spokesman, declined to comment "on any inquiries by the DOJ" about the acquisition.

UPMC spokesman Paul Wood said the hospital giant is cooperating with the investigation. He acknowledged receiving a notice that orders UPMC to hand over documents regarding the acquisition by Feb. 29.

"The Justice Department wants to determine whether acquiring WPAHS, while still contracting with UPMC, would give Highmark even more power to control the pricing of hospital services and to keep rival insurers out of Western Pennsylvania," Wood said in a statement.

"One question raised in the investigation is whether Highmark should even be allowed to have a contract with UPMC after Highmark's acquisition of WPAHS is completed," he said.

The investigation is significant because the Department of Justice does not investigate all such acquisitions as a matter of routine, said David Herring, a law professor at the University of Pittsburgh.

"They are somewhat selective," he said.

It's unusual that the Highmark acquisition would prompt an investigation because, Herring said, "you would think that this merger would improve competition."

"It looks like they're (UPMC and Highmark) getting ready to compete hard, which is what the antitrust laws would want," he said.

This is not the first time the acquisition has attracted antitrust concerns.

In December, U.S. District Court Judge Arthur Schwab ordered almost all of the affiliation agreement between Highmark and WPAHS to be made public.

In his order, Schwab wrote: "If UPMC continues its contractual relationship with Highmark, then arguably Highmark would be in control of, in whole or in part, or at least influence, pricing at the two dominant hospital systems in this region, potentially leading to further antitrust concerns."

Highmark began pursuing an acquisition of West Penn Allegheny during spring 2011.

The two organizations reached agreement on the $475 million deal in November, triggering regulatory review by the state Insurance Department, the state Attorney General's Office and the Internal Revenue Service.

That review may not be completed until autumn at the earliest, state officials have predicted. The CEOs of West Penn Allegheny and Highmark have been lobbying regulators to complete it this summer because of worries that the health system could be bankrupt by July.

Since April, Highmark has given West Penn Allegheny $175 million through grants, loans and an advance, though the health system did not report a $50 million loan and a $50 million grant in November as income on its latest financial report.

Highmark officials have said they stepped in to prop up the failing health system to preserve competition for health care services in the Pittsburgh market and to keep UPMC, the region's largest hospital system with 19 hospitals and more than 3,200 doctors, from extending its domination.

UPMC, which last spring was in negotiations with Highmark on new reimbursement contracts, now refuses to contract with the insurer.

UPMC CEO Jeffrey Romoff has said there will be no new contract because Highmark will be a direct competitor once it acquires West Penn Allegheny.

The stalemate means Highmark members in Western Pennsylvania will lose access to UPMC's hospitals and doctors after June 30, 2013.

Legal entanglements and allegations of anti-competitive behavior stretch back years before this latest dispute.

UPMC and Highmark were subjects of a Justice Department inquiry that started in 2007. Federal investigators began looking at the two organizations as part of a national probe into health care competition.

In September, Highmark and UPMC said they were no longer under investigation.

Both organizations are giants in the local health care market. UPMC performs nearly 60 percent of all inpatient medical procedures in Allegheny County. Highmark controls about 65 percent of the region's health insurance market.

West Penn Allegheny accused UPMC and Highmark of anti-competitive practices in a 2009 lawsuit. Highmark was dropped from the lawsuit in November. West Penn Allegheny has asked to amend the lawsuit to accuse UPMC of predatory business practices that have put West Penn Allegheny in financial hardship.

Highmark also is suing UPMC, alleging the health system engaged in false advertising.

The contract dispute has produced several proposals from state lawmakers seeking to keep Highmark and UPMC from ending their relationship next year.

Gov. Tom Corbett stepped into the fray in December with a mediator, which produced an agreement extending the termination of physician contracts until June 30, 2013. Those pacts had been set to end this June.

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