The Definitive Blog

2013-04-30 – Highmark buys West Penn Allegheny Health System

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Now the real work begins for Highmark Inc.

The state approval of the health insurer’s $1.1 billion bid to buy West Penn Allegheny Health System shifts the focus from tens of thousands of pages of planning documents to the process of rebuilding Pittsburgh’s moribund No. 2 hospital chain.

“They’re going to have to do something that no one has been able to do in a decade: Make West Penn work,” said Steve Foreman, associate professor of health care administration at Robert Morris University in Moon. “And they’re probably going to be blamed for any untoward events that occur, such as increasing health premiums, failure to contract with UPMC and/or the closure of multiple community hospitals.”

The Pennsylvania Department of Insurance approval marked the final piece Highmark needed to advance an ambitious strategy to compete head-to-head with UPMC, the largest hospital network in Western Pennsylvania.

“The community knew what was at stake if West Penn Allegheny Health System didn’t survive,” said Highmark’s CEO, Dr. William Winkenwerder. “It will not only survive, it will be revitalized.”

Anchored by West Penn Allegheny, the system will be called Allegheny Health Network, Highmark officials said. It will be led by John Paul, a former UPMC executive who for two years has worked at Highmark to build the network.

As president and CEO, Paul said his priority will be to build a patient-centered network with affordable prices.

“When we do it right, we’ll set the template for the whole country,” Paul said.

The deal was critical for the Pittsburgh area. Highmark, headquartered Downtown in Fifth Avenue Place, is the state’s largest health insurance company, with about 5 million members, $15.2 billion in annual revenue and $4.1 billion in reserve. West Penn Allegheny owns five hospitals in the Pittsburgh area and employs about 12,000 people.

Nevertheless, the state’s approval didn’t happen easily. The insurance department since November 2011 reviewed several versions of the deal, including the latest submitted in January.

Some conditions the state imposed are that West Penn Allegheny not share confidential information of competing insurers with Highmark; that Highmark not influence West Penn Allegheny’s negotiations with other insurers, or limit its contracts with other insurers; that West Penn Allegheny executives tie their compensation to the system’s performance; and that Highmark create a transition plan if it cannot secure a reimbursement contract with UPMC beyond 2014.

The last condition appears to be the most thorny challenge. UPMC has given no indication it will strike a contract with Highmark and its Blue Cross-Blue Shield customers. The contract would give Highmark members access to all UPMC hospitals. UPMC released a statement urging Highmark to establish a transition plan “as there will be no new UPMC contract or extension when the current one expires in just 19 months.”

Michael Consedine, Pennsylvania’s insurance commissioner, told the Tribune-Review he is prepared to impose other conditions on Highmark if it fails to meet the conditional requirements designed to protect consumers and Highmark’s stability.

“We are not issuing this today and washing our hands of what happens in the marketplace after the order goes into effect,” Consedine said. “A lot of these conditions are really designed to keep the department in the loop as to how this whole transaction plays out.”

Cathy Stoddard, president of the SEIU Healthcare Pennsylvania chapter that represents nurses and service workers at Allegheny General, was relieved that the deal had been approved.

“Now we can focus on the patients,” Stoddard said. “There’s nothing more valuable than coming to work every day knowing you have the resources and the leadership you need.”

State approval took effect immediately. Highmark had asked for a decision by Tuesday, when its agreements with West Penn Allegheny and the struggling health system’s bondholders expire.

To avoid a West Penn Allegheny bankruptcy, Highmark struck a deal to buy about $710 million in bonds from investors at a discounted price. The insurer said on Monday that it finalized agreements to purchase $604.2 million of the bonds, or about 85 percent of the outstanding principal amount.

Highmark is giving West Penn Allegheny $475 million in grants and loans to help boost the system’s finances and operations.

Gov. Tom Corbett said Highmark’s acquisition of West Penn Allegheny “is an important step toward” improving health care access, quality and affordability in Western Pennsylvania.

“This affiliation also protects thousands of jobs of hardworking people who provide critical care in our local communities,” Corbett said.

May 14, 2013