West Penn Allegheny snuffs Highmark affiliation

Saying insurer Highmark Inc. has breached their $475 million affiliation agreement, West Penn Allegheny Health System on Friday announced that it was walking away from the deal and would be "exploring new options for its future direction."

According to a West Penn press release, the affiliation agreement was breached by Highmark as a result of its "unequivocal" position that it would not close on the deal even if it received approval from state regulators. Further, the provider stated, it was opposed to Highmark's insistence that WPAHS restructure its operation through bankruptcy.

"West Penn Allegheny is willing to work with Highmark to find a better alternative to Highmark's new deal bankruptcy," said Jack Isherwood, board chairman of WPAHS, in a press conference announcing the deal was off. "To us, however, bankruptcy is not the first option, it's the last option."

Meanwhile, Pittsburgh-based Highmark, the region's dominant insurer, denies that it has breached the agreement to join the two entities.

"Highmark continues to believe that an affiliation between Highmark and WPAHS is in the best interests of both parties, and more importantly of the entire community -- the physicians and employees of WPAHS, Highmark plan members, employers and all parties," read a statement posted on the company website. "We have been working in good faith with WPAHS to move forward our proposed affiliation in a way that creates a strong foundation for success. We believe that we have made substantial progress in this regard, especially in recent weeks."

That view, apparently, is not shared by the management at West Penn. According to the company, Highmark recently brought forward new terms to the deal, ones that were materially different than the original terms proposed, which, on the surface, appear to have been a result of Highmark's hiring of new CEO William Winkenwerder.

"Simply put, the stark financial terms that were laid out to our board yesterday by Dr. William Winkenwerder and his advisors bear no resemblance to the alliance and common purpose that was articulated on June 28 and November 1, 2011," Isherwood stated.

According to Isherwood, the issue of West Penn's debt, which is currently estimated to be $800 million to $1 billion, has become an issue for Highmark, despite the fact its debt has remained steady and is at roughly the same level it was when Highmark first entered the deal.

The only additional liability incurred by West Penn has been in the form of a $100 million loan provided by Highmark. Highmark has also provided West Penn with a $100 million grant. One result of the infusion of cash from Highmark has been to enable the provider to reopen the emergency department at its flagship West Penn Hospital, as well as to begin a revitalization of its Forbes Regional Medical Center, located in Monroeville, Pa., just east of Pittsburgh.

These activities were seen as vital to the health of West Penn, which has recorded operating losses in each of the past five years and declining discharge numbers the past three years. Reopening the ED and other investments that have also allowed the six-hospital system to recruit new physicians were seen as way to increase discharges and begin to right the ship.

According to Isherwood, that turnaround has been evident based on those efforts as well as the management of interim CEO Keith Ghezzi, MD. "Our operating performance has improved considerably and remains on a positive trajectory," Isherwood noted at the press conference.

If Highmark was looking to give a reason to get out of the agreement, it wouldn't be apparent based on its recent activities. According to a report in the Pittsburgh Post-Gazette published in late August, the insurer was actively recruiting a new executive team to run the health system, which it hoped to have in place within 90 days of the closing of a deal with West Penn.

But a decision for approval of the deal from the Pennsylvania Insurance Department, which Highmark predicted earlier this year would occur in October, will likely take longer. The delay is likely due to Highmark's announcement in June that it has entered into a $275 million affiliation agreement with Jefferson Regional Hospital, a move that would further build out Highmark's footprint as a healthcare provider.