PITTSBURGH - In a change of course that left a city and its healthcare community stunned, West Penn Allegheny Health System in late September announced it would look for a new buyer for the financially strapped health system saying insurer Highmark had breached its 2011 agreement to acquire it for $475 million.
According to West Penn Allegheny, Highmark had insisted in a joint meeting of the companies' boards of directors that the health system enter bankruptcy in order to restructure its debt load as a condition of closing the deal.
"Part of the rationale is they wanted a reduction in the purchase price even after they had already singed a binding legal agreement," said West Penn Allegheny's interim CEO Keith Gezzi, MD. "And they said they were concerned about West Penn Allegheny's debt load."
WPAHS's contention the deal is off set off a round of legal maneuvers by both sides. Highmark almost immediately sought to enjoin WPAHS from courting new suitors; West Penn Allegheny counter-sued contending, among other things, that changes that the health system has undergone under the agreement with Highmark have hurt its value to other potential suitors and it should be compensated for the difference between the original Highmark price and the price any other buyer would offer.
According to the WPAHS court filing, the legal action by Highmark is simply "an attempt to prevent West Penn Allegheny from determining what options other than bankruptcy exist."
But Highmark has summarily rejected WPAHS claims that it was insisting on bankruptcy as the only way forward for the affiliation. "Highmark categorically denies the WPAHS claim that Highmark has breached the affiliation agreement," read a statement on the Highmark website after it filed the court papers. "Highmark has strived to work collaboratively with WPAHS to develop a mutually agreed upon restructuring of WPAHS' obligations that significantly improves the health system's financial condition and creates a strong foundation for success in the long term..."
Highmark may have some backing for its contention it did not breach the agreement via an analysis of the original deal by Bank of America Merrill Lynch. In an opinion published Oct. 12, for investors and bond holders Bank of America noted that "a material inaccuracy or breach of a representation or warranty made by either party is cause for termination, but the performance of activities that one side does not like is not listed as such."
There may be other mitigating factors that caused WPAHS to contend the offer was breached, however, most notably the assertion by those in the late September meeting of both company boards in which West Penn Allegheny directors said they were told by Highmark they didn't intend to close on the deal even if it received regulatory approval.
"Bank of America's discussion of the breach unfortunately does not take this vital fact into consideration," said West Penn Allegheny spokeswoman Kelly Sorice in a report published in the Pittsburgh Tribune-Review.
Yet while the two sides wrangle the clock is ticking on West Penn Allegheny. According to various estimates, the health system only has between 50 to 60 days of operating capital and its mountain of debt estimated to be more than $800 billion, including about $700 billion in high interest junk bonds, is a major roadblock to attracting a new suitor.
Meantime, the city of Pittsburgh holds its collective breath. A WPAHS failure resulting in a chapter 7 bankruptcy and subsequent liquidation would leave western Pennsylvania with only one dominant health network: UPMC. And that dominant position could likely draw the attention of the Federal Trade Commission, which could view UPMC as a monopoly, said Jan Jennings, president and CEO of Pittsburgh-based consultancy American Healthcare Solutions.
"From a business point of view, I can't imagine anything worse for this town than for UPMC, West Penn Allegheny and Highmark not to find a way to coexist," said Jennings. "Pittsburgh underwent an amazing Renaissance from a smokestack industry to an economy based on healthcare and higher education and to see all three of them challenged by extant circumstances is very troubling."