West Penn Allegheny Health System announced last Friday that it is canceling the $475 million affiliation agreement with Highmark Inc. over demands by the region's dominant insurer that the health system enter bankruptcy proceedings in order to move forward with the deal.
When it was announced last November, the deal was seen as a saving grace for WPAHS, which had been closing departments and wings of its hospitals in order to survive amid decline patient volumes, continued operating losses and a significant debt burden.
According to Keith Gezzi, interim CEO of West Penn Allegheny, management of the health system first became aware Highmark was cooling on the deal at an Aug. 30 meeting in which Highmark said it was interested in modifying the affiliation agreement.
"West Penn Allegheny is willing to work with Highmark to find a better alternative to Highmark's new deal," 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."
While the main bone of contention is Highmark's insistence that WPAHS enter bankruptcy, it went beyond that, according to Gezzi. "Beyond that, it is also the fact that Highmark's CEO and board chair indicated to us that they would not consummate the current deal even if it was approved by the insurance commissioner and that is a clear breach," Gezzi told Healthcare Finance News.
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 Gezzi, the real purpose of the demand by Highmark is to lower the acquisition price it agreed to last November. It presented its new proposal to WPAHS management in a meeting last Thursday and it took less than 24 hours for the health system's board to declare the deal dead, based on these demands.
"Simply put, the stark financial terms that were laid out to our board yesterday by (Highmark CEO) 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 in the press conference.
Highmark has only released a single statement on West Penn Allegheny's scuttling of the deal. But it would appear that the deal, brokered by former Highmark CEO Ken Melani, as a means to protect itself from the expected expiration of its contract with the region's dominant health network UPMC, is not favored by its new CEO William Winkenwerder, MD.
Winkenwerder was named the company's new CEO in early June and stepped into the role only about six weeks ago.
According to Isherwood, the issue of West Penn's debt, which is currently estimated to be $800 million, 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.
"Highmark had opportunity to do extensive due diligence on the health system before it signed the agreement and in my professional experience some of the most in depth due diligence I have seen," Gezzi said. "They knew of the health system's debt burden, they knew of the health system's operating challenges and they knew of the health systems' pension liability. None of this is new information."
To date, Highmark has provided $200 million in grants to help make improvements in WPAHS. One result of the infusion of cash from Highmark has been to re-open the emergency department at 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 its 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 a way to increase discharges and begin to right the ship.
But some of the projections in terms of patient volume and physician recruitment have gone more slowly than anticipated, Gezzi noted. "But despite this, due to maintaining expenses, we were able to better the projections (Highmark) submitted to the insurance commissioner."
A decision for approval of the deal from the Pennsylvania Insurance Department, which Highmark predicted earlier this year would occur in October, has been lagging. 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 would further build out Highmark's footprint as a healthcare provider and to the hiring of Winkenwerder.
It was also likely delayed by the unexpected extension of Highmark's contract with UPMC through 2014 announced earlier this year, a move Gezzi said has not allowed for the significant increases in patient volume at WPAHS as originally projected last November.
Regardless, Gezzi noted, the health system has "fulfilled all of our obligations under the affiliation agreement and did what Highmark asked us to do in terms of investment in clinical programs and investment in facilities."
Now, the health system is back to square one, albeit somewhat revitalized by the money already infused by Highmark. Gezzi said the company is now actively engaged in trying to find another suitor but is also leaving the door open for Highmark.
"We are going to actively engage in identifying other partners for West Pen Allegheny Health System although we remain committed to our partnership with Highmark," said Gezzi. "Highmark is a large and high-quality insurer in the region and we represent a significant portion of their patients base."