West Penn Allegheny Health System abruptly broke off its courtship with insurer Highmark, apparently spiking a high-profile deal in the works since June 2011.

The deal attracted national attention as one of a number of acquisitions that would merge payers and providers in unusual alliances intended to adjust to the demands of healthcare reform and market changes.

Officials for the Pittsburgh health system, which has seen its operating losses mount since the deal was announced, said West Penn Allegheny faced bankruptcy under new terms laid out last week by Dr. William Winkenwerder, Highmark's president and CEO.

The breakup comes roughly four months after Highmark named Winkenwerder, a consultant and former Defense Department official, to replace Dr. Kenneth Melani, who was dismissed in April.

“Our impending marriage is over because Highmark is demanding new terms that will alter the course of the West Penn Allegheny Health System in ways far afield from our agreed-to strategic vision,” Jack Isherwood, the system’s board chairman, said as he announced the decision, according to a copy of his remarks. West Penn Allegheny “will begin immediately to identify alternative partners,” he said.

The health system’s decision to walk away from Highmark could further strain an already weak credit rating for the system’s roughly $737 million in outstanding municipal bonds and raises questions about West Penn Allegheny’s financial viability.

Fitch Ratings and Moody’s Investors Service placed West Penn Allegheny on watch for a possible downgrade last Friday. In June, Fitch said West Penn Allegheny’s “viability hinges on the successful execution of the affiliation with Highmark.” Fitch rates the system B+. “If the affiliation agreement is not finalized, a multi-notch negative rating action is likely to occur.”

Moody’s likewise said then that Highmark’s financial support likely prevented West Penn Allegheny from restructuring in the prior year, and analysts said Highmark would probably need to invest more than the $475 million originally promised. Moody’s rates the system Caa1. Standard & Poor’s lowered its rating for the system in May to B- on the system’s weak finances and said Highmark’s deal prevented a lower rating.

A West Penn Allegheny spokeswoman said in an e-mail that the system has “enough cash to operate for the foreseeable future. We are seeking a long-term partner to avoid a restructuring, and we believe options exist.”

Pennsylvania Insurance Commissioner Michael Consedine said in a statement that he “raised significant concerns” after review of regulatory filings “about WPAHS’s projected deficit and inability to meet its bond obligations—in both the short and longer term.” The agency did not seek restructuring in the deal. “We urged the partners to work together to address these issues,” the statement said.

West Penn Allegheny CEO Dr. Keith Ghezzi said Highmark breached terms of their agreement by indicating Highmark would not close on the existing deal and instead would seek restructuring as a condition of continued financial support. The insurer has so far invested $100 million in the system and has loaned West Penn Allegheny another $100 million. The loans convert to grants if Highmark breached the agreement, under terms of the deal.

Ghezzi said the West Penn Allegheny board of directors did not receive any operating plans to justify bankruptcy. Highmark entered into the agreement well aware of West Penn Allegheny’s pension costs and outstanding debt, he said, and operating performance for the year exceeded Highmark’s earlier projections.

West Penn Allegheny lost $87.8 million on operations during the first nine months of its fiscal year compared with $35 million during the same period the prior year. Its financial statements as of March 31 listed its pension obligation as $192.9 million. Ghezzi said operating results improved during the fourth quarter, which ended June 30. Fourth-quarter results are not yet publicly available.

Highmark “categorically denies” the insurer breached its deal, the company said in a statement. “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,” the statement said.

Highmark said in an August filing that it reversed an earlier decision to exclude West Penn Allegheny’s rival, the University of Pittsburgh Medical Center, from its provider network in 2013. Ghezzi said Highmark’s pledge to exclude UPMC from its network—which would increase hospital volume for West Penn Allegheny—was critical to the system’s original decision to enter into the deal.