Children's Hospital of Pittsburgh last week rejected an offer of financial assistance from the area's dominant insurer, Highmark Blue Cross and Blue Shield, and announced it would merge with academic powerhouse UPMC Health System.
The rejection put an end to Highmark's latest effort to manipulate hospital competition in the market by playing banker to struggling acute-care facilities. Highmark's bid of up to $100 million to fund a replacement facility for 235-bed Children's was a last-ditch effort to keep the city's only pediatric hospital out of the hands of UPMC, the area's dominant provider.
Highmark spokesman Michael Weinstein said the health plan wants Children's to remain a "free zone." He said UPMC might block access to services there for patients not covered by UPMC's own health plan. Weinstein noted that Children's is the only provider of certain multi-organ transplants and the area's only level-one pediatric trauma center.
"For this market it is the premier hospital for children's care," Weinstein said.
But officials of Children's and UPMC said access is a bogus issue. They said Highmark's real concern is UPMC's continued growth in a market where most hospitals are struggling.
Children's President and Chief Executive Officer Ronald Violi said a patient's access to all services, regardless of insurance, would be maintained after the merger. "Access is sacred to this board," he said.
UPMC has 16 acute-care hospitals, including four specialty hospitals, and a health plan with approximately 300,000 commercial and Medicaid members. Its market share for acute-care services is 39% in Allegheny County and 22% for all of Western Pennsylvania, said Jeffrey Romoff, UPMC President and CEO. Highmark claims 2.8 million enrollees in western Pennsylvania, or 60% to 65% of the non-Medicare market.
"It's a battle of the titans," Romoff said. He added, "I couldn't imagine using Children's as hostage in the battle between an insurer and a provider."
Highmark executives presented their alternative proposal to the Children's board last week as the board met to vote on the merger. Highmark pledged $25 million to build a new hospital plus a matching contribution of up to $25 million based on donations from other businesses. The health plan also was considering a $50 million advance payment for services, Weinstein said.
Instead, Children's announced it would accept a more lucrative deal to join UPMC. The deal is expected to be completed by early October. UPMC will provide $250 million to build a replacement hospital a few blocks from Children's current site. It also pledged $250 million to fund pediatric research over 10 years. The deal would allow Children's to move $200 million of its assets to an endowment that raises funds to support its clinical and research programs.
It isn't the first time Highmark has tried to intervene to maintain provider competition in the Pittsburgh market. Last year, the insurer issued a $125 million subordinated loan to finance the West Penn Allegheny Health System, which was formed by a merger of hospitals from the bankrupt Allegheny, Health, Education and Research Foundation and the Western Pennsylvania Healthcare System.
Romoff said the merger would have a positive impact on pricing. "We should be able to do everything less expensively," he said. That includes financing for the replacement facility, which is to be built by 2005. Romoff said UPMC can use its $4 billion in assets, including $1.8 billion in cash, to obtain capital more cheaply than Children's could get on its own. Children's had an operating profit of $960,000 last year, with revenue of $231.8 million.
Further, Romoff called the merger a "natural" because UPMC faculty provides most of the care at Children's. Both Children's and three of UPMC's hospitals are on the University of Pittsburgh campus.