Skip to main content
Subscribe
  • Sign Up Free
  • Login
  • Subscribe
  • News
    • Current News
    • Providers
    • Insurance
    • Government
    • Finance
    • Technology
    • Safety & Quality
    • Digital Health
    • Transformation
    • ESG
    • People
    • Regional News
    • Digital Edition (Web Version)
    • Patients
    • Operations
    • Care Delivery
    • Payment
    • Midwest
    • Northeast
    • South
    • West
  • Opinion
    • Bold Moves
    • Breaking Bias
    • Commentaries
    • Letters
    • Vital Signs Blog
    • From the Editor
  • Events & Awards
    • Awards
    • Conferences
    • Galas
    • Virtual Briefings
    • Webinars
    • Nominate/Eligibility
    • 100 Most Influential People
    • 50 Most Influential Clinical Executives
    • Best Places to Work in Healthcare
    • Excellence in Governance
    • Health Care Hall of Fame
    • Healthcare Marketing Impact Awards
    • Top 25 Emerging Leaders
    • Top Innovators
    • Diversity in Healthcare
      • - Luminaries
      • - Top 25 Diversity Leaders
      • - Leaders to Watch
    • Women in Healthcare
      • - Luminaries
      • - Top 25 Women Leaders
      • - Women to Watch
    • Digital Health Transformation Summit
    • ESG: The Implementation Imperative Summit
    • Leadership Symposium
    • Social Determinants of Health Symposium
    • Women Leaders in Healthcare Conference
    • Best Places to Work Awards Gala
    • Health Care Hall of Fame Gala
    • Top 25 Diversity Leaders Gala
    • Top 25 Women Leaders Gala
    • - Hospital of the Future
    • - Value Based Care
    • - Hospital at Home
    • - Workplace of the Future
    • - Digital Health
    • - Future of Staffing
    • - Hospital of the Future (Fall)
  • Multimedia
    • Podcast - Beyond the Byline
    • Sponsored Podcast - Healthcare Insider
    • Video Series - The Check Up
    • Sponsored Video Series - One on One
  • Data Center
    • Data Center Home
    • Hospital Financials
    • Staffing & Compensation
    • Quality & Safety
    • Mergers & Acquisitions
    • Data Archive
    • Resource Guide: By the Numbers
    • Surveys
    • Data Points
  • Newsletters
  • MORE+
    • Contact Us
    • Advertise
    • Media Kit
    • Jobs
    • People on the Move
    • Reprints & Licensing
MENU
Breadcrumb
  1. Home
  2. Finance
February 23, 2013 12:00 AM

Highmark's big gamble

Will $1.1 billion bid for West Penn rescue system?

Melanie Evans
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    One of the nation's largest health insurers will acquire its first hospital in a deal expected to close this week, but still unresolved is Highmark's $1.1 billion bid for a distressed health system central to its ambitious expansion plans.

    Also unknown: Whether $1.1 billion will be enough to rescue West Penn Allegheny Health System.

    The Pittsburgh-based health system's deteriorating finances and weak operations have already required Highmark to invest more heavily than originally proposed. Highmark's initial 2011 acquisition plan for West Penn Allegheny was valued at $400 million in grants and loans. But in a move that likely kept the five-hospital system out of bankruptcy, the Pittsburgh-based insurer said in January it would invest a total of $525 million in West Penn Allegheny and borrow another $600 million to buy the health system's bonds.

    “We don't know what their limit would be,” said Steve Zaharuk, senior vice president of Moody's Investors Service's U.S. insurance team. Such a sizable investment will make it difficult to walk away or say no to further cash infusions if the system continues to struggle, he said. And until Highmark receives a regulator's final approval for the deal, the insurer cannot fully assess West Penn Allegheny's operations or pursue strategies that may turn the system around.

    Highmark's deal for West Penn Allegheny won approval in recent weeks from a Pennsylvania court, but consent is also required from the state Insurance Department, which in late January noted Highmark's heightened risk and said a review would likely last until early April, at least.

    The longer the review, the greater the delay to efforts by Highmark to turn around West Penn Allegheny, say credit analysts. “Time gets short,” Zaharuk said.

    West Penn Allegheny's chronic losses accelerated last year as it hemorrhaged $112.5 million on operations, unaudited figures show. Saddled with debt and unable to generate necessary cash, West Penn Allegheny's capital investments have lagged its larger, financially stronger rival in Pittsburgh, the UPMC system, said Lisa Martin, Moody's lead analyst for West Penn Allegheny.

    West Penn Allegheny Health System's credit rating has fallen nearly as far as it can go, and now Highmark is at risk for a downgrade of its credit. Should the health system drain more than has already been committed by Highmark, the insurer's rating could drop more than one notch, Moody's warned. Standard & Poor's said the insurer also faces rating pressure should its financial investment to create an integrated delivery network grow.

    Highmark has also pledged $260 million in a deal for 373-bed Jefferson Regional Medical Center, Jefferson Hills, Pa. The deal won approval from a Pennsylvania court and is expected to close by March 1. And in coming weeks, the insurer is expected to reach a definitive agreement with St. Vincent Health System, based in Erie, Pa.

    Jon Reichert, director of insurance ratings for Standard & Poor's, said West Penn Allegheny's financial performance will be “our primary indicator” of the success of Highmark's strategy.

    West Penn Allegheny's operations have only made a profit for a single year since the system was formed in 1999, according to Moody's. Losses narrowed in the early half of the last decade, and the system posted its only positive margin of 1.3% in 2005 before slipping back into the red. The system's margin last year was negative 7.2%. Any turnaround includes potential hazards. In entering a deal with a distressed company, Highmark risks closing the deal only to uncover problems that did not surface in vetting it, said Tom Cassels, executive director of research and insights for the consulting company the Advisory Board.

    Turning around money-losing hospitals also hinges on the support of physicians and nurses, who can undermine efforts with a “vote of no confidence,” he said. Dissatisfied doctors may leave or direct patients elsewhere. Wholehearted commitment by management to turnaround strategies is also critical, he said.

    Less tangible, but still important, is an acknowledgment of the risks from lenders or others with a stake in the results. Management must also clearly convey strategies to mitigate those risks to investors and others. “The reality is turnarounds don't happen overnight,” he said.

    Trey Crabb, a managing director with Ziegler who oversees the investment bank's healthcare merger and acquisition division, said any deal also raises the risk that managers are distracted by the transaction from their primary business. Highmark's push to create an integrated delivery system will expose the insurer to new businesses, which are related, but still different, he said. The potential gain for such a risky investment is the chance that Highmark acquired West Penn Allegheny at a bargain, which would increase its value should the turnaround succeed, Crabb said.

    Also important is the strategic benefit Highmark is seeking to gain as a rival to UPMC, which owns 11 Pennsylvania hospitals and has its own a health insurance unit, said Standard & Poor's Reichert.

    Highmark's executives have repeatedly cited competition as the reason for its entry into healthcare delivery. “Paramount to our affiliation with West Penn Allegheny is preserving provider competition and choice in healthcare providers for the entire community,” Dr. William Winkenwerder, president and CEO of the insurer said in a news release in January.

    Letter
    to the
    Editor

    Send us a letter

    Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

    Recommended for You
    Copy of 030821-Regionals-Highmark_WEB_i.jpg
    Highmark Q1 net income rose 250% on investment gains
    merger - money - puzzle
    Newly combined Advocate Health sees net gains in first post-merger report
    Most Popular
    1
    More healthcare organizations at risk of credit default, Moody's says
    2
    Centene fills out senior executive team with new president, COO
    3
    SCAN, CareOregon plan to merge into the HealthRight Group
    4
    Blue Cross Blue Shield of Michigan unveils big push that lets physicians take on risk, reap rewards
    5
    Bright Health weighs reverse stock split as delisting looms
    Sponsored Content
    Daily Finance Newsletter: Sign up to receive daily news and data that has a direct impact on the business and financing of healthcare.
    Get Newsletters

    Sign up for enewsletters and alerts to receive breaking news and in-depth coverage of healthcare events and trends, as they happen, right to your inbox.

    Subscribe Today
    MH Magazine Cover

    MH magazine offers content that sheds light on healthcare leaders’ complex choices and touch points—from strategy, governance, leadership development and finance to operations, clinical care, and marketing.

    Subscribe
    Connect with Us
    • LinkedIn
    • Twitter
    • Facebook
    • RSS

    Our Mission

    Modern Healthcare empowers industry leaders to succeed by providing unbiased reporting of the news, insights, analysis and data.

    Contact Us

    (877) 812-1581

    Email us

     

    Resources
    • Contact Us
    • Advertise with Us
    • Ad Choices Ad Choices
    • Sitemap
    Editorial Dept
    • Submission Guidelines
    • Code of Ethics
    • Awards
    • About Us
    Legal
    • Terms and Conditions
    • Privacy Policy
    • Privacy Request
    Modern Healthcare
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • News
      • Current News
      • Providers
      • Insurance
      • Government
      • Finance
      • Technology
      • Safety & Quality
      • Digital Health
      • Transformation
        • Patients
        • Operations
        • Care Delivery
        • Payment
      • ESG
      • People
      • Regional News
        • Midwest
        • Northeast
        • South
        • West
      • Digital Edition (Web Version)
    • Opinion
      • Bold Moves
      • Breaking Bias
      • Commentaries
      • Letters
      • Vital Signs Blog
      • From the Editor
    • Events & Awards
      • Awards
        • Nominate/Eligibility
        • 100 Most Influential People
        • 50 Most Influential Clinical Executives
        • Best Places to Work in Healthcare
        • Excellence in Governance
        • Health Care Hall of Fame
        • Healthcare Marketing Impact Awards
        • Top 25 Emerging Leaders
        • Top Innovators
        • Diversity in Healthcare
          • - Luminaries
          • - Top 25 Diversity Leaders
          • - Leaders to Watch
        • Women in Healthcare
          • - Luminaries
          • - Top 25 Women Leaders
          • - Women to Watch
      • Conferences
        • Digital Health Transformation Summit
        • ESG: The Implementation Imperative Summit
        • Leadership Symposium
        • Social Determinants of Health Symposium
        • Women Leaders in Healthcare Conference
      • Galas
        • Best Places to Work Awards Gala
        • Health Care Hall of Fame Gala
        • Top 25 Diversity Leaders Gala
        • Top 25 Women Leaders Gala
      • Virtual Briefings
        • - Hospital of the Future
        • - Value Based Care
        • - Hospital at Home
        • - Workplace of the Future
        • - Digital Health
        • - Future of Staffing
        • - Hospital of the Future (Fall)
      • Webinars
    • Multimedia
      • Podcast - Beyond the Byline
      • Sponsored Podcast - Healthcare Insider
      • Video Series - The Check Up
      • Sponsored Video Series - One on One
    • Data Center
      • Data Center Home
      • Hospital Financials
      • Staffing & Compensation
      • Quality & Safety
      • Mergers & Acquisitions
      • Data Archive
      • Resource Guide: By the Numbers
      • Surveys
      • Data Points
    • Newsletters
    • MORE+
      • Contact Us
      • Advertise
      • Media Kit
      • Jobs
      • People on the Move
      • Reprints & Licensing