Insurer Highmark acquires first hospital

Pittsburgh-based insurer Highmark closed on a deal for its first hospital under a costly plan to diversify and compete with the region's well-financed and largest health system.

Jefferson Regional Medical Center, in Jefferson Hills, Pa., will receive $100 million for capital projects under the deal, as well as cash for outstanding debt and pension costs, which Moody's Investors Service estimated to be $160 million. Jefferson Regional Medical Center's foundation will also receive $75 million under the deal.

Highmark in 2011 announced plans to expand into hospital operations with the proposed acquisition of West Penn Allegheny Health System—a deal that has struggled as the health system's financial distress intensified—and the insurer went on to reach an agreement with Jefferson Regional. Highmark also entered into talks with St. Vincent Health System of Erie, Pa. No definitive agreement has been reached with St. Vincent, according to a Highmark spokesman.

“Our partnership with Jefferson Regional is a critical step in our efforts to build a new, integrated healthcare delivery system,” said Dr. William Winkenwerder, president and CEO of Highmark, in a news release announcing the deal.

The most significant step, however, remains uncertain as Highmark's increasingly expensive bid for West Penn Allegheny undergoes review by the Pennsylvania Insurance Department, which last week demanded new financial projections for the struggling health system.

The insurance agency said ongoing negotiations to include West Penn Allegheny's rival, University of Pittsburgh Medical Center, in Highmark's health plans beyond 2014 raised concerns about financial projections for West Penn Allegheny. State insurance regulators noted similar concerns were raised by a state senator over patients' demand for West Penn Allegheny services if UPMC remains an option under their insurance plans.

The number of patients admitted to West Penn Allegheny's hospitals also dropped by roughly one-fifth between 2008 and last year, Moody's said. That does not include hospital patients who are now categorized as observation patients, which brings the drop in hospital stays to 28%.

Financial statements released Friday show West Penn Allegheny's financial losses and a drop in patients continued between July and December last year. The health system's operations lost $61.4 million on $764.2 million during the six-month window, compared with $63.9 million on $735.9 million the prior year. Hospital discharges dropped 3.3% during that six-month period in 2012 compared with the same period the prior year.

Highmark said in January that it would increase its investment in West Penn Allegheny to more than $1.1 billion as the health system's financial losses accelerated, a move that likely prevented West Penn Allegheny from entering bankruptcy court and has raised concern among financial analysts. That is expected to include more than $600 million to buy West Penn Allegheny bonds at a discount in a debt restructuring deal reached with investors.