Highmark completes West Penn deal, announces new system

Highmark, a Pittsburgh-based not-for-profit insurer, swiftly closed on its acquisition of West Penn Allegheny Health System after Pennsylvania's Insurance Department approved the deal, albeit with continued oversight.

The acquisition ends more than a year of contentious public debate, legal fights and regulatory scrutiny of West Penn Allegheny's shaky finances that raised doubts if the deal would survive. With the acquisition, Highmark will join Kaiser Permanente as one of the nation's largest private integrated systems with both insurance and hospital operations, Dr. William Winkenwerder, president and CEO of Highmark, said on a call with reporters.

A new parent company, to be called Highmark, will include an insurance arm and the newly announced Allegheny Health Network, a subsidiary that will include West Penn Allegheny Health System and Jefferson Regional Medical Center in Jefferson Hills, Pa., which the insurer acquired in March, doctors and other health delivery businesses.

Highmark named John Paul, head of its provider division, as president and CEO of the Allegheny Health Network.

Pennsylvania's Insurance Department set conditions on Highmark's acquisition that give the state power to review and sometimes approve Highmark's financial support for West Penn Allegheny, which has ballooned to roughly $1 billion from $400 million since the deal was first proposed. That includes Highmark's tender offer for West Penn Allegheny's bonds, which closed today.

Highmark paid $528 million to acquire roughly 85% of the health system's outstanding bonds at 87.5 cents on the dollar, said Nanette DeTurk, Highmark's CFO.

West Penn Allegheny's weak finances and faltering operations deteriorated as regulators reviewed Highmark's proposed acquisition. Insurers recently required Highmark to submit new projections for its planned turnaround of West Penn Allegheny.

Winkenwerder said Paul and others would move quickly to adopt new turnaround strategies, including actions related to physician alignment, revenue cycle and patient referrals.

Under conditions for the deal, Highmark must review any financial support for its potential impact on policyholders and whether it furthers the insurer's not-for-profit mission. Highmark must notify the state if financial aid totals $100 million within a 12-month period. The state must approve financial aid that exceeds $250 million in the course of a year. West Penn Allegheny's finances must also be reported quarterly though June 30, 2015, and data must include the system's capital budget, salary schedules and volume at its hospitals.

The state will have authority to approve financial donations that are larger than 3% of its surplus “as regards to policyholders” or more than 25% of its net income.

Highmark must also draft a corrective action plan criteria if West Penn Allegheny's deteriorating finances and operations fail to improve if the health system cannot break even by June 30, 2015, or if Highmark must pour another $100 million into the system and West Penn Allegheny continues to receive speculative grade ratings from two ratings agencies though that period.

West Penn Allegheny ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's are among the lowest speculative ratings awarded to borrowers.

“Our objective was to really hold Highmark to the promises it has made” to control healthcare costs, promote competition and innovate, Insurance Commissioner Michael Consedine said in an interview.

The deal was first announced in June 2011 and submitted for approval in November 2011.

Other conditions set by the Insurance Department include state review of executive compensation. A “meaningful portion” of long-term pay to top executives must be “tied to achievement of quantifiable and tangible benefits to policyholders” or the not-for-profit, the Insurance Department said.

Regulators also sought to protect competition.

Conditions set by the Insurance Department require a firewall policy to prevent Highmark and West Penn from sharing rivals' pricing or product information, which could reduce competition. Conditions also prohibit exclusive contracts by Highmark's hospitals, doctors or other providers or contracts longer than five years. The regulator also banned use of deals that guarantee insurers the best terms or price, known as “most favored nation” clauses.

UPMC—a Pittsburgh-based rival to West Penn Allegheny that also owns an insurer—said in a statement that the health system “looks forward to competing” with Highmark's new integrated network. But UPMC won't renew or extend a contract with Highmark that ends in 19 months. “It is important that consumers understand these changes so they can take the steps needed to continue accessing their preferred doctors and hospitals.”

Follow Melanie Evans on Twitter: @MHmevans