Highmark Health braces for divorce from UPMC

Highmark Health, the parent of health insurer Highmark and its eight-hospital network, continues to reshape its organization as it gears up for a split with the University of Pittsburgh Medical Center in 2019.

Highmark and UPMC are pitted in an arms race as they look to maintain a competitive edge in the rapidly consolidating Pennsylvania market. Both are targeting certain markets and service lines across the state as their contract expires in June 2019.

"It is very much a chess game with them and, now with the understanding that they are going their separate ways, I think it is a race to see which can strengthen and build their network as quickly as possible," said Ken Marlow, chair of the healthcare department at law firm Waller Lansden Dortch & Davis.

Highmark's Allegheny Health Network hospital chain has been expanding to prepare for its upcoming divorce with UPMC, which will ultimately create narrower networks. In June 2019, UPMC will sever most business ties with Highmark. Seven UPMC hospitals, outside of the Children's Hospital of Pittsburgh, will exit the Highmark network, while the children's hospital will continue to be part of the network through 2022. UPMC's Mercy in Pittsburgh exited the network in 2016.

One of Highmark's latest deals involved a partnership with Hershey, Pa.-based academic health system Penn State Health. It will help Penn State Health bolster its primary, specialty and acute care locations across central Pennsylvania to better manage population health goals while Pittsburgh-based Highmark Health will expand outside of Pennsylvania's major cities.

The partnership, announced Dec. 15, will give consumers easier access to care as they demand more convenient options, said Dr. A. Craig Hillemeier, CEO of Penn State Health.

"Both of our organizations are committed to the belief that they shouldn't have to travel two to three hours for care," he said in a statement.

Highmark Health and Danville, Pa.-based integrated health system Geisinger also signed a letter of intent in May to form a joint venture. Highmark President Deborah Rice-Johnson said the agreement with Geisinger will allow it to better compete with UPMC.

"We know how UPMC has behaved in other markets is causing higher costs for healthcare services," she previously told Modern Healthcare.

Provider-owned insurer UPMC Health Plan formed a joint venture in late 2016 with Reading Health System to offer health insurance to employers and individuals in southeastern Pennsylvania. The venture introduced a range of insurance options in 2017 including Medicare Advantage, Medicaid, individual, fully insured and self-insured group, special needs and children's health insurance plans.

UPMC finalized its merger with fellow Harrisburg-based system PinnacleHealth in September. UPMC, which owns more than 30 hospitals, also got four Pennsylvania hospitals and medical centers that Pinnacle acquired from Community Health Systems in a separate transaction. Penn State's planned merger with PinnacleHealth fell through in October 2016 after antitrust regulators challenged the deal.

It would be virtually impossible for UPMC to do a horizontal merger, so this was a way for them to get more provider assets while strengthening their health plan in central Pennsylvania, said Joe Lupica, chairman of Newpoint Healthcare Advisors.

"If one of them leaps into a market, the other will be right behind them," he said. "UPMC had a presence in central Pennsylvania, but what allowed them to jump in so quickly is that Pinnacle made a bold move with CHS hospitals and needed a capital partner quickly."

Highmark Health responded with a Penn State affiliation and a $1 billion plan to grow its Allegheny Health network, including a new hospital in Pittsburgh's North Hills suburbs, four community hospitals and renovating its current hospitals. It also committed $315 million to a new cancer institute at its flagship hospital in Pittsburgh.

In November, UPMC announced plans to build three specialty hospitals in the Pittsburgh area that will feature heart and transplant, cancer, and vision and rehabilitation service lines.

"You are seeing with these regional networks that they have identified certain service lines," Marlow said. "They have the added benefit of an insurance and provider arm that creates the opportunity for greater transparency and data, better quality of care, spreading expenses and providing leverage in capital improvements and vendor relationships while increasing their network of physicians."

When providers and insurers work closer together, they typically want to keep premiums low and do not have an incentive to increase healthcare costs, said Paul Ginsburg, director of the Center for Health Policy at Brookings Institution and director of public policy at the USC Schaeffer Center for Health Policy and Economics. But there may be some hospital consolidation issues with organizations as big as Highmark and UPMC, he said.

"I see some real upside in closer relationships between plans and providers that can lead to smoother coordination of care and fostering alternative payment approaches—big picture stuff," Ginsburg said. "But western Pennsylvania is overwhelmed by the sheer nature of the hospital competition between Highmark and UPMC."

The provider-insurer integration mirrors deals including CVS and Aetna and UnitedHealth Group and DaVita. Delivering cost-effective, efficient care through an integrated model will become more valuable as organizations take on more risk and embrace payment models that tie reimbursement to outcomes, especially for patients with chronic conditions. Partnerships and mergers could accelerate that transition as companies build data analytics tools, integrate IT platforms, and hire additional staff to try to improve coordination, reduce variation and redundancy, and deliver better outcomes at lower costs.

Collaboration between providers and insurers could unlock helpful data, and more of these types of vertical integrations will come into play, experts said. Providers could leverage more robust demographic information, utilization patterns and patient behavior to improve preventative care.

Highmark Health, which employs more than 40,000 people nationwide and has 2,800 affiliated physicians, said it is the second-largest integrated healthcare delivery and financing network in the nation based on revenue. Highmark and its subsidiaries and affiliates provide health insurance to about 7 million people. Its eight hospitals are predominantly spread throughout Pittsburgh and Erie.

UPMC employs about 80,000 people and more than 5,700 affiliated physicians across 30 hospitals and 600-plus doctors' offices and outpatient sites. It has a 41% medical-surgical market share in western Pennsylvania, according to the company's website. About 3.2 million members are covered by UPMC's health insurance.

"This rivalry between the two is remarkable and unique because when you look at the rest of these transactions, most were more horizontal mergers for distressed assets," Marlow said.

An edited version of this story can also be found in Modern Healthcare's Jan. 1 print edition.