High­mark-west Penn deal il­lus­trates the high stakes in in­te­gra­tion game

Modern Healthcare - - Front Page - Front cover photo by Dou­glas Ray

The deal that brings to­gether trou­bled West Penn Al­legheny Health Sys­tem and High­mark could cause big waves in West­ern Penn­syl­va­nia. “We can go to the physi­cians and go to the hos­pi­tals and say, ‘We’re go­ing to start re­im­burs­ing based on qual­ity met­rics, out­comes, and also based on cost ef­fec­tive­ness.’ All of a sud­den, that in­cen­tive of be­ing vol­ume-driven com­pletely goes away,” says Dr. Tony Farah, left, of West Penn Al­legheny.

High­mark’s pro­posed ac­qui­si­tion of West Penn Al­legheny Health Sys­tem ex­ac­er­bates what has al­ready been a com­bat­ive re­la­tion­ship be­tween the in­surer and West Penn Al­legheny ri­val, UPMC. The deal also de­mon- strates how much High­mark is will­ing to spend to en­sure its mar­ket po­si­tion in West­ern Penn­syl­va­nia.

The af­fil­i­a­tion agree­ment, an­nounced last week, calls for High­mark to ac­quire West Penn Al­legheny, the fi­nan­cially trou­bled five- hos­pi­tal sys­tem. Terms in­cludes a $50 mil­lion grant, a $75 mil­lion ed­u­ca­tion grant and up to $350 mil­lion over four years.

The deal could have a sig­nif­i­cant ef­fect on the Pitts­burgh health­care mar­ket, which is served by only two health sys­tems: West Penn Al­legheny and UPMC, a 10-hos­pi­tal sys­tem with its own health plan.

David Cyganowski, a man­ag­ing di­rec­tor at Cit­i­group, called the deal a “gamechanger” for the in­dus­try, not­ing the lim­ited num­ber of health in­sur­ers to opt into health­care de­liv­ery in re­cent years. “A deal of this sig­nif­i­cance and this size is go­ing to cause in­sur­ers to pause and re­assess,” he said. “Up un­til (this deal an­nounce­ment), hos­pi­tals were seek­ing out other hos­pi­tals for cap­i­tal part­ners. West Penn Al­legheny sought out a health in­surer for its cap­i­tal part­ner—that’s the sig­nif­i­cance of it all.”

Con­tract ne­go­ti­a­tions be­tween High­mark and UPMC had dis­in­te­grated this year and their cur­rent 10-year con­tract is ex­pected to ex­pire June 30, 2012. “We felt that it was im­por­tant that (West Penn Al­legheny) needed to sur­vive, that we did pre­serve a choice and we did con­tinue to al­low competition in the mar­ket­place,” said Deb­o­rah Rice, ex­ec­u­tive vice pres­i­dent of health ser­vices at Pitts­burgh-based High­mark.

In the fis­cal year end­ing June 30, 2010, UPMC said rev­enue in­creased to $8 bil­lion and the health sys­tem’s op­er­at­ing in­come also grew, to $240 mil­lion. West Penn Al­legheny re­ported $1.6 bil­lion in rev­enue and a $19 mil­lion op­er­at­ing loss for fis­cal 2010, also end­ing June 30.

“West Penn has been the No. 2 player with very healthy mar­ket share for the past 10 years, but they’ve been con­strained by cap­i­tal,” Cyganowski said. “They didn’t have

West Penn Hos­pi­tal would have been closed in Septem­ber with­out a cap­i­tal part­ner, ex­ec­u­tives said.

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