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