High­mark closes the deal

Reg­u­la­tors will closely watch to see if in­surer keeps prom­ises on West Penn

Modern Healthcare - - THE WEEK IN HEALTHCARE - Me­lanie Evans

One of the na­tion’s largest in­sur­ers last week closed on a $1 bil­lion deal to be­come a large in­te­grated de­liv­ery sys­tem with a pledge that newly ac­quired hos­pi­tals and doc­tors would de­liver sav­ings for en­rollees and pa­tients.

As Pitts­burgh-based High­mark moves into the busi­ness of pro­vid­ing health­care, Penn­syl­va­nia in­sur­ance reg­u­la­tors are fol­low­ing the com­pany into that arena to hold the com­pany to its prom­ises. The ven­ture could serve as a nat­u­ral ex­per­i­ment ex­pos­ing whether the in­te­grated net­works can gen­er­ate sig­nif­i­cant sav­ings. The sur­vival of the health sys­tem High­mark just ab­sorbed may de­pend on it.

Last week, High­mark ac­quired West Penn Al­legheny Health Sys­tem af­ter more than a year of le­gal wran­gling and pub­lic fra­cas. The deal was closely watched na­tion­ally as one of the big­gest of sev­eral re­cent trans­ac­tions that seek to con­sol­i­date health­care’s tra­di­tion­ally frag­mented ser­vices. Dr. Wil­liam Winken­werder, High­mark’s pres­i­dent and CEO, said last week the deal would cre­ate one of the na­tion’s largest in­te­grated de­liv­ery net­works. High­mark re­ported $14.8 bil­lion in rev­enue in 2011.

Penn­syl­va­nia’s In­sur­ance Depart­ment set con­di­tions on the ap­proval it granted late last month for High­mark’s deal. The com­pany will have to re­port an­nu­ally on sav­ings achieved by unit­ing in­sur­ance, hos­pi­tals and doc­tors into a sin­gle op­er­a­tion. The con­di­tions un­der­score the chal­lenge such deals present to reg­u­la­tors with limited ju­ris­dic­tion who are tasked with pro­mot­ing con­sumers’ best in­ter­ests as mar­kets con­sol­i­date. The deal also gives Penn­syl­va­nia in­sur­ance reg­u­la­tors over­sight of hos­pi­tal op­er­a­tions by High­mark.

“Our ob­jec­tive was to re­ally hold High­mark to the prom­ises it has made,” said Penn­syl­va­nia In­sur­ance Com­mis­sioner Michael Conse­dine.

The In­sur­ance Depart­ment sought to set con­di­tions that would ex­pand its limited ju­ris­dic­tion over High­mark with new re­port­ing and ap­proval re­quire­ments when High­mark makes large in­vest­ments in hos­pi­tals or med­i­cal groups, Conse­dine said. Trans­ac­tions or op­er­a­tions that do not fall un­der the In­sur­ance Depart­ment’s con­trol may none­the­less threaten the fi­nan­cial sta­bil­ity of the in­surer, and laws have not changed to re­flect that risk.

High­mark now in­cludes an in­sur­ance sub­sidiary, to be known as High­mark Health Ser­vices, and a provider sub­sidiary called the Al­legheny Health Net­work, which will in­clude West Penn Al­legheny Health Sys­tem; Jef­fer­son Re­gional Med­i­cal Cen­ter in Jef­fer­son Hills, Pa.; Al­legheny Clinic, the sys­tem’s med­i­cal group; a group pur­chas­ing or­ga­ni­za­tion; and an ad­min­is­tra­tive ser­vices or­ga­ni­za­tion. High­mark ex­ec­u­tive John Paul was named pres­i­dent and CEO of the

“Our ob­jec­tive was to re­ally hold High­mark to the prom­ises it has made.” —Penn­syl­va­nia In­sur­ance Com­mis­sioner Michael Conse­dine

Al­legheny Health Net­work.

West Penn Al­legheny’s fi­nan­cial in­sta­bil­ity threat­ened to un­ravel the deal and more than dou­bled the cost of the trans­ac­tion for High­mark.

The health sys­tem tried un­suc­cess­fully to break things off as its fi­nances de­te­ri­o­rated and its lead­ers balked at a pos­si­ble debt re­struc­tur­ing in court. High­mark ul­ti­mately reached a deal with the health sys­tems’ in­vestors to buy bonds for 87.5 cents on the dol­lar.

High­mark Chief Fi­nan­cial Of­fi­cer Nanette DeTurk said bond­hold­ers sold 85% of West Penn Al­legheny’s bonds. That cost High­mark $528 mil­lion, and the in­surer has pledged to in­vest as much as an­other $525 mil­lion.

As a con­di­tion of the in­sur­ance depart­ment’s ap­proval, High­mark will have to re­port on four sav­ings mea­sures and its turn­around of West Penn Al­legheny’s fi­nances, which hem­or­rhaged $112.5 mil­lion on rev­enue of $1.6 bil­lion in the fis­cal year ended June 30, 2012.

Bench­marks for sav­ings in­clude whether High­mark’s new in­te­grated net­work has re­duced pre­mi­ums by $3,000 an­nu­ally for a fam­ily of four by 2016 com­pared with pro­jected pre­mi­ums had the deal never oc­curred. High­mark must also re­port per­for­mance against tar­gets to re­duce spend­ing for hos­pi­tal care and out­pa­tient ser­vices by 10% and other pro­jected cost sav­ings.

Still more re­port­ing is re­quired each year on sav­ings across eight cat­e­gories, which High­mark pro­jected would to­tal about $1.1 bil­lion through 2016, ac­cord­ing to con­sul­tants for the in­sur­ance depart­ment. The com­pany said it would pro­duce sav­ings in part by car­ing for pa­tients in low-cost set­tings, re­duc­ing hos­pi­tal vis­its and du­pli­cate tests and use of generic drugs.

If its con­tract with ri­val Pitts­burgh health sys­tem UPMC con­tin­ues be­yond next year, sav­ings tar­get would be lower, at $796 mil­lion.

But that seems un­likely. A UPMC spokesman said in an e-mail that the sys­tem has no in­ten­tion of re­new­ing or ex­tend­ing its con­tract with High­mark. “It is im­por­tant that con­sumers un­der­stand th­ese changes so they can take the steps needed to con­tinue ac­cess­ing their pre­ferred doc­tors and hos­pi­tals,” said UPMC spokesman Paul Wood. UPMC “looks for­ward to com­pet­ing” with High­mark, he said.

If West Penn Al­legheny’s op­er­at­ing losses con­tinue through June 30, 2015, High­mark must sub­mit a cor­rec­tive ac­tion plan. The health sys­tem has earned an op­er­at­ing profit only once since its for­ma­tion in 1999, ac­cord­ing to Moody’s In­vestors Ser­vice. High­mark must also sub­mit plans to turn around losses if it pours an­other $100 mil­lion into the sys­tem through June 30, 2015, and at least two rat­ings agen­cies con­tinue to rate West Penn Al­legheny’s credit as spec­u­la­tive.

High­mark must dis­close West Penn Al­legheny’s fi­nances and key op­er­at­ing statis­tics—in­clud­ing hos­pi­tal vol­ume, which has dwin­dled—ev­ery three months through June 30, 1015.

Winken­werder said ex­ec­u­tives would move quickly to turn around the sys­tem.

Three days af­ter the deal closed, Moody’s down­graded High­mark to Baa2, cit­ing the ad­di­tional debt needed to fi­nance the deal. An­a­lysts said High­mark was at risk to fall fur­ther be­cause of con­cerns it can­not com­pete with UPMC.

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