June 18--Highmark Inc. will need to spend more than the $475 million it committed to West Penn Allegheny Health System if it wants to turn around the struggling hospital network, a credit rating company warns.

West Penn Allegheny "will need more capital and/or operating support over the next two years," according to a report from Moody's Investors Service. Highmark, the state's largest health insurer, gave West Penn Allegheny half of the $400 million in grants and loans that are part of its proposed acquisition, which includes $75 million to establish a medical school.

"Highmark will be willing and motivated to provide further support," Moody's said.

Highmark spokesman Michael Weinstein declined to comment on Monday. The Tribune-Review could not reach West Penn Allegheny spokeswoman Kelly Sorice.

Moody's said the five-hospital health system has significant financial challenges: uncertainty about Highmark's strategy to expand the system, large operating losses, falling patient volume, a weak cash position, heavy competition from UPMC and other issues.

West Penn Allegheny's interim CEO, Dr. Keith Ghezzi, said in February that the system could achieve profitability in about two years.

It reported a $24 million loss from operations in the January-March quarter, an improvement from a $37 million operating loss in the previous quarter. Moody's said, "It is too early to determine whether further improvement is achievable."

The system posted more than $180 million in operating losses during its past three financial years. Its auditors last year expressed skepticism about its survival though this fiscal year, which ends June 30. Through the first nine months of the fiscal year, West Penn Allegheny posted a loss from operations of $87.8 million and a net loss of $75.7 million.

With money from Highmark, West Penn Allegheny is renovating West Penn Hospital in Bloomfield and Forbes Regional Hospital in Monroeville. Though patient volume fell 8 percent in the nine months, Moody's noted that volume at West Penn Hospital increased recently because of the addition of private rooms and a remodeled emergency department.

Jan Jennings, CEO of American Healthcare Solutions, a Downtown consulting firm, believes Highmark can meet its two-year goal of turning around the health system without committing more money.

"Anything that (Moody's) would say, with respect to a commentary, I would expect to be negative, whether it's accurate or not," Jennings said. "It's just a guess on their part. ... They don't know the Pittsburgh market."

The Trib could not reach the Moody's analysts who wrote the report.

Highmark's acquisition awaits approval from the state Insurance Department. The insurer prevented the hospital system from sliding into bankruptcy last year, but Moody's said it will maintain a negative outlook on the system's credit rating, which is in junk bond status, until it sees greater evidence of improvement.

Since announcing the planned acquisition, Highmark has said it will spend an additional $500 million to buy private doctor practices, build outpatient centers across the region and partner with other hospital systems. Experts believe those changes could help increase patient volume.

Last week Highmark said it would form a "strategic partnership" with Jefferson Regional Medical Center, a deal worth at least $275 million. The 373-bed hospital in Jefferson Hills would become a "southern hub" for Highmark's medical provider network, which the insurer is building to compete with UPMC.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or anixon@tribweb.com.

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