Jan. 28--Standard & Poor's Ratings Services downgraded its outlook on Highmark Inc. on Monday because of the rising costs of acquiring West Penn Allegheny Health System, building an integrated health system and giving rate increases to UPMC.

S&P affirmed its "A" rating of Highmark but dropped its outlook on the state's largest health insurer to negative, from stable, on concern that its profit would drop this year.

"The outlook revision reflects our expectation that Highmark's operating earnings will weaken further in 2013 primarily because of concessionary pricing actions implemented during the company's contentious contract negotiations with UPMC, as well as expenses related to its integrated delivery strategy and preparing for health care reform," Jon Reichert, S&P credit analyst, said in a statement.

Highmark spokesman Aaron Billger declined to comment.

In its contract extension with UPMC, announced in May, Highmark will raise reimbursement to UPMC by 9.9 percent three times between July 2012 and July 2014, according to documents filed in Allegheny County Common Pleas Court. The extension expires on Dec. 31, 2014.

Highmark's costs for building a health system to compete with UPMC are rising. The insurer said this month it will buy out investors holding West Penn Allegheny bond debt for about $635 million. That cost is on top of $475 million it agreed to pay for the nearly bankrupt operator of five Pittsburgh-area hospitals.

Highmark is awaiting state approval to close the acquisition of West Penn Allegheny.

It plans to buy Jefferson Regional Medical Center in Jefferson Hills and St. Vincent Health System in Erie.

Highmark recently forecast that its net income this year would drop to $106.1 million, down 74 percent from $412.6 million in 2012, according to documents filed with the state Insurance Department this month.

Last week, Moody's Investors Service said it is reviewing "for downgrade" Highmark's credit and financial strength ratings because of the added debt from the bond buyout.

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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