Analyst: Highmark dominion in decline as a new leader is sought [The Pittsburgh Tribune-Review]

April 08--UPMC and Highmark Inc. engaged in a nasty public feud 10 years ago when Western Pennsylvania's premier hospital network demanded an unheard-of $300 million payment from the region's biggest insurer.

"That is absolutely an act of extortion," an angry Dr. Kenneth Melani, then Highmark's executive vice president for strategic business development, said at the time.

About a decade later, in the midst of another high-profile fight with UPMC, Melani lashed out again at the region's dominant health care system and its CEO, Jeffrey Romoff, after a state Senate hearing in Erie.

"He is trying to rape the commercial marketplace to build his empire," Melani told the Tribune-Review in September. "It has to stop."

Melani, 58, of O'Hara is unlikely to get a third chance to lash out. Highmark fired him for "gross and willful misconduct" on April 1 because of another high-profile fight that went public. Oakmont police arrested Melani after a fight at the Oakmont home of Mark Myler, 49, the husband of the executive's live-in mistress and Highmark employee Melissa Myler, 28.

The sudden downfall of Melani, who earned $4.3 million last year, left health care industry experts reeling.

"That contract would have never, ever been signed without Ken," Ron Violi, president of Wheeling Hospital in West Virginia and former CEO of Children's Hospital of Pittsburgh, said of the 2002 negotiations. "Losing Melani is a great loss for the city."

Melani became CEO within months of brokering that deal.

Highmark's board must now search for a leader at a time when the most recent dispute carries greater consequences for Western Pennsylvania. The future of financially struggling West Penn Allegheny Health System and its 11,000 employees hangs in the balance. Highmark's fortune will be at risk if it loses subscribers to UPMC Health Plan or other insurers that will offer in-network access to UPMC hospitals and doctors when the UPMC-Highmark contract expires in 2013.

'Light bulb going dim'

Business associates, politicians and industry observers wonder how ousting Melani, whom many viewed as a top-notch leader and strategist, will alter the health care landscape.

"The timing of Melani's departure could not be any worse," said Jan Jennings, president of Downtown consulting firm American Healthcare Solutions, who noted Highmark's intent to acquire West Penn Allegheny for $475 million. "Highmark once had control of 70 percent of covered lives. They are now in a state of decline. It's like a light bulb that's going dim."

State Sen. Don White, R-Indiana County, who chairs the Senate Banking and Insurance Committee, said Melani was not present at several meetings he oversaw between officials from the warring health care giants. Highmark sent executives Deborah Rice, 48, and Dan Onorato, 51, to those meetings, and losing Melani would not affect future talks, White said.

"They both had the ability to make decisions on the spot on behalf of Ken Melani," White said.

He endorses Rice, executive vice president in charge of health services, as a logical successor to Melani. Onorato, the former Allegheny County executive and unsuccessful Democratic gubernatorial nominee, is chief communications and public affairs officer.

With or without Melani, White said, Highmark faces challenges: maintaining membership in the face of competition, keeping West Penn Allegheny afloat while awaiting state Insurance Department approval of the deal, and turning around the money-losing hospital network.

State officials might not rule on the deal until October, White said. Melani had argued that Highmark needed approval by June to prevent the system's failure. West Penn Allegheny lost $144 million during the past two fiscal years and has about $1 billion in bond debt and pension liabilities.

"They're a big firm. They've got a lot of talented people. They have a lot of reserves. I cannot see it causing a major difficulty," Steve Foreman, a health care economist at Robert Morris University, said of Melani's firing.

But Foreman noted, "I think this West Penn Allegheny deal is a really bad deal for them. ... I'm not sure anybody can run that hospital system."

From physician to CEO

Melani's impetus to rescue West Penn Allegheny may be traced to his early career as a resident at West Penn Hospital.

Melani grew up in the New Kensington-Arnold area, the son of a machinist. He attended Washington & Jefferson College, then Bowman Gray School of Medicine, now part of Wake Forest University.

He came home in 1979 to serve his residency at West Penn Hospital and spent five years building a medical practice with offices in the Allegheny Valley. He remained on staff at West Penn, Citizens General Hospital in New Kensington and what was then St. Margaret Memorial Hospital near Aspinwall.

As a physician, taking calls and working on weekends, he found he had no time for himself, according to court documents.

Melani quickly became interested in the business side of medicine and took a leave of absence to work as interim CEO for West Penn Cares, a physicians group looking to develop managed care products.

By the time Highmark's board picked Melani to replace retiring CEO John Brouse in 2003, the insurer was well on its way to dominating the region's health insurance scene.

Doctors might not have agreed with Melani about reimbursements, but they appreciated that he was an experienced doctor.

"They valued the fact that he was someone who had been in their shoes, someone who had cared for patients," said Jack Krah, executive director of the 3,000-member Allegheny County Medical Society. "Physicians often feel that people running insurance companies don't really understand what they do. ... They felt at least (with Highmark) there was an appreciation for how complex medical care can be."

As chief executive, Melani transformed the insurer into a powerhouse. A strategy of diversifying the company into vision, dental and reinsurance businesses is paying off for the company. Though profit from its core health insurance business was flat last year, profit from the three subsidiaries rose 20 percent, the company said last week. Income from the subsidiaries last year accounted for half of Highmark's total profit.

And late last year, Highmark closed its acquisition of Blue Cross Blue Shield of Delaware, giving it about 400,000 new members.

Among Melani's failures: an attempt to merge with Independence Blue Cross of Philadelphia in 2009. The deal fell through because of concern that it would reduce competition across Pennsylvania.

"I would have disapproved the deal if Highmark and Independence Blue Cross hadn't withdrawn their application," Joel Ario, the state Insurance commissioner at the time, said last week. Ario now practices law in Washington.

Creative thinking

Melani's creative thinking benefited Highmark during uncertain times, said Dr. Leo McCafferty, president of the Allegheny County Medical Society.

"There is this great dynamic in health care. We don't know how insurance as it's delivered today will still be delivered in four or five years," McCafferty said.

Melani did not sit back and wait to see how national health care reform would affect the insurer, McCafferty said. Instead, he started converting Highmark into an integrated health and finance system with the proposed acquisition of West Penn Allegheny -- a move experts believe could enable the combined organization to offer higher-quality, lower-cost care.

Melani never lost sight of his working-class roots. While occupying the penthouse on the 31st floor of Fifth Avenue Place, Downtown, he told Tribune-Review reporters in December 2010 that he inherited his furniture from a former executive. He pointed out that what appeared to be a marble staircase outside his suite was actually painted wood.

With Melani out of the picture, some suggest UPMC might be willing to negotiate a contract with the insurer. Some speculate that Melani simply clashed with Romoff.

UPMC spokesman Paul Wood said UPMC reacted to Highmark's strategic goals, not Melani's personality.

"Highmark has made a deliberate strategic decision to enter the provider business," Wood said. "Our decision was purely a business decision. It's not personal. Our reaction to their strategy is not changing."

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