Insurer Highmark, West Penn Allegheny Health System differ on debt deal [The Pittsburgh Tribune-Review]

Oct. 05--West Penn Allegheny Health System has not ruled out declaring bankruptcy with the help of Highmark Inc., an official said on Thursday.

But that is not what the health insurer offered the financially struggling hospital system, spokeswoman Kelly Sorice said.

"Highmark is not offering to back a bankruptcy," she said, referring to a structured bankruptcy in which Highmark would negotiate deals with West Penn Allegheny's creditors beforehand. "Or at least they haven't offered it so far."

According to Sorice's account of Highmark's demands, West Penn Allegheny would declare bankruptcy and discharge some or all of its $1 billion in debt, and then the insurer would decide whether to continue with its $475 million acquisition.

Highmark, which is suing the health system to stop it from seeking a new buyer, "categorically denies" it made bankruptcy a condition of the acquisition.

"Highmark encourages WPAHS to change its position and work cooperatively to move forward with the proposed affiliation," the insurer said.

Sorice said West Penn Allegheny officials are willing to talk about a deal with Highmark that could include a structured bankruptcy but will explore options, including purchase by another company.

Given the system's shaky finances, she said, "we want to continue to move as quickly as possible."

Declaring bankruptcy carries risks, including costs from $50 million to $100 million, and the loss of employees and patients, she said.

Another factor behind the 18-member board's decision to pull out of the year-old deal with Highmark was the 1998 bankruptcy of Allegheny Health, Education and Research Foundation, whose $1.3 billion debt made it the largest nonprofit bankruptcy in U.S. history.

"Twelve years later, we still haven't found our footing," Sorice said, referring to the 1999 founding of the current system from the merger of AHERF's Allegheny General Hospital and independent West Penn Hospital. "The board is well-aware of that."

Though none of West Penn Allegheny's board members was on the AHERF board, four members were then practicing physicians at Allegheny General Hospital. Board member David McClenahan's law firm, K&L Gates, represented AHERF.

Board member Russell Evans, who chairs the board of West Penn Allegheny's Allegheny Valley Hospital in Natrona Heights, said the board voted unanimously to declare Highmark in breach of the acquisition agreement.

Highmark, which gave West Penn Allegheny $200 million, is asking the Allegheny County Common Pleas Court to issue a temporary restraining order to stop the health system from talking with other companies. Judge Christine A. Ward set a hearing on Oct. 25 and 26.

Highmark said in a court filing that the agreement required West Penn Allegheny to give the insurer 30 days to correct any perceived breach of contract. Sorice said the health system disagrees with that.

West Penn Allegheny hired Los Angeles-based investment bank Houlihan Lokey to advise it. The bank's managing director, Andrew Turnbull, advised Forum Health, a bankrupt hospital network in Youngstown, Ohio, acquired by Community Health Systems of Tennessee in 2010. Turnbull declined to comment.

West Penn Allegheny interim CEO Keith Ghezzi was interim CEO at Forum from 2006 to 2008, leaving about a year before Forum entered bankruptcy.

Some experts say Community Health Systems could be a possible buyer of West Penn Allegheny. The for-profit company owns 16 hospitals in Pennsylvania.

Given West Penn Allegheny's financial problems, its options appear limited, experts said.

"West Penn alone has no hope of paying its debts if it continues to operate as a going concern, so I do not see anyone else wanting to buy them," said Mark Pauly, a professor of health care management at the University of Pennsylvania'sWharton School. "I do not know of any examples of a virtually insolvent hospital finding a white knight."

West Penn Allegheny posted net losses of $55.8 million, $25.2 million and $63.1 million in its 2008, 2009 and 2010 fiscal years, respectively. It would have lost $30.4 million in fiscal 2011 without Highmark's$50 million grant. The system will release financial results for the year ended June 30 at the end of this month.

In it most recent financial statement, West Penn Allegheny had liabilities of $1.4 billion and assets of $1.2 billion as of March 31.

The state Insurance Department, which was reviewing the acquisition, "raised significant concerns" about the system's ability to repay debt, it has said. Highmark has said that West Penn Allegheny could need $350 million over five years for expenses -- on top of Highmark's$475 million.

Dave Rudov, a bankruptcy attorney with the Downtown firm Rudov & Stein, said he cannot understand why West Penn Allegheny's board would so strongly oppose bankruptcy. He suspects it's the taint that a bankruptcy carries.

"People are still buying GM cars. People are still buying Chryslers and Jeeps," Rudov said, referring to the 2009 bankruptcies of automakers General Motors and Chrysler. "And during AHERF's bankruptcy there were still patients in their hospitals."

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or [email protected].

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