Some signs of discontent appeared months ago in surprising Highmar-West Penn Allegheny separation [The Pittsburgh Tribune-Review]

Sept. 30--Fewer than three hours before West Penn Allegheny Health System announced it wanted a divorce, Highmark Inc. CEO William Winkenwerder learned the insurer's high-stakes deal to buy the financially ailing health system was off.

Winkenwerder appeared before the West Penn Allegheny board on Thursday to tell its members the health system would have to file for bankruptcy as a means to reorganize financial affairs. Apparently after he left, the board had other ideas.

At 7:30 a.m. Friday, Keith Ghezzi, West Penn Allegheny's interim CEO, met with Winkenwerder to deliver the board's decision to seek other suitors because it felt Highmark had breached its acquisition agreement.

By then, a news conference had been announced to the media. One Highmark official, contacted by a Tribune-Review reporter inquiring about the purpose of the event, responded: "What are you talking about? What press conference?"

Though Highmark officials and others in the region were caught off-guard by the development, signs of the destruction of the year-old plan to save the nearly bankrupt West Penn Allegheny appeared publicly as early as April.

That's when state Insurance Commissioner Michael Consedine grilled Highmark's acting CEO at the time, J. Robert Baum, and Deborah Rice, Highmark's senior vice president of health services, during a public hearing Downtown about the $475 million deal.

Consedine wondered aloud whether Highmark might be buying a money pit, and if West Penn Allegheny's nearly $1 billion in bond and pension debt might be too substantial to overcome.

"We are certainly hearing from a number of stakeholders that $475 million may not be enough," Consedine said. "That you are purchasing, for lack of better analogy, that Victorian house on the corner that ends up being the money pit that you pump more and more money into."

Consedine said the department's job "is to ensure financial solvency of the insurance company. Certainly one of the larger exposures, that you mentioned, is the debt obligations."

Baum and Rice expressed confidence the funding was enough to turn around the health system, and said Highmark's insurance business was sufficiently insulated from the debt burden.

Baum was interim CEO after the board fired CEO Ken Melani on April 1 amidst his affair with a Highmark subordinate.

Melani engineered the deal and Highmark's plan to morph into an integrated health system that could rival UPMC, the region's largest. Under the plan, Highmark provided $100 million in grants to West Penn Allegheny that did not need repayment and $100 million in loans. West Penn Allegheny contends it does not have to repay the loan money because Highmark breached the contract agreement.

After Winkenwerder took over as CEO in June, he pledged to review every investment the insurer was making. Winkenwerder apparently wasn't as comfortable with that deal as Baum and Rice.

In the end, it appears West Penn Allegheny's approximately $750 million in bond debt and $250 million in unfunded pension liability ultimately forced the organizations apart.

West Penn Allegheny officials said Friday that Highmark changed the terms of their deal, finalized last year, by requiring that West Penn Allegheny reduce debt through bankruptcy. The health system's pension debt would be unloaded on the federal Pension Benefit Guaranty Corp.

"Dr. Winkenwerder and his team have been crystal clear in their position that if they assume the fiscal burdens of West Penn Allegheny Health System, they will put Highmark's financial portfolio and, ultimately, their subscribers at risk," West Penn Allegheny's board Chairman Jack Isherwood said. "The only way out, in their analysis, is to put the patients, nurses, physicians and suppliers of the West Penn Allegheny Health System at risk through debt restructuring and bankruptcy."

Highmark officials declined to comment or make Winkenwerder available for an interview.

Although it raised "significant concerns" over the debt, the Insurance Department emphasized it did not require bankruptcy as a condition of approving Highmark's takeover of West Penn Allegheny. "We urged the parties to work together to address these issues," the department said.

Isherwood said Winkenwerder broached the idea of bankruptcy during an Aug. 30 meeting with West Penn Allegheny's directors.

When Winkenwerder met with the board again, Isherwood said, he made it clear the deal would not move forward without bankruptcy.

"This new development is especially startling since ... Highmark's leaders and press spokesperson have been adamant that bankruptcy would not be a consideration and that it would, in fact, prove counter to our joint mission."

After several hours of deliberation, the board concluded Highmark breached the agreement. The board agreed its best option was to look for a new company to acquire it.

Experts were not surprised to hear that Highmark demanded a restructuring of West Penn Allegheny's debt through bankruptcy.

"That entity is inefficient. It's been losing money," said Stephen Foreman, a professor of health care economics at Robert Morris University.

"Unless they radically alter West Penn Allegheny, you now perpetuate the inefficient operation," Foreman said. "I think you do need to run that entity through a bankruptcy proceeding."

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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