Highmark Inc. on Friday closed its $375 million acquisition of Jefferson Regional Medical Center, the first step in forming a $1.6 billion competitor to UPMC, the dominant hospital system in Western Pennsylvania.
The state’s largest health insurer still faces challenges. Foremost is convincing the state Insurance Department that it can turn around the struggling West Penn Allegheny Health System, which on Friday reported a net loss of $30.3 million for the three months ended Dec. 31.
“Our partnership with Jefferson Regional is a critical step in our efforts to build a new, integrated health care delivery system,” Highmark CEO William Winkenwerder said in a statement. “This is great news for patients and families who continue to rely on the high-quality health care service that Jefferson Regional provides the community.”
At the core of Highmark’s new health system is the acquisition of West Penn Allegheny, a network of five Pittsburgh-area hospitals. The deal hinges on approval from the Insurance Department, which has been reviewing it since November 2011.
“It’s very complex, and it will take time,” Insurance Commissioner Michael Consedine said on Friday at a business meeting in Cranberry.
The department is seeking new financial projections from Highmark showing what a long-term contract between the insurer and UPMC would mean to West Penn Allegheny.
UPMC has said it won’t extend the contract that determines what Highmark pays UPMC for treating Highmark patients past a current expiration date of Dec. 31, 2014. But Highmark maintains that a new long-term contract is essential. Without it, Highmark members will lose in-network access to UPMC, starting in 2015.
The Insurance Department and state Sen. Don White, R-Indiana County, have questioned whether Highmark can fix West Penn Allegheny’s finances at the same time it has a relationship with UPMC.
“I’m concerned about the consequences a long-term insurance contract between Highmark and UPMC could have on Highmark’s ability to execute the turnaround of WPAHS,” White wrote to Winkenwerder last month.
Consedine said his department’s review is focused on the impact the West Penn Allegheny acquisition will have on the financial viability of Highmark’s insurance business.
If a long-term contract with UPMC slows West Penn Allegheny’s recovery and requires more funding from Highmark, then “that needs consideration,” Consedine said.
Highmark Chief Financial Officer Nanette DeTurk said on Tuesday that it could take up to five years to return West Penn Allegheny to profitability if Highmark secures a new contract with UPMC. The revival would take two years without it, DeTurk said.
On Friday, West Penn Allegheny’s financial results for the quarter ended Dec. 31 showed higher revenue and a smaller loss compared with the same period in the year before. Although it’s realizing a benefit from the reopening of West Penn Hospital in Bloomfield and the recruitment of new physicians, its patient volume is declining, especially in Monroeville where Forbes Regional Hospital is facing strong competition from the 8-month-old UPMC East hospital.
Highmark’s acquisition of Jefferson Regional, a 370-bed nonprofit hospital in Jefferson Hills, is meant to provide an anchor for the new health system in Pittsburgh’s South Hills. In exchange for taking control of Jefferson Regional’s board of directors, Highmark is giving the hospital $100 million for upgrades, including a new emergency department and a $75 million donation to the hospital’s foundation, and Highmark has guaranteed the hospital’s debt and pension liability up to $200 million.
“Today marks an important milestone for everyone associated with Jefferson Regional and the communities that we serve,” CEO John Dempster said. “Through our new affiliation with Highmark, we are well-positioned to strengthen the high-quality medical services that have become synonymous with Jefferson Regional for decades.”
Last month, Allegheny County Orphans Court, which oversees transactions involving nonprofit organizations, signed off on Highmark’s acquisition of Jefferson Regional, pending approval by the Insurance Department of Highmark’s acquisition of West Penn Allegheny.
Highmark also plans to buy St. Vincent Health System in Erie. Highmark spokesman Michael Weinstein said there’s no timetable for when that deal will close.
Alex Nixon and Luis Fábregas are staff writers for Trib Total Media. Nixon can be reached at 412-320-7928 or firstname.lastname@example.org. Fábregas can be reached at 412-320-7998 or email@example.com.