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Allegheny Health Network’s $600M plan to expand reach depends on Highmark

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Allegheny General Hospital, part of Allegheny Health Network, in Pittsburgh's North Side.

Allegheny Health Network proposes investing part of $175 million from Highmark Inc. in renovations and technology upgrades at its Allegheny General and West Penn hospitals, anticipating that they will accommodate more patients when Highmark insurance subscribers lose in-network access to UPMC next year.

The Highmark-owned hospital system would build outpatient medical centers and expand emergency, trauma and women’s health services to underserved parts of Western Pennsylvania as part of a spending plan that executives say will help it better compete with UPMC.

“The entire amount … will be used for capital improvements at Allegheny Health Network to fill in certain service line gaps,” Chief Financial Officer Karen Hanlon said during a state Department of Insurance hearing Monday. “No portion of the requested funding will go to pay operating expenses.”

UPMC Treasurer Tal Heppenstall Jr. said Allegheny Health Network is in worse financial condition than Highmark has reported and chided the company for its “profound lack of financial transparency.” He said it appears Highmark is hiding huge losses in “sporadic, fragmented and murky” financial statements.

“I have full clarity of our consolidated financial position, and I can assure you that our position is strong and stable,” Hanlon responded.

She said the grant would be part of a $600 million capital improvement plan. She did not specify where outpatient centers will be built or services will be expanded.

Part of the money would come from the sale of urgent care company MedExpress to United Health Group last month, Highmark CEO David Holmberg revealed. Highmark owned a 10 percent stake in MedExpress and received $100 million from the sale, Holmberg said. The value of the deal had not been disclosed.

The Insurance Department held the hearing to gather public comment about Highmark’s plan to transfer the money and to assess the financial condition of its hospitals. Highmark must seek state approval for large investments under conditions imposed when the state allowed it to establish Allegheny Health Network in 2013. There is no timeline for approval.

Most speakers at the hearing favored the plan, arguing that the network provides an essential counterweight to UPMC’s dominance of the hospital market.

“There is absolutely no doubt in my mind that the people of Western Pennsylvania need a viable competitor to UPMC,” said state Sen. Randy Vulakovich, R-Shaler. “Many of my constituents rely on the hospitals in Allegheny Health Network.”

In April, Highmark Health, the parent of Highmark’s insurance business and Allegheny Health Network, put its loss from operations last year at $178 million, an increase from a $126 million operating loss in 2013. The report did not detail the finances of each part of the business.

The former West Penn Allegheny Health System, the core of the network, said its operating loss narrowed in the first quarter. In a separate report released Monday, the system said it had an operating loss of $9.7 million, an improvement from a $15.2 million loss during that quarter a year earlier.

Hanlon said Allegheny Health Network needs the capital investments because patient volume will increase as Highmark subscribers go out-of-network at UPMC. A broad reimbursement contract between the health giants expired at the end of last year, but many Highmark members stayed with UPMC doctors under a provision of a state-brokered consent agreement. The “safety net” provision, which expires at the end of this year, allowed members to see UPMC doctors while looking for doctors in Allegheny Health Network.

Hanlon said about 1 million Highmark members live in the service area of Allegheny General Hospital, in the North Side, and 44 percent of them seek treatment from UPMC. “A significant portion of that care is expected to move” to the North Side hospital, she said.

UPMC spokesman Paul Wood acknowledged that some patients may switch doctors and hospitals, but he predicted the number would be “very few.” “Highmark has already lost a lot more subscribers to rival insurers that would prefer to keep their UPMC doctors and hospitals,” he said.

James McTiernan, a vice president at Downtown benefits consulting firm Arthur J. Gallagher, said the number of Highmark members who switch to Allegheny Health depends on how the consent agreement is interpreted. UPMC has pushed for a broad reading of the agreement that would allow more Highmark members to be considered in-network. Highmark wants a narrow reading of the agreement. State officials have promised to rule on individual disputes as they occur.

Alex Nixon is a staff writer for Trib Total Media.

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