HARRISBURG — Health insurance giant Highmark Inc. received conditional approval Monday from Pennsylvania regulators to take over the financially troubled West Penn Allegheny Health System as part of its plan to compete with UPMC, western Pennsylvania’s dominant network, for patients and their health care dollars.
The takeover is a landmark transaction, said Pennsylvania’s insurance commissioner, Michael Consedine, and proponents of the deal hope it will slow the growth of health care costs and improve health care in western Pennsylvania.
The deal creates one of the largest integrated health networks in the nation, said Highmark’s CEO, William Winkenwerder Jr. Highmark is the nation’s only Blue Cross Blue Shield licensee to own a health system or hospital, according to the Blue Cross and Blue Shield Association.
“This is a new day for health care in western Pennsylvania,” Winkenwerder said at a news conference. “It is a great day and a historic day for the people of this region.”
The newly named Allegheny Health Network will bring together seven hospitals, including the five-hospital West Penn Allegheny system, Jefferson Regional Medical Center in suburban Pittsburgh and Saint Vincent Health System in Erie. The purchase of Saint Vincent is pending court approval. The network will employ 1,200 physicians, Highmark officials said.
The department’s approval comes amid a feud between Pittsburgh-based Highmark and UPMC, the University of Pittsburgh Medical Center’s health system, which also has its own health insurance plans. An insurance contract between the two is scheduled to expire in 2015.
“We may have the type of competition in western Pennsylvania for your insurance dollar that we should have had 20 years ago,” said State Sen. Don White, R-Indiana. “I am excited about that, if it works.
“But I am worried about what happens in the next 18 months. I know Highmark will want the Legislature to pass a bill that would force UPMC to do business with Highmark, and that goes against my nature. I don’t think we should be in the business of making anybody do business with a company that doesn’t want to do business with them.”
Consolidation is a growing trend in health care as insurers, hospitals and physicians increasingly gather under one roof in what they see as an effort to improve health care quality while eliminating redundant costs and bureaucracy. Meanwhile, more insurers, including Medicare, are looking for ways to reward doctors and hospitals for the quality of their services, as opposed to the sheer volume of procedures.
Highmark’s takeover also enjoyed political support from top state lawmakers because of the fear that West Penn’s hospitals would otherwise collapse, leaving UPMC as a monopoly in the Pittsburgh region.
In a statement, Gov. Tom Corbett said the Insurance Department’s decision was in line with his administration’s aim to improve health care access, quality and affordability.
White, the chairman of the Senate Committee on Banking and Insurance, said he is pleased that the approval advances a two-provider network, but he is concerned about the conditions required in the 27-page Insurance Department ruling.
The conditions of the approval are designed to protect the public, community hospitals and Highmark policyholders while preserving fair competition and the financial stability of Highmark, the Insurance Department said.
One condition is intended to ease access to Highmark’s network for unrelated medical providers, community hospitals and insurers, while other conditions require Highmark to inform patients and subscribers about the potential end of the UPMC contract in 2015, the department said.
“I want protection for my community hospitals,” White said. “I don’t want Highmark, who needs 31,000 patients to make a go of it at West Penn, raiding (local hospitals).
“I know they’re going to raid UPMC, but they can afford it. But you can’t afford to lose 100 patients at IRMC or Armstrong Memorial of Clarion or Punxsutawney. So I want some assurances that they are going to back up the talk that they support community hospitals. They realize cheaper medical procedures can be done there at less cost than moving them into West Penn, so I want them to follow up on that.”
Winkenwerder said he is comfortable with the conditions, saying Highmark would have met many of them anyway and that they are welcome because they encourage a competitive marketplace.
A UPMC spokesman said Monday that there will be no new contract with Highmark or an extension when the current one expires, and it urged Highmark to begin working with it immediately to plan for that transition.
A key question for Highmark will be whether it can shift enough patients from the UPMC health system to turn around the finances of the West Penn hospitals. A consultant to the Insurance Department determined that the proposed parent company appeared to be well-capitalized and unlikely to jeopardize Highmark’s financial stability.
Highmark notified the Insurance Department in 2011 of its planned $475 million takeover of the West Penn health system. Highmark’s obligation to pay West Penn bondholders will be about $100 million less than initially anticipated. Instead, Highmark purchased the bonds for $528 million Monday, company officials said, making its commitment $1 billion, rather than $1.1 billion.
To date, Highmark has spent $283 million on the West Penn system, the Insurance Department said Monday. At the end of 2012, Highmark reported a surplus of $4.1 billion to the state Insurance Department.
White said he questions the amount of money Highmark said it needs to support the new network.
“I think they’re low-balling it. I think it’s going to take a lot more,” White said. “They’re using reserve money that belongs to every policyholder in Western Pennsylvania. I want to make sure we don’t jeopardize two institutions on the financial side.”
Under the existing contract, Highmark’s 3 million subscribers are able to use UPMC’s 3,200 doctors at in-network rates. In addition to offering health insurance plans, UPMC runs more than 20 academic, community and specialty hospitals and 400 outpatient sites. It employs more than 3,200 physicians.
Gazette reporter Chauncey Ross contributed to this report.