Highmark and West Penn: it’s about mitigating consolidation, not transforming the system

Highmark will invest up to $475M in the West Penn Allegheny Health System, a move characterized as a prelude to purchase. This is no bold move to drive closer integration of information flows and care decisions or align incentives in a transformative vertically integrated model. My take: this is about desperately propping up the last competing provider standing in a highly concentrated hospital market. Highmark’s hand was forced by West Penn’s financial bleed out. But, in response, UPMC has thrown down the gauntlet in a move that will reshape the Western PA market.

Some background: West Penn is the #2 hospital system in Western Pennsylvania with 6 hospitals and about 2K beds. It competes with the much larger UPMC (with 14 hospitals in Pennsylvania and 5K beds) and is struggling: West Penn lost $63M in its 2010 fiscal year on revenues of $1.6B vs. $379M profit on $8B in revenue at UPMC. The West Penn picture has gotten worse since the close of FY 2010 last June.

West Penn claims in a long running anti-trust law suit that its difficulties are the result of a pact between Highmark and UPMC under which UPMC would sign no deals with other health insurers in return for advantaged reimbursement rates from Highmark. That truce settled (so the suit alleges) a dust-up many years ago in which Highmark had launched a narrow network health plan excluding UPMC and, in response, UPMC launched its own health plan. Once the pact was arranged, Highmark withdrew its narrow network product and UPMC pulled back on marketing its health plan (a big piece of it is Medicaid). More important, UPMC made no deals with national health plans and they were effectively locked out of Western PA.

The 10 year contact between UPMC and Highmark is set to finish in mid-2012 and for the past several months the two players have been grappling over the new terms. At the same time, West Penn’s financial conditions have been getting worse and worse: despite extensive restructuring and capacity shutdowns, costs were not being cut fast enough. Time was on UPMC’s side. Highmark is reported to have been trying to find a white knight provider to take over West Penn – Cleveland Clinic among them – but no mention was made in the deal announcement. The rumors began floating that Highmark will invest and, shortly after, UPMC signed deals with Aetna, Cigna and United; they have indicated that no deal will be reached between Highmark and UPMC (requiring Highmark members to seek care at West Penn or pay out of network rates).

UPMC SVP Tom McGough has described the future landscape thus: people who want to have their care at West Penn will choose HIghmark. People who want to have their care at UPMC can choose UPMC plan or one of the newly signed nationals. And people who want both providers can choose the national plans.

Hospital-payer disputes often end up with a phase of hardened “take it or leave it” public poses while still ending with a deal. Indeed, it is hard to imagine some deal for including UPMC in the Highmark network not being struck – they are both so large they are effectively mutually dependent. And Highmark may be able to unwind some of its commitment to West Penn (the press release only talks of $50M committed cash to keep two hospitals running, the promise of “up to” $475M could presumably be held at just that $50M in an extreme scenario, and the definitive agreement has not been finalized). But the UPMC deals with the national payers seem very hard to unwind and the effect on the market will be seismic.

The news will stir nightmares among payers anxious about provider consolidation in their service areas — if it goes too far, they, too, may end up having to keep a weakened #2 hospital system on life support and then seeing their market quickly transform into vertically integrated camps.

Some things to watch in the coming months in Western PA:

  • A sourcing agreement between UPMC and one of the nationals to access capabilities and perhaps a national network for its health plan (a la Aetna-Carillion). This will signal to what extent UPMC is serious about its health plan business or believes that, despite its extraordinary leverage, it will need new skills to navigate new reimbursement approaches.
  • Domestic medical tourism benefits for Highmark enrollees to mitigate perception among enrollees that they are forced to receive care at the #2.
  • Energetic efforts to create greater public awareness in Western PA regarding actual quality and costs to blunt the impact of reputation and perception.
  • Investments by Highmark to expand the academic affiliations of West Penn (already seen in the promise to fund scholarships for medical students affiliated with West Penn noted in the deal announcement) to improve its quality reputation.
  • Highmark-led initiatives to orchestrate a dramatic improvement in the quality and efficiency of care for the non-UPMC affiliated portion of Western PA care to ensure that Highmark products centered on West Penn are extremely cost and outcome competitive.
  • Continued efforts to bring in national provider brands (like Cleveland Clinic) to Western PA market to help lift the reputation of the non-UPMC provider options.

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