By Jeffrey Barg

Published May 1999

PROVIDERS ESCALATE CONFLICT WITH INSURERS

• Highmark defends role in West Penn-Allegheny merger

• Insurance Dept. inches closer to Blues hearings

• Payors & providers reach impasse

• React to this article in the Discussion Forum.

PND: Why did UPMC file a complaint with the U.S. Justice Department, the Federal Trade Commission and the Pennsylvania Attorney’s General Office against Highmark’s financing of the acquisition of the Allegheny hospitals?

JP: We expressed our concern over Highmark’s involvement in such a risky transaction, not only from the standpoint of the investment of public money—which Highmark’s reserves are given their state tax exempt status, but also from a standpoint of Highmark being the dominant and controlling insurer in western Pennsylvania moving into such a prominent role with a large provider system, impacting on competition in western Pennsylvania. Our concern is that Highmark, through this investment, has no other alternative but to take a position of advocacy for the combined West Penn-Allegheny organization.

PND: Why is that a problem?

JP: When you have an insurer that clearly dominates 70-80% of the commercial market, probably 70% of the Medicare managed care market, 60% or so of the Medicaid managed care market, it’s pretty obvious they control finance of health care in western Pennsylvania. And now to have them integrate in such a large way with the combined West Penn-Allegheny organization and giving them the ability to take control of the organization, it gives us great cause for concern. We have additional concerns because our understanding of the merger documents indicates that Highmark will not only lend its financial support but its strategic support, which would include steering and channeling of patients. The latest Hospital Council information shows that a vast majority of hospitals in western Pennsylvania are losing money and obviously steerage away from these could put several in financial jeopardy and again cause irreparable harm to his community.

PND: Didn’t UPMC seek a similar relationship with Highmark in terms of the joint ownership of insurance products that would have steered patients to UPMC hospitals?

JP: Actually we suggested to Blue Cross of Western Pennsylvania that they should embrace both Tri-State and Pyramid and utilize those networks to see if we couldn’t improve the cost and delivery of health care in western Pennsylvania. And those conversations evolved into a discussion of some sort of joint venture, not with just UPMC and Highmark. We encouraged John Brouse to think about creating a new board that would oversee health care financing and delivery in western Pennsylvania that would have representation not only from Highmark but from the employment community, labor community, some politicians and certainly providers. Not just our providers. We explicitly said that we felt that other providers needed to be represented and be part of this in order to try to rationalize the entire delivery system in western Pennsylvania. So, yes, there has been a lot of misunderstanding of what those dialogues were about. That is, in fact, what we pursued. We were unable to bring that to fruition, unfortunately.

PND: You think Highmark’s dominance in health insurance coupled with their increased role with these hospital systems would constitute a violation of anti-trust law?

JP: We do believe that.

PND: Why in your view is this such a risky investment?

JP: For multiple reasons. There have been no organizations that have put forth a proposal to take over the Allegheny West Hospitals and physicians other than West Penn, which strikes us as odd. Secondly, there have been no banking institutions that have stepped forward and offered their credit for this transaction. As a matter of fact, it’s our understanding that the banks that currently hold either the insurance or the credit enhancement to the debt that is outstanding for both Allegheny and West Penn would like to see that debt refinanced as quickly as possible, which is indicative of their concerns about the future viability of the system. While not legally declared bankrupt, the Allegheny West organization certainly would not be looking for a partner had it not been apparent that they’re very close to being pulled into bankruptcy. And it seems odd to us that we as a community would pay over a hundred cents on the dollar, which is our understanding of the proposed transaction, for an organization that is for intents and purposes bankrupt. And in all likelihood, if that organization went through bankruptcy, it would be sold for pennies on the dollar, much like it happened in Philadelphia.

PND: What do you think is motivating the various entities, West Penn, Highmark and the Community Health Alliance?

JP: I think from West Penn’s standpoint it makes sense for them to try to get involved in a meaningful way with a larger group of hospitals. Obviously this is an opportunity to do so. And I would guess that that is the same for the Community Health Alliance. I really can’t say why Highmark would get involved in such a risky transaction other than to compete with us. Our concern would not only be an issue of competing with us but also put them in a position where they would ultimately be able to control not only the financing but the delivery of health care in western Pennsylvania. So it should be a matter of great interest in this community. We have absolutely no problem with West Penn and the other hospitals merging with the Allegheny hospitals. Our great concern is over Highmark’s involvement in this transaction.

PND: What would you ultimately like to see happen as a result of your filings?

JP: First and foremost the government needs to ensure that Highmark’s role in this transaction is very limited and Highmark has no ability to channel patients away from other institutions like St. Francis, Mercy, St. Clair Hospital, UPMC and others to these entities. Once invested in these entities, Highmark has an inherit interest in ensuring that these entities have financial resources to ensure that its investment will ultimately pay off. This ultimately means they have to advocate for these entities.

PND: Is there any way to change the terms of the transaction so that Highmark’s financing would not lead to an anti-competitive situation?

JP: I think one very simple way would be for Highmark to buy, as other investors presumably will, a portion of the bond offering that West Penn is presumed to do.

PND: Do you think that they would be able to finance the transaction without the direct Highmark financing?

JP: Personally I do not, which is another indication of how risky this transaction is. I think that ultimately should be a matter for the investment community to review and determine whether it’s a worthwhile investment or not.

PND: Do you feel that the health care market in the Pittsburgh area would be better off if the Allegheny Hospitals were permitted to fold?

JP: First of all, we don’t believe the Allegheny hospitals would fold. Certainly the three community hospitals are absolutely necessary in their communities to provide care and should continue to thrive. And Allegheny has certainly been a great asset to this community and the people on the North Side obviously need to have health care delivered locally. Our assumption is that these hospitals would not fold and, in fact, they would be reborn out of a bankruptcy clean of claims, and that this would be done much more economically than the proposed transaction and ultimately save this community money.

PND: Isn’t there a need for a large and strong hospital system other that UPMC to provide some competition in the market?

JP: We definitely are not by the legal rendering of the definition anywhere near a problem from a competitive and anti-trust standpoint as a hospital system. More importantly, we have no problem with West Penn and Allegheny getting together. We think that someone ultimately needs to be involved with the Allegheny institutions, whether it’s West Penn or anyone else. Our only concern in this transaction is Highmark’s involvement.

PND: Is there any legitimate role for Highmark in this process?

JP: We feel that Highmark should do what it does best, which is to be an insurer.

PND: Highmark has said the same thing about UPMC in terms of your entry into the health insurance market.

JP: UPMC’s strategy in the insurance market was done in a totally defensive posture because we felt that our ability to negotiate fair rates with Highmark was impaired due to their control of the market. And as a result we felt that they could do us harm if we didn’t have other alternatives available to us. Certainly this community is unique in that it has an insurance company that has tax exempt status in the state of Pennsylvania with two billion dollars in reserves that is allotted to maintain its dominance in the financing arena. We don’t have a community that has insurance competition. As a result, providers and employers are always going to be at the mercy of Highmark. That could work well for this community or, if not handled appropriately, it could be extremely detrimental to the community. We’ve very concerned about which direction this goes.

PND: How do you think that situation would be best resolved?

JP: I believe there should be more community involvement on the Highmark board. More provider involvement on the Highmark board. A business coalition should get more involved in delivery and financing and evaluation of health care services in western Pennsylvania.

PND: It’s been reported that you’ve retained a high powered anti-trust law firm. Are you considering filing some sort of anti-trust lawsuit if the regulators don’t provide any relief?

JP: We’re looking at all of our options and obviously our concerns are not only short term but long term survival.