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West Penn Allegheny Health System Moves On From Affiliation Agreement with Highmark

West Penn Allegheny Health System (WPAHS) today notified Highmark that the System is released from its obligations under the Affiliation Agreement that was signed by the two organizations in November 2011, and as a result WPAHS will be exploring new options for its future direction.

According to West Penn Allegheny, Highmark has breached the Affiliation Agreement by its unequivocal position that Highmark will not close the transaction set forth in the agreement, even if the Pennsylvania Insurance Department (PID) approves the deal. Moreover, despite earlier assurances to the contrary, Highmark has specifically demanded, among other things, that WPAHS restructure through bankruptcy.
Jack Isherwood, Chair of West Penn Allegheny’s Board of Directors, said that Highmark remains an important partner in the delivery of healthcare and that WPAHS is open to new discussions with the insurer about better alternatives to bankruptcy, but WPAHS needs to move forward in exploring all options available to it. He said that a bankruptcy is not the preferred course for the organization since it may cause harm to the health system, its many employees and the community.
“Our goal now, as it was when we signed this agreement, is to ensure a robust West Penn Allegheny Health System that preserves the choice of exceptional health care services in our region. There is no question that a provider network with West Penn Allegheny as its core would afford the region with outstanding, patient-centered healthcare services that are unsurpassed in quality, cost and convenience,” Isherwood said. “To date, we have met every obligation outlined in the Affiliation Agreement to make that concept a reality and have worked earnestly and with absolute transparency to help expedite a review and approval of the agreement by the PID.“
Continuing, Isherwood said that from the outset of West Penn Allegheny’s discussions with Highmark and negotiations to reach the Affiliation Agreement, the central concern of West Penn Allegheny has been to safeguard its valuable community assets and to protect its nearly 12,000 dedicated employees.
“West Penn Allegheny’s board would violate its fiduciary responsibility if it failed to determine whether a better alternative exists to Highmark’s proposed financial strategy,” Isherwood said.
Isherwood said that Highmark, however, can still be part of the solution.
“Highmark has touted West Penn Allegheny’s high quality and low cost services when promoting its planned integrated delivery network and its new Community Blue product. Highmark’s unwillingness to pay us at fair rates that recognize West Penn Allegheny’s value to the community does not make sense,” Isherwood said.
“We have been and are continuing to ask Highmark to agree to a reasonable rate request, which we have earned and which would help strengthen West Penn Allegheny for the future. Delaying such an increase only serves to further weaken the System financially,” he said.
Bond debt has been identified by Highmark as a key financial hurdle to finalizing the affiliation. In fact, the System's debt level has not changed since the affiliation agreement was signed, except for the addition of loans from Highmark that were part of the affiliation agreement. Keith T. Ghezzi, MD, Interim President and Chief Executive Officer at WPAHS and a principal at the healthcare turn-around firm Alvarez and Marsal (A&M), cited several other developments that Highmark initiated over the past year that negatively affected WPAHS. These include extension of the UPMC contract plus the addition of UPMC East, the abrupt change in Highmark leadership in April 2012, and Highmark’s failure to generate the volume increases that Highmark projected in the PID filing in November 2011. 
Alvarez and Marsal was hired by Highmark to assess the value and viability of West Penn Allegheny prior to its signing the Affiliation Agreement. West Penn Allegheny’s board then contracted with A&M, at the urging of Highmark, to implement a turnaround plan for the organization.
“We have always believed that Highmark was an appropriate community partner, and we trusted Highmark’s intentions to help restore our system for the benefit of community. This breach of the Affiliation Agreement by Highmark is contrary to the discussions that West Penn Allegheny and Highmark leadership had throughout our negotiations and it is incumbent upon us to now explore other potential partners who are interested in preserving our health system for the community,” Isherwood said.