In western Pennsylvania, a longstanding dispute between Highmark as the dominant health insurer, and UPMC (University of Pittsburgh Medical Center) as the dominant health system, shows no sign of letting up. The disagreement is a story of vertical integration in the new world of value-based health care, and could provide a narrative for the development of health systems across the country under the ACA.
The Allegheny acquisition
In a high profile purchase in April 2013, Highmark acquired the West Penn Allegheny Health System, a relatively small and ailing health system in Pennsylvania. Now, UPMC has said that it will no longer accept Highmark products at most hospitals when the two groups’ contract ends on December 31 — leaving regulators to worry about consumers (other than exempted cancer patients) getting adequate access to care.
According to the Pittsburgh Post-Gazette, UPMC insists it won't renew or extend its in-network contract with Highmark beyond 2014 now that West Penn Allegheny — now renamed Allegheny Health Network — is competing with UPMC. Highmark asserts its willingness to discuss a new contract, whereas UPMC wants to focus on planning a smooth transition out of the agreement covering about 1 million people in the region.
Increasingly, the U.S. health care market is seeing instances of hospitals and delivery systems buying insurers, and vice versa, said Mark Rouck, senior director at Fitch Ratings, Inc. in Chicago. That's because everyone is trying to better align their interests, he told Healthcare Dive.
“There's an emphasis to reduce costs, especially given the Affordable Care Act's implementation,” Rouck said. “You've got health systems saying, 'If we provide insurance along with our own health care delivery, we can do it at lower cost.’ And insurers are saying, 'If we acquire a health care system, we can do it better.'”
Basically, Rourk said, an acquisition combines two businesses (i.e., insurance companies and hospitals) that both have high capital requirements and are operationally complex. While there is a chance of better outcomes and reduced costs, he said, there also is financial risk involved.
Highmark decided to buy a small, financially weak health system because that is what was left in a region dominated by UPMC, according to market experts. While Johns Hopkins and The Cleveland Clinic are making some inroads into Pittsburgh's competitive market, West Penn Allegheny offered established, local hospitals.
Given the level of competition, Highmark worried about what the loss of UPMC hospitals and doctors would mean to its bottom line. It reorganized its corporate structure and launched its own integrated delivery network a year ago after acquiring the financially ailing West Penn Allegheny Health System.
Under the reorganization, Highmark Health became the parent of Highmark, Inc., a Blue Cross and Blue Shield licensee with 5.3 million members in its health plans in Pennsylvania, Delaware, and West Virginia. Also under its umbrella is the renamed Allegheny Health Network, which includes eight hospitals (West Penn is the centerpiece), physician organizations and ambulatory surgery centers.
“Nationally, people are watching to see how this acquisition goes, and whether it's possible for large insurers to pick up financially troubled health systems,” said Andrew Simpson, Ph.D., a professor at Duquesne University in Pittsburgh who focuses on the development of health systems. “If Highmark is successful with merging payers and providers into an integrated network, this could offer a model for integration under the Affordable Care Act.”
What happens next?
The first clues recently became public. Highmark Health on June 3 released its first financial report since the corporate reorganization. Highmark, which hadn't reported an annual financial loss in a dozen years, had annual 2013 revenues of $15.8 billion against annual expenses of $15.98 billion.
Highmark reported an overall operating loss of $186 million for 2013, driven by a one-time “goodwill impairment charge” of $311 million. Allegheny Health Network posted a net operating loss of $107 million at the end of 2013, Highmark said, noting it spent $120 million-plus last year on capital investments for the provider network, including a new surgery center.
Highmark Health put a positive spin on its 2013 finances, describing Highmark, Inc. as well capitalized and its performance last year as being “very similar” to 2012. The company reported $7 billion-plus in cash and investments and a surplus of nearly $6 billion as of Dec. 31, 2013.
Simpson agrees that Highmark's financial performance seems on track. The company is reducing red ink on the provider side — and few expected Allegheny Health Network to make money in 2013. “To me, taking the $311 million write-down was really just a way of [Highmark] saying, 'We're absorbing this business,'” he said.
But Highmark must try to turn around its provider network's finances fairly quickly, within the next few years, Simpson told Healthcare Dive. “There already has been a local bidding war for local doctor practices for the past year or so,” he said. “And if Highmark no longer has access to certain hospitals and its own network doesn't pay off, that could spell trouble down the road.”
If, however, Highmark succeeds in owning a range of hospitals, doctor practices and clinics, “keeping people within a particular health system is a good way to control costs every step of the way,” Simpson said.