Highmark Inc. has sued West Penn Allegheny Health System for calling off the $475 million affiliation of the two Pittsburgh organizations.
In its filing late Monday in the Allegheny County Court of Common Pleas, Blue Cross Blue Shield insurer Highmark said Friday’s action by struggling West Penn came “unilaterally and in breach of its obligations,” and was “a flight from reality.”
Highmark, which serves 4.9 million health plan members in Pennsylvania, West Virginia and Delaware, also named West Penn’s affiliate hospitals in the lawsuit. The company wants to halt West Penn from talking with other suitors and seeks monetary damages to be determined later.
West Penn, whose 2007 issuance of $737 million of double-B-rated health system revenue bonds made it one of the largest speculative-grade issuers in the municipal market, announced last Friday that it was backing out of the affiliation agreement announced last November.
The Allegheny County Hospital Development Authority issued the 2007 bonds for West Penn Allegheny.
West Penn officials said they objected to the insistence by new Highmark chief executive William Winkenwerder Jr. on Aug. 30 that the hospital system file for bankruptcy protection before the affiliation closes. The company fired Winkenwerder’s predecessor, Kenneth Melani, in April after he got into a public altercation with his girlfriend’s husband.
Rating agencies reacted quickly to Friday’s news. Fitch Ratings and Standard & Poor’s placed their respective B-plus and B-minus ratings under review, as did Moody’s Investors Service with its Caa1 rating. Fitch’s last rating commentary noted that a failure by West Penn to close the merger would pressure its rating downward.
Standard & Poor assigns Highmark an A rating with a stable outlook and Moody’s rates it Baa2 with a negative outlook.
After the companies announced their merger agreement last November, Highmark funneled $200 million in equal parts loans and grants as part of a $475 million lifeline. Before they agreed to the merger, Highmark hired turnaround firm Alvarez and Marsal Inc. to value the target. At Highmark’s urging, West Penn’s board then contracted with Alvarez and Marsal to implement a turnaround plan.
“The only reason WPAHS has been able to avoid default of its debt and other obligations is by virtue of the financial infusions it has received from Highmark,” said Highmark’s lawsuit, filed by the Pittsburgh office of Reed Smith LLP.
“Although a financial restructuring is one option that must be considered to meet these objectives, Highmark is open to considering alternative WPAHS proposals that would sustain the system’s long-term financial soundness,” the firm said in its statement Tuesday announcing the legal action against West Penn Allegheny.
Despite Highmark’s funding, the suit added, the shortfall between West Penn’s anticipated revenues and expenses over five years is expected to deteriorate by about $350 million.
“It is truly sad that Highmark has taken this step,” West Penn vice president Kelly Sorice said Tuesday. “In a nutshell, they are asking a court to help Highmark stand in our way as we try to find an alternative option to bankruptcy. To date, Highmark has not seriously considered any alternatives proposed by WPAHS. … We are shocked and disturbed that a nonprofit organization would take this action against another nonprofit community asset.”
Pennsylvania insurance commissioner Michael Considine, whose department must approve the merger, said: “We are very concerned about [the] announcements and events. The department had raised significant concerns to both Highmark and WPAHS about [West Penn’s] projected deficit and inability to meet its bond obligations in both the short and longer term. However, the department did not ask nor require bankruptcy or restructuring of its debt.”
Federal officials had cleared the partnership.
