An interesting tidbit in the news yesterday had the Hoover’s health care industry team buzzing: a major regional health insurance provider, Highmark, wants to acquire a major regional hospital operator, West Penn Allegheny Health System (WPAHS).
The news immediately struck us as unusual — an affiliation agreement of the sort that we don’t usually see while conducting our daily scouring of industry news sources. While hospitals sometimes operate their own small health care plans, this is the first announcement in recent memory of a merger between a major health plan and a sizable hospital system. To quote Bill Murray in Ghostbusters: “Dogs and cats living together!”
So, who stands to gain from this unorthodox union? It could be a positive growth move for Highmark, which hasn’t had much luck with its recent attempts to grow within the insurance market. The company spent several years trying to hook up with Independence, another major regional BCBS provider, but that merger was nixed by the regulatory chaperones. The company’s proposed acquisition of BCBS of Delaware has also faced some hurdles.
The plan to buy up WPAHS also comes in the midst of failed contract negotiations between Highmark and Pittsburgh’s other major medical provider, UPMC. Highmark is refusing UPMC’s 40% reimbursement-increase request, and in response, UPMC is likely dropping itself from Highmark’s preferred provider network. UPMC has its own health insurance unit, and a tie-up between Highmark and WPAHS would create two areas of direct competition between the companies.
The alliance will likely be beneficial to WPAHS, which is currently operating at a loss and has faced lower patient volumes and reimbursement levels due to economic conditions in recent years. The cash infusion and potential increase in Highmark patients could help the health system stave off drastic cost-cutting measures such as hospital closures.
Highmark and WPAHS are breathlessly assuring all that their affiliation will serve to maintain high-quality medical care options for residents of Western Pennsylvania. But the complexity of the situation begs several questions. If UPMC and Highmark quit one another completely, scores of patients will be scrambling to change doctors, and some argue that the standoff will harm the community by reducing patient access. On the other hand, the increased competition in both the insurance and acute care markets could effectively serve to lower the overall cost of medical care in the region.
One other question is whether such insurance company/hospital operator tie-ups are positive for the industry at large. For ailing hospitals like WPAHS, it could provide a means of bringing their operations back up to par. It could also give insurance companies like Highmark a means of gaining more control over health care claims processing and approvals, potentially driving measures to streamline standards of care.
Here at Hoover’s, we’ve spent a considerable amount of time this year updating and discussing the rise of mergers among hospitals, and this announcement struck us as something new. If successful, this merger could mark the start of an industry trend. If not, it might be a spectacular lesson in what not to do. Either way, it’s part of the flurry of activity we’re seeing as health-related companies scramble to meet health reform mandates and lower the skyrocketing cost of medical care in the US market.