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Talks with Highmark resume after judge bars West Penn from seeking new suitor

Talks between West Penn Allegheny Health System and Highmark resumed Monday just a couple of days after a judge ruled last week that Highmark had not breached the $475 million merger deal, effectively barring West Penn from negotiating a new deal with other companies.

In her ruling last Friday, Court of Common Pleas Judge Christine Ward said Highmark would have undergone “irreparable harm” if it were not able to complete its affiliation with WPAHS.

In a statement released by West Penn Allegheny, Jack Isherwood, board chairman, said he was disappointed with the court’s ruling but noted “we have said from the beginning, we believe that Highmark is a good partner for WPAHS. We look forward to engaging in constructive dialogue with them as soon as possible regarding the best way to move forward.”

For its part, Highmark has maintained from the beginning that it remains committed to completing its partnership with WPAHS. “We believe that the proposed affiliation is in the best interests of both parties, and more importantly, the entire community – physicians, employees of WPAHS, Highmark subscribers, WPAHS patients and employers in the region,” read a statement posted on its website in response to the court ruling.

To date, Highmark has already made more than $200 million in facilities investments at West Penn, and has been banking on the hospital network to be the centerpiece of a $1 billion investment the insurer is making to build a broader integrated delivery system in western Pennsylvania. Last month, Highmark announced it would acquire Erie, Pa.-based St. Vincent’s Health System for $65 million; in June it announced an affiliation agreement with Jefferson Regional Medical Center valued at $275 million; and Highmark has also been developing medical clinics in and around the Pittsburgh area.

According to published reports, leaders of both companies, including Highmark CEO William Winkenwerder and West Penn’s Isherwood met yesterday and they also met with WPAHS bond holders, who would have the most to lose should the health system be forced to declare bankruptcy prior to completing the deal with Highmark. The amount of debt held by West Penn – about $800 million – has been a major sticking point in the negotiations to this point.

But in a joint statement issued to the press yesterday after talks had resumed the two companies said the talks had been “productive” and were centered on “efforts the parties could take to address the financial condition of WPAHS to secure approval of their affiliation agreement by the Pennsylvania Insurance Department. Both parties realize there are significant issues that must be addressed and that prompt action is essential.”

The need to move quickly is apparent. West Penn recently released financial results for the 2012 fiscal year, which ended in June, that showed a widening loss of $112 million. Further, industry experts said in October, when the health system alleged the breach of their affiliation agreement by Highmark, that WPAHS had only 50 or 60 days of operating capital on hand.

And the recent squabble may also have done some irreversible damage, as Pittsburgh area media reports have indicated some physicians have jumped ship from West Penn Allegheny to rival health network UPMC.

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