Highmark looks to expand hospital and physician ownership

Faced with a future where its home region's largest health system could be outside of its network, Pittsburgh-based Highmark plans to buy and affiliate with more hospitals and physician practices.

Highmark's June announcement that it would purchase West Penn Allegheny Health System established its first large-scale foray in the clinical side of the health care business. It also contributed to the deterioration of contract negotiations with the University of Pittsburgh Medical Center, which sees West Penn as a competitor.

Highmark's new direction is similar to what other insurers are trying to do. Insurers, hospitals and physicians are merging, affiliating and contracting in new ways as they seek alternatives to fee-for-service payment arrangements and look ahead to a post-reform health system, said Kevin Ryan, a Chicago-based attorney who is a member of the Health and Life Sciences practices at law firm Epstein Becker & Green.

During a conference call with reporters Dec. 8, Highmark Executive Vice President David O'Brien said the West Penn deal "is only a small part of our strategy going forward."

"We are in discussions with physicians and hospitals," O'Brien said. "We're looking to expand our footprint in the provider world. We think the future for us strategically is being able to work closely with providers, to be in the provider space."

O'Brien said that may include both purchases and partnerships with hospitals, clinics and physician practices.

In a phone interview the week after that call, Highmark Senior Vice President Mike Fiaschetti said Highmark is focused on the local market and motivated by the need to preserve competition and choice in Western Pennsylvania and other markets Highmark serves.

"It's too big a market to have one dominant tertiary provider," he said. "There has to be competition to drive value."

UPMC sees Highmark's strategy as aimed primarily at undercutting UPMC's standing in the market so that Highmark can drive members of its health plan to cheaper care settings, UPMC spokesman Paul Wood said.

"What Highmark is doing is essentially transforming from a neutral insurer where every subscriber could go to any hospital, to a competing integrated delivery and financing system. That puts them in direct competition with UPMC," he said. UPMC and Highmark are fighting in federal court over issues arising during contentious contract negotiations. UPMC's contract with Highmark expires on June 30, 2012.

Physicians support a competitive marketplace that preserves patient choice, said Marilyn Heine, MD, a hematological oncologist and emergency physician who practices in the Philadelphia area and serves as president of the Pennsylvania Medical Society.

UPMC is so dominant in Western Pennsylvania that "to have competition with that may be favorable, but the details are going to determine exactly how it will play out," she said.

She said it's important that some physicians remain independent. Whether Highmark's acquisitions are good for patients and physicians or not depends on the number of type of practices purchased, whether physicians retain some governance over the practices, and whether Highmark eventually restricts access to physicians it does not own, she said.

The West Penn acquisition included five hospitals, 1,664 staff physicians and a physician group with 230 offices across western Pennsylvania. West Penn admitted more than 61,000 patients and treated 836,474 as outpatients in the fiscal year ended June 30.

That's compared with 20-plus hospitals, more than 400 physician practices and clinics, and more than 3,000 employed physicians at UPMC, which saw 220,000 inpatient visits and 4.5 million outpatient encounters.

UPMC also operates a health plan with 1.6 million members. Highmark, a Blue Cross and Blue Shield licensee, has 4.8 million health plan customers in Pennsylvania and West Virginia.

Although Ryan didn't want to comment specifically on Highmark's plans, he said there are risks to insurers who try to enter the clinical arena.

"I've been around long enough to see that physician practice acquisitions come and go," he said. "In the past, I've seen other types of managed care arrangements where providers got into accepting risk or taking more risk, only to not have it work out. The same is true with payers who got into more of the health care operations."

Another complication of the West Penn acquisition was the potential conflict of interest with Highmark's Medicare claims processing subsidiary, Highmark Medicare Services. Highmark executives said they were concerned that regulators might see a conflict of interest in that subsidiary processing Medicare claims while another subsidiary -- West Penn -- generates them.

They said officials at the Centers for Medicare and Medicaid Services were "willing to work with them," but that it made more sense just to divest the Medicare claims business to avoid any future complications.

Diversified Service Options, a subsidiary of Blue Cross and Blue Shield of Florida, will buy that business, executives with both companies announced Dec. 8.