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Culture clash between insurer, hospital system results in merger meltdown

West Penn Allegheny Health System backs out of an affiliation agreement with Highmark, which is suing to get the deal back on track.

By Victoria Stagg Elliott — Posted Oct. 15, 2012

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Health industry experts say the collapse of the merger agreement between the large but financially distressed West Penn Allegheny Health System in Pittsburgh and Highmark, the largest private health insurer in the region, is a sign that differing company cultures can stress or even break the growing number of affiliations between insurers and health professionals.

“Insurance companies and hospital systems think they understand each other’s points of view,” said Kevin Wong, MD, a family physician in Jeannette, Pa., who is employed by West Penn and president of the Pennsylvania Academy of Family Physicians. “But they really don’t. It really is a total mess.”

West Penn announced Sept. 28 that it was backing out of an affiliation with Highmark and will seek other partners. Highmark, which has invested more than $225 million since the two entities agreed to merge last year, announced Oct. 2 that it was seeking a temporary restraining order to prevent West Penn from starting affiliation discussions with other organizations.

The merger arrangement was in part a response to the fact that Highmark was in a dispute with the University of Pittsburgh Medical Center, which holds about 55% of the area’s hospital market, over the fee schedule. This was settled July 3, with Highmark members having access to UPMC facilities until at least 2015. West Penn says it backed out of the deal because Highmark wanted to restructure West Penn through bankruptcy. Highmark denies breaching any contractual obligations.

Experts say this is an example of what can happen if mergers do not take company culture into account. On the surface, West Penn and Highmark are health care nonprofits. A nonprofit health system, however, can vary greatly from a nonprofit health insurance company.

“Payers can bring a lot of resources to the table, but the way that insurers and physicians want to operate, make decisions, measure success can be very different,” said Lisa Bielamowicz, MD, senior vice president of physician strategy for The Advisory Board Company in Washington.

Consultants also say situations where insurers invest in other health care sectors rather than owning them may work out better for all concerned. Insurers increasingly are putting money into medical practices, but this can take many forms.

For example, Blue Cross and Blue Shield of North Carolina invested in FastMed Urgent Care in September to allow the chain to build several new outposts in the state. The insurer acquired a minority stake in the company.

“When you accept an investment, you’re accepting influence,” said Tim Monaghan, an attorney and partner with Shutts & Bowen in West Palm Beach, Fla., who works on health care legal issues. “But there’s a difference between accepting influence and going to work for the insurer. Influence doesn’t necessarily require the health system to give up control.”

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