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Payor-Provider Integration: Anatomy of the Highmark-West Penn Deal

In a session at the Becker's Hospital Review Annual Meeting in Chicago on May 17, Bob Edmondson, former vice president of strategic planning and business development at West Penn Allegheny Health System in Pittsburgh, and Poras Davé, managing director at Apex Health Associates, discussed payor-provider integration and shared their experiences with West Penn's recent integration with insurer Highmark.

Mr. Edmondson began by discussing current consolidation in the healthcare industry. He believes healthcare is "on the throes of a major industry consolidation" but is unsure what exactly the consolidation will look like. He asked: Will hospital-hospital mergers remain popular? Will hospital-physician deals? Will payors and provider start merging?

He believes the latter arrangement will become more common in the future. In the session, he shared five driving forces he believes will lead to the marriage of payors and providers:

  • Payors are beholden to medical loss ratio limits. The Patient Protection and Affordable Care Act now requires insurers spend no less than 80 percent of their funds on medical care unless the remaining funds are used for certain initiatives related to quality and patient safety. Therefore, insurers are looking for ways to invest in these types of initiatives.
  • Physicians are the core of the accountable care organizations. They direct care and ensure efficiency. Thus, payors need collaborative relationships with physicians to succeed as an ACO. These relationships can be secured through health systems, which often already have close relationships with physicians.
  • Insurers have key ACO competencies, such as easy access claims data, data registries, actuarial analysis capabilities, etc.
  • Providers are assuming greater population risk through a variety of models, including patient-centered medical homes, accountable care organizations, etc. Payor and provider roles are "starting to blur." Who is responsible for what is less and less easily defined.
  • ACO start-up capital is high at a time when hospital revenues are flat or declining. Payors have the cash reserves to get these organizations off the ground.

Mr. Davé took the podium next and gave a brief overview of the market surrounding the Highmark-West Penn deal.

West Penn had been struggling financially for some time but was hoping a strategy of consolidating its urban services to free up money for investment in Pittsburgh's suburban communities could help it turn the corner. While this plan had began to show some progress, it wasn't happening quickly enough to move toward some of the new models of care the system wanted to implement. The system provided high quality, low cost care but was in what seemed like a losing battle with competing University of Pittsburgh Medical Center for market share. It needed a partner to provide the capital to help it develop an ACO and other integrated models.

At the same time, the area's biggest insurer, Highmark, was renegotiating its contract with UPMC, and talks were deteriorating, according to Mr. Davé. The academic medical center wanted an increase of 10 percent, and the Pittsburgh market's premiums were already some of the highest in the nation.

From West Penn's perspective, Highmark was able to provide much needed capital to help it meet its strategic goals. Highmark saw the opportunity as a way to create a provider network that could compete with UPMC in the market and preserve competition.
While the insurer and health system explored several various partnership models, they eventually determined Highmark's acquisition of West Penn was the best approach. The two groups are currently working together and awaiting final approval of the deal by regulatory bodies.

More Articles on Highmark-West Penn:

Highmark, West Penn Merger Gets Public Support in Hearing
UPMC Asks Judge to Halt West Penn's Antitrust Suit
Union Urges UPMC, Highmark to Resume Contract Negotiations

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