Highmark faces a challenging future as it gets to work turning around the finances of West Penn Allegheny Health System, which it acquired this week, according to a report from Moody’s Investors Service.

Moody’s on Thursday downgraded Highmark’s debt rating and insurance financial strength rating citing concerns over whether it can “establish WPAHS as a credible alternative delivery system to University of Pittsburgh Medical Center before its contract with UPMC expires at the end of 2014,” the rating agency said.

Highmark is now the parent organization for an insurance business called Highmark Health Services and a hospital division called Allegheny Health Network. It purchased financially struggling West Penn Allegheny as the centerpiece its health network that will compete with UPMC.

The $1.1 billion purchase included spending $604 million for West Penn Allegheny’s bond debt, which Moody’s said weakens Highmark’s financial position.
Highmark spokesman Aaron Billger declined to comment.

“While Highmark’s affiliation with WPAHS provides Highmark needed flexibility in its provider network, there are considerable risks involved,” Steve Zaharuk, a Moody’s senior vice president, said in the report. “These include the ability to improve the financial condition of WPAHS while promoting and delivering quality and efficient health care, and perhaps most importantly, convincing its membership base to switch from the UPMC network to the WPAHS network.”

To be financially successful, Highmark needs to move a large portion of its 2 million members in Western Pennsylvania who see UPMC doctors and are treated at UPMC hospitals to Allegheny Health Network, which includes West Penn Allegheny’s five hospitals, Jefferson Regional Medical Center and St. Vincent Health System in Erie.

At the same time, it faces the expiration of its reimbursement contract with UPMC, the largest hospital system in the region. Without a new contract, Highmark’s members won’t have in-network access to UPMC, which could cause them to leave Highmark for another health insurance company that does have access, including UPMC Health Plan, Aetna Inc., United Healthcare and Cigna Corp.

UPMC this week reiterated its stance that it will not sign a new contract with Highmark.

“UPMC looks forward to competing with the newly formed Highmark-WPAHS integrated delivery network and to continuing to serve consumers with the innovative, high-quality, cost-effective health care and insurance services UPMC is known for,” spokesman Paul Wood said.

Highmark’s debt rating was lowered to Baa3, from Baa2, and its insurance financial strength rating was dropped to Baa2, from Baa1. The Baa3 rating is one notch above junk, a status that increases borrowing costs.

Moody’s also noted that its outlook on Highmark is negative and that isn’t likely to change in the next 12 months.

But it could move to stable if Highmark makes “significant progress” in turning around West Penn Allegheny, extends its contract with UPMC, maintains its insurance membership at current levels and achieves profit margin of 3 percent.

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May 3rd, 2013