The National Significance of the Highmark and West Penn Allegheny Merger

Updated on September 20, 2011
James T. Parker

By James T. Parker

A health-care transformation is unfolding in Pittsburgh that has national implications for health care. Recently, Pittsburgh-based Highmark announced its purchase of West Penn Allegheny Health System (WPAHS), a five-hospital, health system that’s the second largest health system in the Pittsburgh area.

With this announcement, the two organizations have begun to create a preview for what the future of health care may look like.  In fact, the merger of these two organizations offers a glimpse into the challenges that await health-care organizations that take bold steps to reposition themselves into the future.

Others are better positioned to ascribe the true catalysts behind this acquisition.  Nonetheless, it’s entirely plausible to suggest that Highmark was driven to this acquisition out of a fear that UPMC was simply becoming too large a force in the Pittsburgh health-care market.  If that’s the case, Highmark’s move can be seen as a defensive counter-response.  Having said that, Highmark and West Penn Allegheny describe another motive for coming together, one that is more far-reaching and significant.  Together, they describe their desire to create an integrated health-care system that marries the financing and delivery of care.

Why is this a big deal?  After all, there are examples of integrated health systems across the country that also market health insurance to the public. The Geisinger Health System is an example of such a model.  This one, though, is different.  Highmark comes to this acquisition already well entrenched in the health-benefit market.  Highmark’s health plan includes more than 3-million members and holds significant market share in Western Pennsylvania as a stand-alone insurer.

Highmark also includes almost every hospital in the area in its network of hospitals and physicians.  This means that Highmark will have to manage a hugely difficult transformation.  The company occupies the leadership position in the benefits market and the market power that comes with this.  It is less clear that the Pittsburgh market will cede to Highmark the same position as an integrated health system.  Equally as significant, the company will eventually find itself in direct or indirect competition with many of the hospitals and medical professionals now in its networks.

Health plans have historically avoided ownership of health-care delivery systems for a couple of sound reasons.  Agreeing to managed-care joint ventures with hospital systems has been about as far as health plans have been willing to go, and most of these have not performed up to their promise.  In fact, these partnerships have underperformed because the two parties involved were not as aligned as they wanted others to believe.

What’s more, health plans have sought competitively advantageous pricing from their partners, and health systems have sought competitively advantageous referrals to their systems.  Neither party has been truly able to make a difference in how care was priced or delivered.

In their own words, Highmark and West Penn Allegheny are attempting to create what health-care thought leader, Clayton Christensen, in The Innovator’s Prescription, describes as an integrated, fixed-fee provider system.  As such, Highmark and West Penn Allegheny are undertaking a tremendous change agenda.  In the future they describe when  health-care practitioners will deliver care in a world in which revenues and resources are fixed, not variable.

This doesn’t mean health care will be rationed.  It does mean the delivery of health care will be rationalized.  In other words, patients will be much more likely to receive care from professionals who are best matched to provide the care they need.

With this shift in focus, change of great magnitude is possible.  The new health system will be encouraged to make resource allocation decisions based not on how best to generate immediate revenue, but on how to best maximize fixed, scarce resources.  If accepted in the market, the new organization will be motivated to invest in the health of its members/patients to avoid longer-term costs.

It is too early to say whether this new, combined organization will be accepted into the Pittsburgh market or granted regulatory approval.  But if the answer is yes to these two stipulations, Highmark and West Penn Allegheny have the opportunity to create a “super” accountable care organization (ACO)–an integrated health system that’s also integrated into a large health plan.

The rest of the United States will certainly watch this development closely for its impact on the immediate and long-term impact on American health care.  It’s also worth watching because of the significant leadership challenges and questions the combination of Highmark and West Penn Allegheny presents.

Can the combined management bridge the cultural divide that has defined health-care payers and providers?  If so, how long will it take?

Can the combined management effectively integrate the two organizations into a seamlessly integrated health-care financing and delivery system?

And how quickly can Highmark and West Penn Allegheny abandon their current ways of thinking and redirect their focus toward population-based care delivery and long-term health management?

The nation should watch this game being played in Pittsburgh.  It doesn’t involve the Steelers or the Pirates.  But it is worth keeping a close eye on to see how it all plays out and how it advances a new form of health-care.

James T. Parker is Founder and President of Health Market Strategies, a firm dedicated to improving American health care through the advancement of unique, innovative strategies built on the foundation of voluntary collaborations.  Visit for more information. To reach Jim, call (317) 508-1662 or email [email protected].

+ posts

Throughout the year, our writers feature fresh, in-depth, and relevant information for our audience of 40,000+ healthcare leaders and professionals. As a healthcare business publication, we cover and cherish our relationship with the entire health care industry including administrators, nurses, physicians, physical therapists, pharmacists, and more. We cover a broad spectrum from hospitals to medical offices to outpatient services to eye surgery centers to university settings. We focus on rehabilitation, nursing homes, home care, hospice as well as men’s health, women’s heath, and pediatrics.