UPMC S ANALYSIS OF THE PENNSYLVANIA INSURANCE DEPARTMENT S ORDER PRECLUDING A CONTRACT WITH UPMC

UPMC S ANALYSIS OF THE PENNSYLVANIA INSURANCE DEPARTMENT S ORDER PRECLUDING A CONTRACT WITH UPMC Highmark is relentlessly pursuing by any means possible a new or extended contract with UPMC. As will be detailed below, this directly contradicts and abrogates a two-year process of review by the PID, defies the public trust, and makes a mockery of Highmark s promises to save WPAHS. Highmark s protestations that the PID did not reject a UPMC contract are blatantly false and misleading and, in and of themselves, have precipitated the ad wars criticized by most. BACKGROUND On April 29, 2013, the Pennsylvania Insurance Department ( PID ) issued a thirty-two page, conditionladen Order approving Highmark s plan to affiliate with WPAHS and form an integrated delivery and financing system ( IDFS ) that will compete with UPMC. The Order capped a rigorous, seventeen-month review process conducted by the PID and its expert consultants. That process was prolonged primarily by Highmark s material changes to its original plan (the price tag alone ballooned from $475M to over $1.8B), PID s repeated need to push Highmark for supplemental plans, information and projections, and Highmark-WPAHS litigation regarding the enforceability of their affiliation agreement. Although Highmark made multiple material changes to its plan, one element never changed: Highmark s commercial contracts with UPMC would expire at the end of their terms, originally June 2012 and ultimately, December 2014. This plan component never changed because expiration of the contracts was essential to saving the near-bankrupt WPAHS. Highmark could only save WPAHS by moving substantial patient volume to it from UPMC. (Highmark advised the PID that it intended to shift 41,135 in-patient admissions on an annual basis from UPMC and community hospitals to WPAHS with the vast majority coming from UPMC.) The Highmark-UPMC contracts however, prohibit Highmark (with one minor exception) from steering its subscribers who have overwhelmingly chosen UPMC over WPAHS away from UPMC. Accordingly, Highmark s plan necessarily entailed letting those UPMC contracts expire. Indeed, the public record developed by the PID (as well as by Highmark and WPAHS in their litigation), confirmed that any extension of the Highmark-UPMC contracts would have a devastating impact on WPAHS. The PID review process revealed that WPAHS was not the only entity whose financial stability hung in the PID approval balance. In July 2012, Highmark advised the PID that, absent approval of its IDFS plan, Highmark would lose nearly a half billion dollars in income, roughly 800,000 subscribers and the ability to differentiate itself from the UPMC Health Plan and national insurers in the newly competitive commercial insurance market, a market that Highmark had long dominated as a monopolist. Although pursuing rapid PID approval of what became known as Highmark s Base Case, i.e., its acquisition of WPAHS followed by the expiration of its UPMC contracts, Highmark nevertheless maintained and continues to maintain an active public campaign to extend the UPMC contracts set to expire on December 31, 2014. Then, in February 2013, first Senator Don White and then the PID itself demanded that Highmark explain how the extension of its UPMC contracts it was zealously pursuing would affect WPAHS. Highmark never produced that explanation; instead, it provided the PID with projections based on the outlandish assumption that UPMC would assent to a new Highmark contract that would permit Highmark to shift patients away from UPMC and into WPAHS. The PID s independent 1

expert consultants dismissed these projections as neither reasonable nor credible. Those consultants ultimately reached the same conclusion about Highmark s Base Case projections as well. After consideration of the substantial public record and its consultants highly detailed expert reports, the PID granted Highmark the approval it had vigorously pursued and critically needed albeit with substantial conditions acknowledging that Highmark would indeed fare better with approval than noapproval. The PID also approved Highmark s Base Case, no-upmc contract plan, a plan, as detailed above, from which Highmark s PID submissions never deviated. As for Highmark s public campaign for a new or extended UPMC contract, the PID imposed conditions that render that scenario a nonstarter. First, UPMC would have to agree to such a contract. Given that Highmark intends to compete with UPMC IDFS-to-IDFS and its plan hinges on depleting UPMC, UPMC will not and cannot agree to any such contract. Second, Highmark will have to provide the PID with updated information based on reasonable assumptions and credible projections showing the impact of any new contract on WPAHS financial performance. The public record is clear that any extension of the UPMC contracts would do nothing but devastate WPAHS. Highmark cannot generate reasonable or credible projections that would show otherwise. And, of course, UPMC would not agree to any new contract that would facilitate its demise simply to save WPAHS. Lastly, Highmark would have to produce an independent expert analysis of the impact of any new UPMC contract on competition the region s insurance and provider markets. Highmark would never be able to deliver such an analysis from a qualified or unbiased expert. Although the PID provided Highmark with the approval it ultimately pursued and the PID s Approving Order effectively precludes any new or extended UPMC contract, Highmark persists in pursuing one. The following memorandum details the material facts culminating in the PID s Approving Order and demonstrates why Highmark s ongoing campaign for a new or extended UPMC contract brazenly defies the PID. FACTS 1. Highmark s Predicated its Original Form A Affiliation Proposal On No-Contract with UPMC. In November 2011, Highmark launched its bid to affiliate with WPAHS by filing a Form A with the PID. See Form A (PID Docket No. 1). 1 Highmark s bid to affiliate with WPAHS was predicated on the looming expiration of its UPMC commercial contracts on June 30, 2012. See Letter from S. Johnson to J. Stover, May 31, 2012 (PID Docket No. 795) (noting that Highmark stated in its Form A filing that it was seeking to affiliate with WPAHS in the context of the projected loss of access by Highmark s subscribers to UPMC s facilities. ). After the May 1, 2012 Mediated Agreement brokered by Governor Corbett extended the contract expiration to December 31, 2014, the PID suggested to Highmark that it should amend its Form A to account for this material change. See id. 2. Highmark s Amended Form A Submitted to PID Also Presumed No UPMC-Contract. Highmark responded to the PID in July 2012 by filing an Amended Form A. Amendment No. 1 to Form A, July 13, 2012 (PID Docket No. 803). Like the original Form A, the Amended Form A was also predicated on the assumption that the UPMC contracts would expire. Addendum No. 1 to Amendment No. 1 to Form A, Aug. 24, 2012 (PID Docket No. 866) at 11 (Highmark s affiliation projections assume that UPMC will 1 All cited documents bearing a PID Docket number can be located at http://www.portal.state.pa.us/portal/server.pt/community/industry_activity/9276/highmark west_penn_cumulative_log/103 6250. 2

not renew the contracts, and access to certain UPMC facilities will be terminated, effective December 31, 2014. ). Highmark submitted projections with its Amended Form A which confirmed that the Mediated Agreement would negatively impact WPAHS. Highmark Inc. v. WPAHS, No. GD-12-018361 (Allegheny Cty. Ct. Com. Pl.), WPAHS Ex. 24 (Highmark PID Projections dated July 2012) at 6 (Mediated Agreement would extend the turnaround time for WPAHS, reduce its revenue by $400 million and net income by $200 million). Other projections Highmark submitted at this same time showed that Highmark s IDFS plan entailed shifting 41,135 in-patient admissions from UPMC and community hospitals on an annual basis to WPAHS with the vast majority of those admissions coming from UPMC. See PID Docket No. 1401 (Compass Lexecon Report) at 148. 3. Highmark s No Transaction Projections to PID Revealed a Devastating Impact on Highmark. Around this same time, the PID requested that Highmark provide it with projections showing the impact on Highmark if the affiliation with WPAHS is not consummated. PID Docket No. 866 at 13. Highmark provided these No Transaction Projections to PID in July 2012. WPAHS Ex. 24 at 9-10; see also PID Docket No. 1402 at 66-73 (Blackstone Report). Highmark s No Transaction Projections revealed a devastating impact on Highmark absent approval: Highmark would become a smaller company with lower net income and a lesser ability to differentiate itself in the market. WPAHS Ex. 24 at 13. Among other things, these projections assumed that: (a) WPAHS financial condition will continue to deteriorate without a Highmark affiliation and that WPAHS would ultimately be taken over by a for-profit entity that will reduce capacity by eliminating operating lines and/or facilities not meeting required financial returns, which will result in a shift of additional utilization to UPMC ; (b) a for-profit takeover of WPAHS will likely be conditioned on a new Highmark contract resulting in a 20% increase in contracting rates for Highmark s commercial block of business, effective July 1, 2013 ; and (c) Highmark s next contract with UPMC would result in a 15% increase for commercial business effective January 1, 2015. Id. at 9-10. Under this scenario, Highmark projected that its enrollment would decline significantly. Id. at 10. Highmark would have limited ability to create a differentiated, value oriented product[.] Id. Highmark s pre-tax income would be approximately $480M lower in this scenario than in the affiliation scenario. Id. Moreover, Highmark would have 800,000 fewer policyholders/subscribers. Id. New competitors entering the market would intensify price competition and it is likely that UPMC Health Plan will take significant share in the small group and mid-market books of business while national players (who can price across a broader geographic region) will attract larger experience-rated and non-risk groups. Id. at 13. 4. Highmark Predicated its Second Amended Form A -- a.k.a. Highmark s Base Case Application to PID -- on No Contract with UPMC. Upon the conclusion of the Highmark-WPAHS litigation in December 2012, PID again requested that Highmark provide it with an updated filing regarding its proposed affiliation. See Letter from S. Johnson to J. Stover, Dec. 20, 2012 (PID Docket No. 1149) (noting the continually evolv[ing] nature of the proposed transaction). In response, Highmark filed its Second Amended Form A in January 2013. See Amendment No. 2 to Form A, January 18, 2013 (PID Docket No. 1210). Although the Second Amended Form A sought approval of a plan radically different from the November 2011 Form A and the July 2012 Amended Form A, Highmark s plan was again premised entirely on the absence of a contract with UPMC after 2014. See Second Amended Form A (PID Docket No. 1210). Specifically, the only projections Highmark submitted with the Second Amended Form A assume[d] that UPMC will not renew the contracts, and access to certain UPMC facilities will be terminated, effective December 31, 2014. Id., Tab E at 28. 3

The PID would ultimately define these WPAHS projections as Highmark s Base Case Financial Projections. See PID Approving Determination and Order dated April 29, 2013 ( Approving Order ) (PID Docket No. 1413 at 21). The Base Case projections showed WPAHS discharges ending up well above recent historical levels of WPAHS discharges[.] See PID Docket No. 1401 (Compass Lexecon Report) at 89. 5. PID Demanded that Highmark, Which Was Actively Campaigning for a UPMC Contract Extension, Produce Projections Showing the Impact of That Extension on its Application. The PID advised Highmark that its Base Case projections were inconsistent with Highmark s stated intentions and actions. See Letter from S. Johnson to J. Stover, Feb. 22, 2013 (PID Docket No. 1256); see also Letter from D. White to W. Winkenwerder, Feb. 14, 2013 (PID Docket No. 1256) ( I m concerned about the consequences a long term insurance contract between Highmark and UPMC could have on Highmark s ability to execute the turnaround of WPAHS as envisioned in your [Second Amended Form A] ). The PID explained that Highmark s filing assumes that the Highmark/UPMC contract will not be extended beyond December 31, 2014. Letter from S. Johnson to J. Stover at 1. Highmark, however, is actively seeking to have the Highmark/UPMC contract extended. Id. As a result, the PID requested that Highmark submit projections showing the impact of a possible Highmark/UPMC contract extension on WPAHS and Highmark. Id. By this time, the PID had access to a substantial public record showing that any extension of the UPMC- Highmark contract would have a deleterious effect on WPAHS. See Highmark v. WPAHS, Hr g Tr., Oct. 26, 2012 at 251 (Nanette DeTurk, Chief Financial Officer and Executive Vice President and Treasurer of Highmark, testifying that she knew the Mediated Agreement would result in fewer patients and less money for WPAHS); Id. at 317-19 (Dr. Kenneth Melani, former Highmark CEO, testifying that the Mediated Agreement compromised WPAHS ability to compete with UPMC); Id. at 456, 462 and Hr g Tr., Nov. 1, 2012 at 641, 658 (Dr. Keith Ghezzi, former Highmark consultant and interim WPAHS CEO, testifying that Highmark had projections before filing its November 2011 Form A with PID that keeping UPMC in its network would not return [WPAHS] to profitability or financial stability ). 2 6. Highmark Produced New UPMC In-Network Projections that Presumed UPMC Would Agree to a Contract Allowing Highmark to Tier and Steer UPMC Patients to WPAHS. In early March 2013, Highmark submitted projections to the PID showing the impact of a long term contract with UPMC. See Highmark Addendum No. 4 to Amendment No. 2 to Form A, March 8, 2013 (PID Docket No. 1276) at 2. These projections did not assume that the existing UPMC and Highmark contracts would be extended. Rather, Highmark assumed that UPMC would agree to execute an entirely new contract with Highmark in which it is permitted to tier and steer its subscribers away from UPMC hospitals ( New UPMC Contract Projections ). Id. 7. PID Rejected Highmark s Base Case and New UPMC Contract Projections as Unreasonable and Not Credible. PID s independent experts, Compass Lexecon and Blackstone Advisory Partners, LP ( Blackstone ), evaluated Highmark s Second Amended Form A and attendant projections and issued their respective final reports on April 24 and April 25, 2013. See PID Docket No. 1401 (Compass Lexecon Report) and PID Docket No. 1402 (Blackstone Report). Although Compass Lexecon concluded in its 342 page report 2 See also Highmark v. WPAHS, WPAHS Ex. 230 (internal Highmark email dated May 1, 2012 and revealed in November 2012) (executing the Mediated Agreement would make the turn[-] around of WPAHS much more difficult if not improbable ); Highmark v. WPAHS, WPAHS Ex. 24 (Highmark PID Projections dated July 2012) at 1, 6 (Mediated Agreement would extend the turnaround time for WPAHS, reduce its revenue by $400 million and net income by $200 million); Highmark s Addendum No. 1 to Amendment No. 1 to Form A, Aug. 24, 2012 (PID Docket No. 866) at 4 (Mediated Agreement would negatively impact[] the projected volumes at WPAHS ). 4

that the success of Highmark s affiliation with WPAHS depends critically on the ability of [Highmark s IDFS] to attract large numbers of inpatients away from UPMC to WPAHS, it rejected the Base Case Projections and New Contract Projections purporting to explain the movement of that volume. Compass Lexecon Report at 90, 94. As for the Base Case Projections, Compass Lexecon dismissed them as founded on unreasonable assumptions or otherwise not credible. Id. at 13-14, see also id. at 139-40 ( [i]t is not reasonable to assume that UPMC and other affected [western Pennsylvania] hospitals will simply allow WPAHS, through Highmark s efforts, to shift volume away from UPMC (and other hospitals) to WPAHS without engaging in some type of counter strategy and competitive response to keep these inpatients at these competing hospitals ); id. at 134 (failure of projections to account for a dynamic response from UPMC and community hospitals to loss of volume reflects a severe limitation on the robustness of the projections set forth by Highmark ), id. at 135 (PID should consider this flaw a serious limitation on the robustness and credibility of the WPAHS volume and financial projections provided by Highmark ). Similarly, Compass Lexecon also rejected Highmark s New Contract Projections because they were based on unreasonable assumptions and otherwise not credible. Id. at 160 (emphasis added). Specifically, Compass Lexecon concluded that: It is my understanding that UPMC has anti-tiering and anti-steering provisions in nearly all, if not all, of its provider contracts, including its 2012 contract extension with Highmark. It seems unreasonable in modeling these projections to assume that any new provider contract with UPMC would not include anti-tiering and anti-steering provisions. Since this assumption is the driving force behind attaining all the same incremental discharges as in the [Base Case] scenario, I do not find these projections to be credible. Id. (emphasis added). 8. PID Issued its Approving Order Based on Highmark s Base Case Application, Which Was Predicated Entirely on No UPMC Contract. On April 29, 2013, the PID issued its Approving Order based on a comprehensive record developed as part of the PID s seventeen month review. See PID Findings of Fact and Conclusions of Law, May 31, 2013 (PID Docket No. 1418) at 2. The PID s record included more than 64,000 pages of reports and analytical data, more than 10,000 pages of public comments and more than six hours of public testimony. Id. In addition to considering materials submitted by Highmark, the PID also considered other information, presentations, reports, documents, public comments, and other inquiries, investigations, materials and studies permitted by law as well as the Compass-Lexecon and Blackstone Reports. Id. at 3. The PID s Approving Order included multiple conditions designed to, among other things, preserve and promote competition in insurance in the Commonwealth of Pennsylvania[.] Approving Order at 3; see also Findings of Fact and Conclusions of Law, at 3, 33 132, 37 147 (same). In the section entitled Transition Plan Regarding UPMC Contract, the PID detailed conditions regarding Highmark s contract with UPMC scheduled to terminate on December 31, 2014. Approving Order at 15. The PID also recognized that Highmark s Base Case Application is premised on a non-continuation of the UPMC Contract and that continuation of that contract may delay WPAHS financial recovery. Id.; see also Findings of Fact and Conclusions of Law at 60, 243 (same). Accordingly, the PID outlined conditions it has imposed on Highmark s ability to secure any new or extended contract with UPMC. Specifically, the Approving Order provides that if Highmark were ever to secure[] UPMC s assent to a new contract, Highmark would have to provide [PID] with updated information, based on reasonable assumptions and credible projections on the impact of any new contract on the financial performance of WPAHS, as well as an independent analysis of an expert on the 5

impact of any new UPMC contract on both the insurance and provider markets in the region including but not limited to any effects on competition. Id. at 15-16 (emphasis added). Roughly one month after issuing the Approving Order, the PID published its Findings of Facts and Conclusions of Law. See PID Findings of Fact and Conclusions of Law at 4. Among other things, the PID confirmed that it did indeed approve the affiliation based on Highmark s Base Case. Specifically, the PID explained that Highmark would fare better with approval of the affiliation and no UPMC contract instead of a no-approval and a new UPMC contract beginning in 2015: But when Highmark s projected base case (which assumes approval of the Form A and the closing of the Affiliation Agreement) is measured against the hypothetical [N]o [T]ransaction case, in which the Affiliation Agreement did not close and Highmark instead executed a new contract with UPMC beginning in 2015, it is apparent that, by many measures, Highmark would fare better having the Transaction contemplated by the Form A close than not. For example, its net income, measured as a percentage of revenue, is estimated to be higher in each of 2013 through 2016 with the base case as opposed to the no transaction case. Id. at 55, 226. 9. PID Confirmed in Footnote 5 of its Conclusions of Law that Highmark Remains Bound by the Conditions That Preclude a New or Extended UPMC Contract. PID advised in Footnote 5 of its Conclusions of Law that it would not prejudge any Highmark attempt to satisfy the virtually insurmountable obstacles PID has imposed to any future Highmark bid to secure a UPMC contract: No conclusion has been made in these Findings of Fact and Conclusions of Law with respect to whether a new or extended provider contract should or should not be entered into between Highmark and UPMC. Id. at 60, 243 n.5. Accordingly, Highmark must still need to secure[] UPMC s assent to a new contract, provide PID with updated information based on reasonable assumptions and credible projections on the impact of any new contract on the financial performance of WPAHS, as well as an independent analysis of an expert on the impact of any new UPMC contract on both the insurance and provider markets in the region including but not limited to any effects on competition. Id. at 15-16 (emphasis added). The PID s affirmation of objectivity in Footnote 5, necessary to assert legal integrity, in no way diminishes the fact that PID and its consultants carefully evaluated the Highmark submissions and rejected the contract proposal. Of course PID would review a Highmark bid for a new or extended contract (if UPMC would ever agree to one), subject to the strictures of the Approving Order that any agreement has neither anticompetitive nor anti-wpahs effects. Footnote 5 should not be read to nullify or weaken the other 300 pages of analysis, facts and conclusions. CONCLUSION Notwithstanding the terms of the PID s Order and the undisputed public record that any extension of the UPMC contract would devastate WPAHS, potentially extinguish competition, and indeed place Highmark at risk; Highmark persists in an unabated campaign for a new or extended UPMC contract. Beyond the harm to the community and igniting the ad wars, it undermines Highmark s credibility exposing this lengthy public legal and regulatory process and litigation as a sham of monumental proportions. # # # 6 2013 UPMC 08-16-13