The West Penn Monkey Wrench

The news that West Penn Allegheny Health System had backed out of the Highmark merger on Sept. 27 created some big ripples throughout the business and healthcare community. The decision added more uncertainty to a picture that was already uncertain because of the pitched battle between UPMC & Highmark. Businesses starting to feel comfortable about the impact of the competition now question insurance rates and availability after next year; hospital and doctor availability; and the economic impact on their customers in general. Whatever the eventual outcome, the prospect of WPAHS going its separate way from Highmark – given the hospital’s financial position – adds another level of nervousness to an already uncertain business climate.

One of the related industries that could be impacted is construction. Highmark’s acquisition has already resulted in millions invested in hospital infrastructure and their plans for creating a world-class provider system was going to mean a billion dollar construction program – at minimum – over the next five years or more. Now, that capital program is a big question mark, or maybe a series of question marks.

The most obvious question mark is how does a system with little or no capital keep up with the high costs of maintenance and upgrading that a hospital demands. UPMC annually budgets $250 million or more for capital expenditures. WPAHS has not spent that much on facilities in aggregate over the past ten years. Without a source of capital, WPAHS will have little chance to improve that track record. Projects like the $20 million or so invested in re-opening the West Penn ER or the Forbes Regional modernization probably cannot be done without Highmark or another suitor.

The subject of a partner is probably the biggest question mark hanging over the whole subject, given WPAHS’s debt and operating deficits.

For construction-related businesses, the questions revolve around opportunities (see paragraphs above) and relationships. The firms that have been involved in the work at WPAHS and Jefferson have had ties to the former facilities and executives there but mostly had ties to either John Paul or Ken Melani. As often as not the professionals involved so far have had ties to both. Assuming WPAHS finds either a partner or some working capital what happens to the firms that are asked to work on projects at a WPAHS facility who also retain contracts with Highmark (or who want to keep those doors open)? Astorino has doubtless learned some painful lessons about the West Penn facility since taking on the design/construction mgr. role. Getting familiar with an institution like that takes time and costs money that can be recouped on later projects. Will Highmark view Astorino’s work with them as exclusive and therefore see an independent contract for future West Penn work as disloyal? Do specialty contractors like McKamish or Lighthouse Electric – who were among the first firms working on West Penn because of their extensive experience at the hospital – have to make ‘us or them’ kinds of decisions about responding to requests from WPAHS? What about the dozen or so general contractors who have bid and/or won work thus far at West Penn or Forbes Regional? Must they now decline opportunities in order to have a shot at a multi-million dollar Highmark medical mall?

All these questions are of course still on the table. The WPAHS decision may indeed be just a negotiating strategy designed to push Highmark back away from their apparent desire to see WPAHS restructure its billion dollar debt through bankruptcy. Thus far – and its only one week remember – none of the players serving the proposed capital work have been instructed to stop work. Jefferson’s work can go ahead regardless of the outcome of the WPAHS/Highmark spat so a few bigger hospital projects will advance. And the business case for the medical mall concept hasn’t evaporated so the Wexford project Highmark has been advancing – rumored to be as much as $100 million – may still make sense. For an industry trying to get traction for the next growth cycle, the timing of this latest uncertainty stinks.

 

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