Highmark in focus after sale of vision subsidiary

What a difference a year makes.

In the summer of 2016, Highmark Health downplayed reports that it was looking to sell its vision business.

On Wednesday, the Pittsburgh-based insurer announced that it had struck a deal to sell a majority stake in a major component of that business, Davis Vision Inc. The buyer is private equity firm Centerbridge Partners LP.

Davis will be combined with Centerbridge’s own managed vision care company, Baltimore-based Superior Vision. Highmark will retain a minority equity stake in the amalgamated firm.

In a separate move, Centerbridge will acquire a minority stake in the Visionworks retail optical chain, which is the other major component of Highmark’s vision subsidiary, Texas-based holding company HVHC Inc.

Highmark will retain a majority stake in Visionworks.

The transactions are expected to close in the fourth quarter, subject to regulatory approvals. They also put the spotlight on Highmark’s financial struggles in recent years, and what its leaders’ vision might be for the insurer’s future.

Highmark officials said the move will provide “additional capital to invest in its core businesses.”

Here are some key points to consider about that.

What do they see as their core businesses?

Pittsburgh-based Highmark and its affiliates operate health insurance plans that serve 5 million people in Pennsylvania, Delaware and West Virginia.

During a conference call with reporters on Wednesday, Highmark president and CEO David Holmberg said the influx of cash would help the company strengthen its partnerships with regional providers, notably Danville-based Geisinger Health System and Baltimore-based Johns Hopkins Health System.

Highmark and Geisinger in May announced plans to collaborate on an initiative that would expand “community-based care” in four north-central Pennsylvania counties, including creation of a “comprehensive health campus” in the Montoursville area.

“We have a bold, transformational strategy that will redefine health care,” Holmberg said Wednesday. “Integrated care and coverage is the future, and Highmark Health is going to create it.”

Highmark also is in the provider business

The Pittsburgh Post-Gazette pointed out that another one of Highmark’s core businesses is Allegheny Health Network, a provider established in 2013 to compete with Western Pennsylvania rival UPMC — something the Geisinger affiliation also would do, incidentally.

But Allegheny “has been clawing its way to profitability,” the paper reported.

A recent Highmark report says “2016 was another year of growth and investment for Allegheny Health, recording an operating loss of $39 million, slightly behind prior year performance.”

Costs associated with the implementation of an integrated electronic health record system and investments in physicians and key support staff drove the loss, Highmark said, but it was “partially offset by higher volumes, with particular growth in oncology services.”

Still, Allegheny saw a 1.2 percent increase in both inpatient and outpatient registrations, and has delivered a 30 percent increase in net patient service revenue since it was established in 2013, Highmark says.

Why the need for additional investment?

Holmberg insisted the sale was not the result of financial pressures. It is clear, however, that a significant influx of cash would not be unwelcome.

Things have been looking brighter for Highmark’s overall bottom line, but the insurer is coming off two rough years, thanks to millions of dollars in losses it suffered in 2014 and 2015 under the Affordable Care Act.

Overall, the Pittsburgh-based insurer lost about $800 million on individual health plans sold through the marketplace, Holmberg said last year.

By this spring, Highmark was able to report progress on that front: The insurer raised premiums, narrowed its network to offer fewer marketplace plans and improved patient management.

The result was a $22 million profit for 2016 in its government business unit, which includes the ACA marketplace. But Highmark also continues to pursue money it says it is owed by the federal government to cover its ACA costs.

In March, Highmark announced an overall net profit of $59 million for 2016, following an $85 million loss the prior year. Its total net assets are $5.2 billion, and it has $6.5 billion in cash and investments.

What’s the vision deal worth?

Highmark and Centerbridge won’t say how much the vision transactions are worth, but there are some potential clues.

A Reuters report last September cited persons familiar with negotiations who said that Centerbridge and another firm, Friedman Fleischer & Lowe LLC, had teamed up to buy HVHC, Highmark’s vision unit, for close to $2 billion. That bid was unsuccessful.

Financial results released by Highmark earlier this year show that HVHC delivered revenues of approximately $1.6 billion and an operating gain of $79 million in 2016.

Davis Vision, HVHC’s managed care component to be purchased by Centerbridge, had operating revenues of nearly $780 million and year-over-year network growth of 18 percent in 2016, Highmark statistics show.

Why sell a successful business?

The influx of ready cash is an obvious benefit, but there seem to be other strategic considerations.

Highmark isn’t completely walking away from these businesses, but will retain a minority stake in the merged Davis property and a majority stake in Visionworks.

That way, some of the profits from both companies continue to flow into Highmark’s coffers.

Again, however, neither Highmark nor Centerbridge would disclose the relative size of their respective post-transaction holdings in each firm.

They did suggest that the arrangement will involved continued collaboration between Visionworks and the merged Davis-Superior operation.

“We are thrilled to be partnering with Highmark and the management of all three businesses across this multidimensional transaction,” said Dan Osnoss, managing director of Centerbridge.

Centerbridge expects to support Visionworks “in continuing to deliver an exceptional retail experience and in its next phase of growth,” he added, but did not elaborate on what that support might entail.

“In the coming months, we will continue to work with Highmark to plan and implement a smooth transition for our respective organizations and stakeholders,” Osnoss said.

Why keep Visionworks?

Visionworks’ revenues last year were in the vicinity of $820 million, a spokeswoman confirmed.

Holmberg said Highmark is excited to maintain a retail vision presence through Visionworks, and is looking at ways to be more innovative in that sector.

The chain opened 53 new stores in 2016 in key markets such as Columbus, Ohio, and Seattle, Wash., bringing the current location total to nearly 750 in 41 states and the District of Columbia, Highmark reported. The company sold about 3.6 million pairs of eyeglasses in 2016, its annual report added.

As part of the move, HVHC CEO Jim Eisen is stepping down. He is being replaced by Peter Bridgman, whose experience in the field has included  executive roles with LensCrafters, Pearle Vision and EyeMed.

Holmberg, who has been with Highmark since 2007, himself served as CEO of HVHC before succeeding to the insurer’s top post.

Roger DuPuis
Roger DuPuis covers Cumberland County, health care, transportation, distribution, energy and environment. Have a tip or question for him? Email him at rdupuis@cpbj.com.

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