October 19, 2012 – The troubled West Penn Allegheny Health System’s (Caa1 / 01728AG83) abrupt rejection of a $475 million affiliation offer from its would-be white knight, insurer Highmark Inc., has triggered lawsuits, countersuits, accusations of personnel raids and harsh glare from rating agencies. West Penn’s 2007 issue of $737 million of health system revenue bonds — rated double-B then and since lowered — made it one of the largest junk-bond issuers in the municipal marketplace. Highmark, a Blue Cross Blue Shield insurer that serves about five million health-plan members in Pennsylvania, West Virginia and Delaware, sued in Allegheny County to prohibit West Penn from talking with other suitors. West Penn retaliated with its own lawsuit on Tuesday. Amid all this, officials from the two companies have spoken by phone about possibly reviving talks. Should the latest round of talks fizzle again, West Penn, unless it finds another white knight, may have to file for bankruptcy. West Penn, the second-largest hospital network in western Pennsylvania, reported a loss of $88 million through the first nine months of fiscal 2012. Its predecessor organization, the Allegheny Health, Education and Research Foundation, filed a $1.3 billion Chapter 11 case in 1998 after a series of bond downgrades in what was by far the biggest health-care bankruptcy filing at the time. A repeat Chapter 11 filing — bankruptcy wonks call it “Chapter 22” — would resonate far beyond the Steel City. “If there’s another bankruptcy, it will be monumental. A filing by the same credit in health care would roil the markets. It would be event-breaking,” said Lisa Goldstein, a senior vice president for health care at Moody’s Investors Service.