The company, which operates six hospitals in the Pittsburgh area, has been losing money in recent years, and alleged in a statement Friday that Highmark breached parts of the takeover agreement that the state's largest insurer announced in November. State regulators have not yet approved the deal.
West Penn Allegheny system said the hospital group should restructure through bankruptcy.
"Our impending marriage is over because Highmark is demanding new terms that will alter the course of the West Penn Allegheny Health System in ways far afield from our agreed-to strategic vision," West Penn board Chairman Jack Isherwood said.
Still, West Penn said it was open to new discussions with Highmark.
Highmark denied it breached the agreement and said it still believes an affiliation is in the best interests of both companies.
"We have been working in good faith," Highmark said in a statement. "We believe that we have made substantial progress in this regard, especially in recent weeks."