10 Years Later, An Eerie Echo of the Fall of AHERF

This week, as reported by Steve Twedt in the Pittsburgh Post-Gazette, accounting irregularities were found at the West Penn Allegheny Health System,

An independent review of West Penn Allegheny Health System finances has found that it overstated payments from vendors and patients by $73 million over the past two years, a move that is expected to result in substantial operating losses.

'This is significant,' said analyst Jeff Schaub of Fitch Ratings in New York, who spoke to WPAHS officials yesterday.

WPAHS President and Chief Executive Officer Dr. Christopher Olivia sent a system-wide e-mail yesterday morning assuring staff that the reductions 'have no direct implications on the System's pension plan' and that WPAHS has 'now adopted an industry 'best practice' accounting methodology to help ensure a mistake of this nature does not reoccur.'

Mr. Schaub said hospitals have to estimate revenues for patient services because payments generally don't match hospital charges, but in this case West Penn Allegheny used a flawed methodology to make those estimates.

While it's not unusual for those estimates to be off somewhat, a $73 million adjustment 'is not a trivial amount,' he said, particularly for a system that has relied on investment earnings to stay in the black.

Yesterday's announcement carries uneasy echoes of the 1998 financial meltdown of Allegheny General Hospital's former parent, Allegheny Health and Education Research Foundation, which aggressively expanded into the Philadelphia market only to end up in bankruptcy. Two years later, AGH merged with West Penn Hospital to create the West Penn Allegheny Health System.

In fact, last week, Moody's Investor Service issued a report on the 10 year anniversary of the fall of the house of AHERF (the Allegheny Health Education and Research Foundation). Per an article again by Steve Twedt in the Pittsburgh Post-Gazette, who also wrote a significant series in the same newspaper summarizing the collapse of AHERF,

From the distance of 10 years, the historic bankruptcy of Allegheny General Hospital's then-parent organization still offers valuable lessons for today's health-care industry, says a new report by Moody's Investor Service.

'AHERF left such a stain, such an indelible mark on hospital management teams, they realized that if one of the big systems can fail, no one is immune,' said Lisa Goldstein, leader of the Moody's health-care team that produced the report.

On July 21, 1998, Allegheny Health and Education Research Foundation (AHERF) defaulted, resulting in what is still the largest bankruptcy ever among the 560 Moody's-rated not-for-profit health-care entities. At the time, AHERF had $2 billion in revenue and $555 million in outstanding debt, according to the Moody's report.

Analyst Lisa Martin, who wrote the report, says industrywide forces converged with 'the organization's own management and governance failures' to cause the foundation's failure.

The external forces included Medicare reimbursement cuts -- still an issue a decade later -- and highly competitive markets in both Pittsburgh and Philadelphia.

But, she added, 'we believe its ultimate downfall was driven more by decisions of the organization itself -- weak governance, poorly executed strategies, lack of refined leadership, and absence of methodical execution.'

Although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. I only could locate one article in a medical or health care journal that discussed the case in detail, albeit incompletely since it was written before Abdelhak's guilty plea [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me summarize some of important points not found above (see also this narrative, starting on page 5):

  • AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care imperial CEOs, Sherif Abdelhak.
  • Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
  • While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
  • Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
  • As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
  • After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The story of AHERF is not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping the latest management band-wagons and genuflecting before imperial CEOs.

Yet since the fall of AHERF, we are still hearing breathless stories about the latest wonderful plans to save health care (think about, for example, electronic medical records, pay for performance schemes, etc), and the brilliant CEOs (think about, for example, William McGuire, the former CEO of UnitedHealth) who will be our saviors.

We health care professionals need to stop falling for this hype and spin. Saving health care will take clear thinking and hard work by a lot of people. The "visionaries," if we let them, are likely to depart with a huge cache of money, leaving us and health care worse off. If it is just "not done" to talk about cases such as that of AHERF, and other examples of "recent unpleasantness," how will be learn not to fall for the propaganda?

Of course, it is those who benefit from the propaganda who do not want us catching on to their game.

If physicians, health professionals, health care researchers, and health policy makers do not learn the lessons of the fall of AHERF, they will be doomed to see its repetitions. What just happened to West Penn Allegheny Health Systems is only a small example of all the things that can go wrong.

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