Losses, scrutiny mount at WPAHS

SEC may take action based on disclosure

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The West Penn Allegheny Health System posted a $28.3 million operating loss for the first quarter of its current fiscal year, putting it on track to lose more than $100 million by the time the fiscal year ends June 30.

In another, possibly more worrisome development, the WPAHS financial report released Thursday, about 60 days after the end of the quarter, also disclosed that the U.S. Securities and Exchange Commission has advised the Pittsburgh health system that it will recommend civil action based on allegations WPAHS violated the SEC Act of 1934 in an 2009 disclosure.

The specific regulation cited in the SEC's so-called Wells notice prohibits "any manipulative or deceptive" practice.

The WPAHS financial report did not give specific information about the disclosure in question, although WPAHS board Chairman Jack Isherwood sent a mass distribution email to employees Thursday afternoon that said the notice is not a formal allegation of wrongdoing or a finding of wrongdoing:

"A Wells notice indicates that the SEC may bring a civil action or institute an administrative proceeding. It also provides WPAHS with an opportunity to provide the SEC with information as to why such action should not be brought."

He said the health system intends to respond to the SEC, making the case that action is not warranted.

WPAHS officials declined further comment on the SEC action.

In 2008, the SEC launched an investigation after West Penn Allegheny took a $73 million writedown attributed to overly optimistic patient revenue projections. That investigation has never been officially closed and it is not known if the notice is related to that investigation. The SEC does not comment on investigations.

The $28.3 million operating loss in the first quarter compares with a $27.1 million loss for the same period a year ago. The health system showed a $24.7 million loss overall after accounting for investment income and donations.

During the quarter, inpatient discharges declined by 2 percent, continuing a troubling downward trend in patient volume in the region's second largest health system.

In his email, Mr. Isherwood said that while the health system is doing "an outstanding job of reducing costs, we are seeing higher salary expenses as we employ more physicians and hire more staff for our new programs. This is a strategic decision, which we believe will yield benefits in the future."

West Penn Allegheny and insurer Highmark Inc. are in discussions to finalize their affiliation, which is also under review by the Pennsylvania Insurance Department.

Highmark plans to make WPAHS the centerpiece of a planned $1 billion integrated health care delivery network to compete with rival health system UPMC, although the talks were interrupted this fall when West Penn Allegheny accused Highmark of breaching the affiliation agreement. Highmark successfully won an injunction preventing WPAHS from seeking other suitors.

In his email to employees, Mr. Isherwood said, "WPAHS continues to meet with Highmark on a very frequent basis.

"Several meetings have occurred over the past two weeks where we have had in-depth discussions about our proposed affiliation and the importance of physician retention and recruitment. We agree that there are significant issues that must be addressed, and we are working diligently to address them."

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Steve Twedt: stwedt@post-gazette.com or 412-263-1963.


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