Lessons of AHERF resonate today, Moody's reports

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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."

From 1986 to 1987, AHERF grew from an entity with 350 medical and faculty staff members to more than 10,000, according to a 2000 article in Health Affairs. During the same period, assets ballooned from $274 million to $2.2 billion.

The health system rapidly expanded from one to 14 hospitals, while buying up physician practices by the armful. But, without contracted productivity measures for those practices, the hospitals came under increasing pressure to subsidize physician losses, and eventually was losing nearly $1 million a day.

"I think what happened to AHERF has stimulated greater transparency and greater disclosure from hospitals to bond holders and other relevant parties," said Ms. Goldstein. "The marketplace has demanded greater disclosure."

Allegheny General Hospital avoided bankruptcy by merging with West Penn Hospital, and the two now are part of the West Penn Allegheny Health System. But the damage went beyond business and strategic decisions. In 2002, Sherif Abdelhak, AHERF's former chief executive officer, pleaded no contest to misdemeanor misuse of charitable funds and served three months in the Allegheny County Jail.

"We believe there are important lessons to be learned from AHERF's downfall that are applicable to today's analytical efforts to determine which health systems will be able to navigate future challenges," Ms. Martin wrote.

While today's challenges include a weakened economy that results in more charity care, and an anticipated work force shortage, the report concludes that "hospitals that have learned from AHERF's missteps are in a better position to weather the new challenges facing many hospitals nationally and preserve credit quality and bond ratings."

Steve Twedt can be reached at stwedt@post-gazette.com or 412-263-1963.


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