A possible understating of West Penn Allegheny Health System's long-term pension obligations in 2009 is apparently behind a recommendation by the U.S. Securities and Exchange Commission that the Pittsburgh health system face civil or administrative action.
Three WPAHS-related sources, who spoke on the condition of remaining anonymous, say an SEC investigation initiated in 2008 when the health system took a $73 million write-down seems to have shifted its focus to public disclosures on WPAHS pension plan obligations made a year later, a point confirmed by West Penn Allegheny Board chairman Jack Isherwood in a memo sent to staff and employees Friday.
The regulators' scrutiny may center on a July 8, 2009, investor conference call during which a bondholder asked WPAHS officials how much they expected pension funding obligations to increase that year. According to a transcript later posted on dacbond.com, the officials responded that pension funding "will at least double in FY2011 beyond the $11 million required in FY 2010."
Instead, the fiscal 2011 pension funding turned out to be $75.7 million, as reported in the WPAHS fiscal 2011 annual report -- nearly seven times the amount mentioned in the call with investors a year earlier.
The SEC apparently is looking into why the initial estimate was so far off.
The regulatory action -- known as a Wells notice -- is named after John Wells, who chaired a 1972 SEC committee reviewing the commission's enforcement policies. In essence, the notice alerts the person or entity that the SEC is recommending the commission take administrative action against them that could result in civil penalties.
In his email Friday to West Penn Allegheny staff and employees, Mr. Isherwood said the Wells notice in this case "does not relate, in any way, to the system's financial performance or our present accounting practices.
"On the contrary, the SEC has said it may bring action against WPAHS for disclosures made more than three years ago relating to our pension plan obligations. However, it is also important to reiterate that WPAHS has never missed a pension payment, and we do not intend to do so."
In the summer of 2009, West Penn Allegheny had been going through a period of turmoil and upheaval among its top administrators. Former president and CEO Jerry Fedele had departed in the summer of 2007, followed by a short period with interim CEO Keith Smith at the helm before Christopher Olivia was named permanent president and CEO in March 2008.
Shortly after Dr. Olivia's arrival, the health system announced it was taking the $73 million write-down, which it attributed largely to overly optimistic patient revenue projections. That triggered the SEC investigation that is ongoing, although it appeared to have become moribund in recent years.
Instead, the sources say SEC scrutiny seems to have moved away from issues concerning the write-down and over to the 2009 disclosure.
A significant discrepancy in the projected and actual pension payments would be of interest to WPAHS bondholders because it could affect both the value of the bonds and bondholder decisions to sell or hold onto the bonds. Those projections are not pertinent to WPAHS's ability to meet its pension payment obligations.
Mr. Isherwood, in a mass distribution email to the system's employees Thursday, had described the Wells notice as "neither a formal allegation of wrongdoing nor a determination of wrongdoing." He said the board intends to submit information to the SEC laying out why West Penn Allegheny doesn't believe any action is warranted.
Dr. Olivia was hired to turn around the financially ailing West Penn Allegheny Health System after doing that at Cooper Health System in Camden, N.J. He brought in several top administrators and set out to consolidate services at the Allegheny General and West Penn hospital campuses.
Even as the restructuring took more aggressive turns, such as closing West Penn's emergency department and ending inpatient care at the Suburban General campus in Bellevue, the health system was dogged with falling patient volume and rising costs.
Then, in June 2010, West Penn Allegheny and insurer Highmark Inc. jointly announced that they planned to affiliate, a move that marked Dr. Olivia's immediate departure and the placement of an interim management team to oversee operations while the planned affiliation underwent regulatory review.
Meanwhile, ratings agencies have continued to issue downgrade after downgrade on the $737 million WPAHS bonds issued in 2007 by the Allegheny County Hospital Development Authority.
Last month, Moody's Investors Service downgraded West Penn Allegheny's bond rating again, to Ca from Caa1, just weeks after Fitch Ratings downgraded the bonds to CCC from B+. Both agencies cited the increased likelihood that West Penn Allegheny would undergo a financial restructuring as it moves to complete the affiliation with Highmark.
Steve Twedt: email@example.com or 412-263-1963.