O'Brien oversaw merger of Allegheny General, three suburban affiliates

Tuesday, October 14, 2003

By Frank Reeves, Post-Gazette Staff Writer

Charles M. O'Brien Jr., principal architect of the merger three years ago that kept Allegheny General and its three suburban affiliates from following their parent foundation into bankruptcy, has stepped down as leader of the financially troubled West Penn Allegheny Health System.

Charles M. O'Brien Jr. engineered the merger of West Penn and the Allegheny General group in 2000.

Jerry J. Fedele, the system's senior vice president and general counsel, has been named to replace him.

David McClenahan, chairman of West Penn Allegheny's board, said O'Brien, 60, and the board agreed "a different set of leadership skills would benefit" the health system at this stage in its evolution.

The merger of West Penn, which was then headed by O'Brien, and the Allegheny General group in the summer of 2000 created the region's second-largest hospital network. Many hoped it would provide competition for UPMC Health System, the region's largest.

In 1998, Allegheny General and its affiliates -- Forbes Health System, Canonsburg Hospital and Allegheny Valley Hospital -- narrowly escaped the Allegheny Health, Education and Research Foundation's bankruptcy, the largest nonprofit bankruptcy filing in history.

Fedele, 50, takes over as West Penn Allegheny's president and chief executive officer, at a difficult time in the health system's short history.

During the January-March quarter, West Penn Allegheny's losses ballooned to $17.6 million -- or roughly equal to the $17.4 million in losses the health system reported for the two previous quarters -- bringing total losses for the nine months to $35 million.

West Penn Allegheny spokesman Tom Chakurda said yesterday he did not have specific information for the April-June period, the final quarter of the health system's fiscal year. But he said a preliminary review of the results suggested that "we have made significant improvement .... The economic turnaround has been significant from both a financial and volume standpoint."

The large third quarter losses caused Standard & Poor's Rating Services to downgrade West Penn Allegheny's bonds from B+ to B.

"The losses year-to-date are broad-based as all but one facility [of the six-hospital system] is losing money and all but one facility is doing worse than [in] the comparable period last year," S&P said in cutting the rating.

At the time West Penn Allegheny was formed, it hadn't expected to become profitable before 2004. But projections given to bondholders who financed the merger suggested that losses would have narrowed to $5.76 million by the end of the current fiscal year.

Critics, including UPMC Health System, have argued since the merger that the projections for West Penn Allegheny were too rosy and that West Penn's future was shaky at best.

The financing behind the merger consisted of $465 million in speculative grade bonds and a controversial $125 million loan from Highmark Inc., the region's largest health insurer, which portrayed the support as essential to preserving competition for UPMC.

Highmark has since given West Penn more backing, including commitments for more than $40 million in grants, some $19 million of which has bolstered the institution during the past year.

Fedele, who holds a bachelor's degree in mathematics from the University of Pittsburgh as well as an MBA from Pitt's Graduate School of Business, joined West Penn Hospital in 1988 as vice president and general counsel. In addition, he earned a law degree from the Duquesne University School of Law, where he was valedictorian of his class.

McClenahan also announced yesterday that David Samuel, who last month resigned as the system's chief financial officer effective Oct. 31, has withdrawn his resignation and will remain "with the system on a full-time basis." In announcing his resignation, Samuel had said he needed to spend more time with his family but would act as a senior adviser to West Penn Allegheny.

Allegheny General is also in the midst of negotiations with its 1,300 nurses, whose contract was set to expire at midnight. No one expected a strike today.

Officials of District 1199P of the Service Employees International Union have scheduled a meeting of the nurses for tomorrow, when they will be asked to either vote on a tentative agreement if they have one by then, or give the hospital a 10-day notice of intent to strike if they don't.

"We're going to continue negotiating through the night," Chakurda said. "Our intent is to stay as long as is needed to structure a proposal, so the nurses can vote Wednesday. I don't believe there will be a resolution before midnight, so negotiations will continue. The three linchpin issues are mandatory overtime, staffing ratios and wage and benefits."

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