Last summer's departure of executives Jerry Fedele and Mark Palmer from the West Penn Allegheny Health System resulted in severance payouts of $2 million, weighing down financial results for the first quarter of fiscal 2008.

For the three-month period ended Sept. 30, the region's second-largest hospital network notched a profit of $1.5 million, down 51 percent from the $3.1 million made in the same year-ago period. Patient revenue increased 3.9 percent during the quarter, but expenses jumped more than 4 percent as the system paid off its departing executives, hired more than 300 nurses as part of a recruitment initiative and made investments in cardiology, cardiothoracic surgery, gastroenterology services, oncology, orthopedic surgery, neurosurgery and bariatric surgery. Patient discharges were down slightly.

West Penn Allegheny "is a system which certainly has come a distance, but seems to be relinquishing some [of] its gains as new and real challenges lie ahead," wrote analyst Jody Madala of DEPFA First Albany Securities LLC, in a Dec. 7 research note for bondholders.

"Investors should keep a watchful eye on quarterly performance."

West Penn is still in the midst of a turnaround that began with the 2000 merger of Allegheny General Hospital and the lesser-known Western Pennsylvania Hospital -- a deal that rescued Allegheny General from the collapse of its parent, the bankrupt Allegheny Health, Education and Research Foundation. The new system struggled in its early years but recently completed its fourth consecutive year of net profits, and in May sold $750 million in bonds at near-investment grade interest rates just months before a credit crunch tightened the spigot on financing around the globe.

West Penn Allegheny "had luck on its side," wrote Ms. Madala.

But then came the exit of several top executives, including Mr. Fedele, the systemwide chief executive officer; Mr. Palmer, chief executive of The Western Pennsylvania Hospital in Bloomfield; and systemwide chief financial officer David Samuel, who intends to leave in March. Between them, Mr. Fedele and Mr. Palmer received $2 million in severance, but a spokesman would not disclose how much went to each executive.

Concern that physicians might leave amid the management changes "appears to be at bay for now," Ms. Madala wrote in her Dec. 7 note, but as the system works to integrate its many clinical specialties, that process "could stir things up," as well. "This is a fiercely competitive market and rival University of Pittsburgh Medical Center is likely not to stand in the sidelines just watching this drama unfold ... it would be safe to assume UPMC is selectively reaching out to physicians and physician groups in an attempt to take advantage of (West Penn Allegheny's) most recent hardship. Unfortunately, (West Penn Allegheny) cannot afford any more challenges at this point in time."

A nationwide search for Mr. Fedele's successor as systemwide CEO continues, and board member Keith Smith will remain as interim CEO until a successor can be appointed. That announcement is expected in the first quarter of 2008, the system disclosed in its quarterly filing with bondholders. In the same filing, West Penn Allegheny also disclosed that it had settled an inquiry from the U.S. Attorney's Office into erroneous billing of certain Medicare claims between 2001-2004 and overpayments to the system hospitals. Without revealing the amount at issue, West Penn Allegheny said, "This matter has been settled and paid for the overpayment," plus interest of $1,061.