An independent review of West Penn Allegheny Health System finances has found that it overstated payments from vendors and patients by $73 million over the past two years, a move that is expected to result in substantial operating losses.

"This is significant," said analyst Jeff Schaub of Fitch Ratings in New York, who spoke to WPAHS officials yesterday.

While representing an earnings reduction, rather than a cash loss, "the obvious concern is that what we thought had been operating earnings going back two years seems to have been somewhat lower than what was published," said Mr. Schaub.

He declined to comment on whether the adjustment could affect WPAHS's bond rating, saying only that "We're studying the situation."

WPAHS President and Chief Executive Officer Dr. Christopher Olivia sent a system-wide e-mail yesterday morning assuring staff that the reductions "have no direct implications on the System's pension plan" and that WPAHS has "now adopted an industry 'best practice' accounting methodology to help ensure a mistake of this nature does not reoccur."

Mr. Schaub said hospitals have to estimate revenues for patient services because payments generally don't match hospital charges, but in this case West Penn Allegheny used a flawed methodology to make those estimates.

While it's not unusual for those estimates to be off somewhat, a $73 million adjustment "is not a trivial amount," he said, particularly for a system that has relied on investment earnings to stay in the black.

West Penn Allegheny made a $12 million profit over the first nine months of fiscal 2008 but, without its investment income, it would have recorded a $14.7 million loss. This new adjustment will deepen those losses, but it is still not known by how much.

Yesterday's announcement carries uneasy echoes of the 1998 financial meltdown of Allegheny General Hospital's former parent, Allegheny Health and Education Research Foundation, which aggressively expanded into the Philadelphia market only to end up in bankruptcy. Two years later, AGH merged with West Penn Hospital to create the West Penn Allegheny Health System.

Prior to yesterday's announcement, Dr. Olivia, who came to West Penn Allegheny in March from the Cooper Health System in southern New Jersey, had scheduled a series of town hall meetings with employees this week.

In an e-mail, Dr. Olivia said the meetings were meant to "review the System's present position and where we would like to see it evolve. You will learn our progress to date and gain insights into the process we will be using to transition our organization into a distinctive, integrated health system."

He met with West Penn staff yesterday morning and Allegheny General staff at 5 p.m. He's scheduled to talk at Forbes Regional today, then hold an afternoon meeting at West Penn on Thursday and a morning meeting at Allegheny General on Friday.

During his brief tenure, Dr. Olivia already has put a temporary hold on capital spending, hired consultants and instituted management changes. He recently brought in Roy Santanella from Philadelphia to be chief administrative officer, with responsibility for financial functions. He is now restructuring the finance department.

The financial review was performed by accounting and management consulting firm Grant Thornton. "As a matter of firm policy, we do not comment on the work provided to clients," Kristi Grgeta, a spokeswoman for the company, said yesterday.

Deloitte & Touche, auditors for the West Penn Allegheny system, has not yet evaluated the review.

While the $73 million adjustment "is not the best of news, we must also recognize that we have undertaken material actions to enhance the management of our organization and to improve operations and our financial reporting process," Dr. Olivia said in his e-mail to employees.

"What we have gained in this review of our finances is clarity. With that clarity we will be able to plan our actions and initiatives with confidence and a sound understanding of what is required of us to achieve our objectives."