River of Red Ink Swamps Allegheny Health System: Physicians Flounder, Questions Abound, Answers Vanish

October 1, 1998

Wallowing in $1.3 billion in debt, and after losing about a million dollars a day for the past year, the Allegheny health system-a conglomeration of hospitals, physician medical practices and academic institutions-went down for the count in July, leaving Philadelphia's health care system in a financial snarl that may take years to untangle.

Wallowing in $1.3 billion in debt, and after losing about a million dollars a day for the past year, the Allegheny health system-a conglomeration of hospitals, physician medical practices and academic institutions-went down for the count in July, leaving Philadelphia's health care system in a financial snarl that may take years to untangle.

The collapse of Allegheny-recently a rising star among health care systems-has wreaked havoc on the lives of thousands of physicians, researchers, academics, medical students and patients. The entire mess has now been tossed into the lap of a Pittsburgh federal bankruptcy judge who must determine the best way to compensate Allegheny's estimated 80,000 creditors.

Although the Allegheny officials and representatives contacted regarding this article either declined to comment or failed to return phone calls-partially the result of a gag order issued by the bankruptcy court-published reports and interviews with experts in the health care field reflect a consensus that an apparent lapse in management and internal financial controls cost the system dearly.

Forces in the health care marketplace, however, were also at work. Economists in the area said that with an oversupply of hospital beds, declining Medicare reimbursements and increased financial controls by managed care, healthcare systems in the Philadelphia area would have difficulty in making ends meet.

The downfall of Allegheny, therefore, is not just about a company that went wrong; it is also about the survival ability of any health care system-regardless of how well-run it is-under current economic constraints. Furthermore, as mental health struggles to integrate itself into general medicine, a more fundamental issue arises-can integrated systems work at all?

What may end up as the largest failure in the history of health care, had been, before it filed for bankruptcy, the largest medical care provider in Pennsylvania and the largest nonprofit in the United States. The Allegheny Health, Education and Research Foundation (AHERF)-an amalgam of 13 hospitals in Philadelphia and Pittsburgh, approximately 600 physicians' practices and its flagship Allegheny University of Health Sciences (AUHS)-was the brainchild of Sharif S. Abdelhak, M.B.A., its $1.2 million-a-year chief executive officer until he was dismissed in June. In the early 1990s, he orchestrated an acquisition-oriented growth strategy that turned Allegheny into a health care powerhouse, or so it seemed. In addition to purchasing hospitals, Abdelhak also bought the Medical College of Pennsylvania and Hahnemann University, turning what became AUHS into one of the nation's largest medical schools.

Placing a broad spectrum of health care services under one roof is a business strategy that has proliferated throughout the country as competition and tighter financial margins have forced medical providers to seek greater economic efficiency. Creating integrated care systems offering a range of services while staying at the forefront of technology through linkages with academic and research institutions seemed to be the best way of assuring success in an increasingly cutthroat industry.

"The Allegheny system represents one of the new structures in health care in the United States," said William Glazer, M.D., a psychiatrist and president of Glazer Medical Solutions, a New York City-based consulting firm. "There are going to be winners and losers. What happened at Allegheny is an example of a loser. Although there are other systems that appear to be collapsing, there are also some winners out there that appear to be succeeding."

According to Glazer, rapid expansion without correct revenue projections can be a recipe for financial disaster. Nevertheless, he believes these large business structures are the future. Glazer added, "the American health care system can evolve with these kinds of structures" assuming there is adequate management and administration.

So despite Allegheny's failure, there are already suitors ready to snap up its assets, thinking they can do a better job of running the hospital facilities and forging relationships with physicians, academicians and researchers. In late July, Vanguard Health System Inc., a startup hospital corporation based in Nashville, Tenn., offered $460 million for eight of Allegheny's hospitals, only to be trumped two weeks later by a $465 million bid by Tenet Healthcare Corp.

Tenet is the Santa Barbara, Calif., for-profit hospital corporation that gained notoriety under its previous name, National Medical Enterprises. In the mid-1990s, National Medical Enterprises paid out well over half of a billion dollars to settle federal criminal and civil charges, insurer claims of overbilling and malpractice claims arising out of the operation of its psychiatric hospital facilities.

Thus far, no offer has been accepted by the bankruptcy court, and additional bidders are in the wings. The decision to accept any bid, however, will not only be driven by price, but also by the likelihood that the new purchaser can unwind the financial entanglements that caused the system to go bankrupt in the first place. Allegations of impropriety have swirled around AHERF with claims that previous management raided endowment funds to keep the financially strapped system afloat. Over $10 million in funds earmarked for education, research and libraries were allegedly withdrawn from the accounts, according to reports appearing in the Philadelphia Inquirer in August. The charges have instigated an investigation by Pennsylvania's attorney general and could lead to civil or criminal penalties, depending on the circumstances surrounding the use of any diverted funds.

For psychiatrist Mary Jane England, M.D., president of the Washington Business Group on Health, a D.C.-based association of large employers devoted to analysis of health policy issues, and a past APA president, Allegheny's collapse represents a singular event that does not portend a widespread collapse of health care systems. Nevertheless, "the lesson to be learned is the importance of working on having the best top management."

Efforts to integrate mental health treatment into general medical care, furthermore, won't be stymied by business misadventures, England said, since there are greater obstacles to overcome. "We have a much bigger issue in dealing with mental health and addiction services, and that is, how are we going to strategically convince our colleagues in medicine to work with us to improve their own [primary care and other specialty] practices," she said.

For William R. Dubin, M.D., medical director of AmeriChoice Behavioral Health Inc., clinical professor of psychiatry at Jefferson Medical College in Philadelphia and a past president of the Pennsylvania Psychiatric Society, the demise of Allegheny came as no surprise. "What happened to them was predicted five years ago," he said, based on their aggressive acquisition of hospitals that were not doing well financially.

"My own personal opinion is that there is not enough administrative talent to run these large systems," Dubin said. "It's a very difficult thing to do and only a very few systems have pulled it off. Once you reach a certain critical mass it just becomes too difficult. You're trying to reconcile too many needs in a contracting financial environment."

Dubin added that the rapid acquisition of physician medical practices also could have doomed Allegheny, noting that most of the efforts to bring physicians together as employees have failed. He felt the greatest responsibility for these failures was the misapplication of business principles to health care. "Doctors were not going to compromise their ethics or their quality for some 25-year-old M.B.A. who was going tell them how to take care of patients," Dubin said.

Michael J. Vergere, M.D., chair of psychiatry at the Albert Einstein Health Care Network in Philadelphia and a past president of the Pennsylvania Psychiatric Society, says it is too soon to determine what impact Allegheny's bankruptcy will have on psychiatric services, residency programs and patient care, but he envisions some effect. "There will be some reshuffling of patients, and it would be unfortunate if some of the Alle-gheny services were no longer available for patient care," Vergere said. "These hospitals had good clinical services for adults and children and if they should close they would be sorely missed. Furthermore, they have been excellent training institutions."

The status of AUHS medical and professional schools is still unclear, though the prediction is that they will emerge from bankruptcy as freestanding medical institutions. Both Vanguard and Tenet have included additional sums in their offers to purchase the hospitals. They also offered to assist the schools in their drive to become independent. Nevertheless, some students may end up bailing out, Vergere said, if the turmoil interferes with education.

Kenneth S. Abramowitz, a health care analyst with Sanford C. Bernstein & Co. in New York City, agrees that there will be successes and failures in the health care marketplace, just like in any other industry. But, he said, the huge systems that link varied functions may not work in the long run. Calling combinations like Allegheny a "flawed concept," he urged a more decentralized approach. "Health plans should be health plans; doctors should be doctors; and hospitals should be hospitals," Abramowitz said.

Meanwhile, he also criticized the way health care has evolved. "It would be nice if employers and the government purchased health care based on quality issues rather than price. And it would be nice if individual employees and beneficiaries understood that they're paying for their own care," Abramowitz said.