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Anatomy of a Bankruptcy

Introduction: Hear no evil, see no evil

By Steve Massey, Post-Gazette Staff Writer

Only a decade ago, Allegheny General was the Fort Knox of the hospital business. Led by a board with some of the biggest names in corporate Pittsburgh, it exhibited an abiding respect for the bottom line. Its profit margin — the proportion of revenue beyond expenses — was just shy of 15 percent, the highest of any local hospital and a level many private companies would envy.

And it had a certain swagger. It advertised when other hospitals didn’t. It bought a Sewickley Heights mansion for its top executive. It flew private jets, established a Cayman Islands insurance subsidiary and took its executives on business trips to Amsterdam, Paris and other foreign sites.

It sponsored lavish parties and management retreats, and paid among the highest salaries in the business. And it established a parent company, later renamed the Allegheny Health, Education and Research Foundation, to oversee the organization’s increasingly complicated and scattered affairs.

It sure didn’t act like a nonprofit, charitable institution. If anything, it made too much money, not too little. So much so that at one point it was forced to ante up millions to pacify local government officials who were challenging its tax-exempt status.

But even as Allegheny General sat atop one of the region’s largest and fastest-growing industries, the seeds of its demise were being sown. In 1988, its parent bought a medical school in Philadelphia, beginning an ill-fated and poorly executed expansion that would muscle and siphon away hundreds of millions of dollars.

By the time AHERF filed for bankruptcy last summer, losses were so deep that creditors who were owed a total of $1.5 billion may be lucky to get back $200 million. And Allegheny General had been so weakened financially it openly says it’ll need a partner to survive — if the U.S. Bankruptcy Court doesn’t force a sale first.

How did it go so wrong?

A number of forces worked to conspire against the Allegheny empire: cuts in Medicare, Medicaid and government research; the growing clout of tight-fisted managed-care insurance plans; an expanding load of charity cases; and a cutthroat health care environment in the City of Brotherly Love.

But much of the trouble was of Allegheny’s own making:

Put off by exhaustive documents, discouraged from asking too many questions and caught up in the excitement spawned by its growth, board members failed to probe into the affairs of the organization;

Top management used deceptive public statements and took advantage of lax regulatory oversight and ever-shifting accounting rules to mask the deteriorating financial health of the organization;

And instead of consolidating operations and reining in costs as it grew, Allegheny executives went the other way, spending freely on pay, perks and facilities and creating an unwieldy bureaucracy that, by 1997, totaled 55 corporate entities, 10 separate boards, 132 directors and 117 senior managers — 77 of whom were making at least $200,000 a year.

Yet at the core of the collapse, former and current Allegheny doctors, directors and executives say, was a willingness to allow too much power to be concentrated in the hands of one man, former AHERF Chief Executive Officer Sherif Abdelhak.

Perhaps it’s understandable. Until the past year, everyone seemed to be benefiting from the Allegheny system’s ascent under Abdelhak — its doctors, researchers, managers, directors and lenders.

Who were they to question what was going on? Who was anyone?

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