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Anatomy of a Bankruptcy

Part 1: Wake up to break up

Sunday, January 17, 1999
By Steve Massey, Post-Gazette Staff Writer

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Sherif Abdelhak was desperate. The health care behemoth he had built over a decade, the largest hospital system in the state, one of the largest medical schools in the country, was collapsing.

Losses were closing in on $1 million a day, and it was running out of money. Just making next month’s payroll would be a feat. Suppliers were demanding cash up front, lenders were calling loans and his directors, who had been steadfast in their support for him, were beginning to waver.

But now was not the time to panic. It was time to act. In late April of last year, the 52-year-old mastermind behind the growth of the Allegheny Health, Education and Research Foundation called together his top managers in their luxurious Fifth Avenue Place headquarters and demanded more budget cuts. "No" was not an option.

Never mind that the executives charged with running the far-flung Allegheny empire already had pared, chopped and chiseled over the past year, or that some of its Philadelphia hospitals were running short of bandages, fresh bed linens and other basics.

Abdelhak had to find more money, and quick. The managers knew that to challenge their leader when he was in this take-no-prisoners mood was risky.

Still, Donald Kaye, head of the foundation’s Eastern operations, protested that he must spend money on mandatory repairs to a hospital sprinkler system or he’d go to jail. Abdelhak would have none of it.

"Then you’ll go to jail," he snapped. "I’ve done everything for you."

It was payback time, and Abdelhak was calling in his chits. Over the next hour, he alternately raged, fumed, even appeared to weep — then he stormed out of the meeting, something he’d done with increasing frequency that spring.

The financial fissures that had been developing almost imperceptibly in the Allegheny system over the past several years had suddenly become deep, inescapable crevasses.

Abdelhak’s life work was going down, taking him and the reputations of some of Pittsburgh’s most recognizable executives with it.

Almost from the start, the Egyptian-born businessman and University of Pittsburgh M.B.A. graduate relentlessly pursued his vision for Allegheny General and the Allegheny system — to be the best health care concern in the country, on par with the Harvards, John Hopkinses and Stanfords of the world. His powers of persuasion, and his willingness to spend money and listen to even the lowest-level employee captivated and motivated workers.


Snapshot of AHERF
Spring 1998

Employees: 29,500
Revenue: $2.05 billion
Assets: $2.6 billion
Debt: $1.18 billion
Inpatient admissions: 128,388

* Based on Allegheny Health Education and Research Foundation and tax documents


In public, he exuded power and confidence. He was a compelling speaker with a gift for crystallizing complex ideas and arcane health terms into eloquent, accessible language. "I remember seeing Sherif stand up at a meeting in the mid-1980s at the Hospital Council of Western Pennsylvania and ask questions in the most intelligent way, and I thought, who is this guy? He was really impressive," recalls a fellow hospital president.

Abdelhak was a bigger-is-better strategist, a win-at-all-costs coach who worked long hours and expected the same of everyone. His team of advisers and mentors was small. There was David McConnell, the chief financial officer who’d find the money, a task the amateur race-car driver approached with abandon. There was Nancy Wynstra, the chief counsel who knew the intricacies of corporate structure and law and made sure Allegheny took full advantage of them.

And there was William Penn Snyder III, the patriarch of a family that cut its fortune in iron and steel and traced its roots to Pennsylvania’s first governor, Simon Snyder. There’s been a Snyder on the board of Allegheny General or its parent almost as many years as the 113-year-old North Side institution is old, and W.P. Snyder III — friends call him Bill — had been at the helm since 1965.

In Abdelhak, Snyder had found the man who could help his beloved Allegheny achieve the glory it so obviously deserved. It would mark a fitting end to a life dedicated to community and achievement, one marked by his early involvement in the business group that shaped Pittsburgh’s original Renaissance.

If there were signs of trouble brewing, surely Bill Snyder would let his directors know — not that they would need any help. The board was loaded with executives familiar with the rudiments of high finance, including former chairmen Douglas Danforth of Westinghouse Electric, J. David Barnes of Mellon Bank, and Francis Nimick of Dollar Bank.

Besides, under Abdelhak, Allegheny appeared to be making money even as it grew. Sure, it was relying more and more on endowment earnings and bond financing to make ends meet, but that’s just because it was feeling the pressures all hospitals were feeling from the one-two punch of declining government reimbursements and the rapid rise of managed care.

The bottom line was Allegheny was getting a clean bill of health from its outside auditors, Coopers & Lybrand. To some extent, directors had to depend on the auditors.

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And they also had to have some faith in management — the directors were, after all, busy men and women, and they really didn’t have the time to study all the documents made ready for every meeting. Sometimes there’d be more than 1,000 pages.

Surely PNC and Mellon, hometown lenders who did business with Allegheny, would sound the alarm if things were awry. Both had representatives on the boards of the parent and its affiliates — and both profited from relationships with one of the country’s fastest-growing health care concerns.

Indeed, everybody seemed to be thriving in a system that tossed money and perks around like candy.

In the Abdelhak years, salaries skyrocketed to the top tiers of the health care industry — by 1997, at least 77 managers raked in more than $200,000, more than Abdelhak himself was making a decade before. Abdelhak’s payout exceeded $1 million, as did the compensation of at least a half dozen doctors.

There also were perks like private jets, a skybox at Philadelphia’s Veterans Stadium and box seats at Pittsburgh’s Three Rivers Stadium, and through the Cayman Islands insurance subsidiary, meetings in Holland, Switzerland, and Iceland.

And there was a seemingly bottomless pit of money, for housing loans and luxury cars for doctors and top employees, the purchase of doctors’ offices and medical buildings, and, of course, the takeover of hospitals.

The growth came at a price. Since 1987, bond and bank debt had skyrocketed from less than $70 million to more than $1.1 billion, bankrolling the Allegheny system as it gobbled up two medical schools, 14 hospitals and more than 500 physician practices.

But Allegheny really wasn’t doing anything all that different from the rest of the industry. Hospital mergers and acquisitions soared the past two decades, from almost none in the 1970s to roughly 20 a year by the late 1980s to more than 200 in 1997 alone.

There’s no mystery to the consolidation. With insurers pushing for cheaper outpatient care and restricting overnight stays in hospitals, almost four of every 10 hospital beds are empty on any given day in the country. By merging, hospitals can eliminate excess capacity, increase efficiency and boost market share — and their ability to bargain with insurers.

For Allegheny, the payoff was more than just money — to work there was to work at a company on the rise, a health care concern boasting big-name researchers and doctors performing some of the nation’s most advanced surgery.

So what if the University of Pittsburgh Medical Center boasted being No. 1 in its hometown? In the state, the Allegheny health system was the king of the hill.

"From the top ranks to housekeeping, people were incredibly proud being there," says one former parent corporation executive, who was let go in July and who, like so many in this story, would speak only if promised anonymity.

"It was exciting," she said. "Good Lord, we all want to work for somebody who inspires us. And Sherif inspired us. He set high standards. And people want to aspire to high standards. People want to do their best."

On this late April day, however, the short and intense Abdelhak, known as "the sheriff" or "big little man" by his minions, could see all his aspirations slipping away.

And he was angry. And alone. Never one to seek help or admit mistakes, and pretty much a loner, he had no one he could turn to.

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Although long-time associates in the room didn’t know it, he had already turned on some of them. When queried by his directors about mounting troubles, he would blame his managers, saying they made decisions behind his back or in violation of his orders.

It was a claim that rang false to many board members, who knew Abdelhak to be nothing if not a control fanatic. It was unlikely, they felt, that anything of substance happened without his knowledge.

Within two months of that meeting, the board would fire Abdelhak. Within three, the parent foundation and its Philadelphia hospitals, medical school and physicians practices subsidiaries would be in bankruptcy.

And within six months, the Philadelphia hospitals and the medical school would be sold. And William Penn Snyder III would step down from his post.

Now all that’s left is the old North Side flagship and its local affiliates — Forbes Health System, Canonsburg and Allegheny Valley hospitals.

Whether the group can avoid the fate of its Eastern Pennsylvania brethren remains to be seen. Administrators are weighing potential partnerships with other hospital chains.

Whoever comes in will have to deal with a Western Pennsylvania hospital system that’s been drained of resources.

More than $65 million in building renovation and acquisition funds were siphoned out of Forbes Health System and Allegheny Valley Hospital last spring by McConnell and Abdelhak, roughly a year after the hospitals joined the Allegheny system.

Allegheny General has racked up operating losses — income before earnings on endowments and other investments — of almost $80 million the past four years, draining its reserves and forcing it to openly seek a merger partner with deep financial pockets. Some of the losses simply reflect a tougher operating environment for all Pittsburgh hospitals; but AGH has had to carry the additional burden of supporting its Philadelphia brethren.

That’s not all. To raise money, Allegheny in the last 10 years quadrupled the North Side hospital’s bond and bank debt, from less than $70 million to roughly $250 million. And that doesn’t include another $100 million of lease payments the hospital must make in future years because it sold, then agreed to lease back, two North Side offices and parking garages in 1996. The so-called sale-leaseback transactions, primarily done to get cash, don’t show up on the balance sheet but are non-cancelable obligations akin to debt.

Even if Allegheny General and its Western affiliates are able to find a partner — and to get the U.S. Bankruptcy Court and the AHERF trustee, who was appointed last month, to agree to a deal that will let them survive on their own — the dismemberment of what a year ago was the state’s largest health system has many befuddled and betrayed.

"This thing breaks my heart," says Norma Gentile, a retired nurse and manager who spent 34 years at Allegheny General. "This was MY hospital. It was the best."

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