Struggling to absorb lessons of Allegheny
By Karl Stark and Josh Goldstein, Inquirer Staff Writers, 9/1/02

Stephen Borland helped keep up Allegheny's mainframe computer before the health giant went bust five years ago, and he still keeps in touch with nearly two dozen former employees.

His e-mail lighted up with emotional intensity last week when Allegheny health system's former CEO, Sherif S. Abdelhak, was sentenced to 111/2 to 23 months in a work-release facility for raiding $30 million in medical endowments.

"Only 11½ months or less! This guy should be spending life in prison. He feels bad - too bad!"

"A slap on the hand after all he's done!"

"Definitely not enough time. He should be doing hard labor down in some Southern prison on a chain gang! We are all screaming here!"

Many people were struggling last week to absorb again the lessons of Allegheny, how the state's largest health system, with nine hospitals in the Philadelphia region, could go so wrong, so quickly. Allegheny went bankrupt in July 1998 with $1.3 billion in debt, and Abdelhak was arrested in March 2000 for having ordered his executives to raid dozens of restricted medical endowments meant to support research and education.

The plea, reached last week in Pittsburgh, rankled a lot of people. "It's such a travesty. I can't tell how churned up my stomach is over this," said Jerry Katz, president of Katz Consulting Group, a health-care advisory firm in Plymouth Meeting. "Allegheny is right up there with Enron and WorldCom... . I don't think there's anybody in health care who thinks the plea is other than a sham."

Uwe Reinhardt, a Princeton economics professor, was not surprised that Abdelhak would escape with little punishment. Lax accounting rules enable a host of corporate misdeeds, he said. "The lunacy that is acceptable would make you throw up," he said. "The tragedy of Allegheny was that almost everything they did was probably legal."

One of the biggest lessons of Allegheny's collapse is the performance of nonprofit board members. In quieter times, trustees had mostly to be rich and willing to lend their names to the hospitals they directed. Allegheny changed that.

"The Allegheny debacle truly put pressure on hospital boards to watch their chief executives and managers much more closely," said C. Mitchell Goldman, a long-time Philadelphia health-care lawyer.

Abdelhak's board did nothing to stop him and his top lieutenants from collecting lavish salaries, retirement packages, and even stock options, a rarity in the nonprofit world.

Abdelhak also weeded out trustees, including former PPG Industries Inc. chief executive Vincent Sarni, who scrutinized his actions and tried to curtail his expansion plans.

Allegheny's fall raised the specter that board members who stood idly by could be sued. Stan Spitzer, a Hahnemann University Hospital cardiologist, filed a class-action suit that tried to make Allegheny board members pay personally for the losses suffered by the medical staff during the bankruptcy. Even though Spitzer's effort failed to make the trustees accountable, they still faced other suits and had to spend months in depositions.

Board members "can no longer afford to take an auditor's report or manager's report at face value," said Sean Connolly, a spokesman for Attorney General Mike Fisher, who prosecuted Abdelhak. "In the past, these positions may have been more honorary than active. Now they need to know what their managers are doing and ask the right questions."

The dramatic rise in the 1990s of the Allegheny Health, Education and Research Foundation (AHERF) created a mania in the local health-care scene that forever changed the local marketplace. Allegheny's drive to snap up nine hospitals in the Philadelphia region fueled a drive by its competitors to grow large as well - whether they could afford it or not.

Most damaging of all was the movement to buy doctors' practices. Allegheny bought the practices of about 300 physicians, which created a buying frenzy. Even small community facilities jumped in to buy physicians to help ensure a steady flow of patients.

"Allegheny spurred a lot of the merging, and consolidating, and the buying of physician practices," said Lawton Robert Burns, director of the Wharton Center for Health Management and Economics and the author of an article in Health Affairs, "The Fall of the House of AHERF: The Allegheny System Debacle." "Look at everything it engendered, how much it cost, and all the lives it displaced... . It was a total misjudgment."

Allegheny's financial statements hold another lesson. As with Enron Corp., WorldCom Inc., and the other for-profit companies that issued misleading financial information, Allegheny was forced to admit that its 1997 annual report was inaccurate, and it subsequently lowered its assets by $123.3 million.

The loss of faith hurt other institutions. "There was a tremendous loss in trust in hospital-system financing because of the Allegheny bankruptcy," said Thomas Getzen, professor of risk, insurance and health management at Temple University. "The actions of Allegheny imposed hundreds of millions in additional cost on other hospitals and ultimately on patients around the county... in the form of higher health-care costs."

The state attorney general has 15 lawyers regulating nonprofits, but that's not enough. "There are tens of thousands of charities in Pennsylvania," Connolly, the agency spokesman, said. "We would have to build the biggest bureaucracy in Harrisburg if we were to closely regulate every single one of them."

The lack of government regulators puts more of the burden on board members.

"We are not a super-board of directors. The government cannot run charities," Connolly said. "We rely heavily on the people who have this responsibility, the independent board members."

Temple's Getzen agreed.

"Rules and regulations are not enough. There has to be some respect for the public trust by leaders in these institutions," he said. "We are a trust-based society, particularly in our charitable institutions, and I think people should be held to a pretty high standard."

And that's why Getzen said he thinks the punishment of Abdelhak, who broke that trust while running Allegheny, was too weak.

Getzen said: "I think that most people would feel that that amount of damage justified a lengthier and harsher incarceration."