A group of Allegheny Health, Education and Research Foundation's own hospitals has joined the long line of creditors seeking financial compensation from the bankrupt Pittsburgh-based health system.
And in another ironic twist, the person now in charge of those hospitals was until Dec. 2 the top executive of the larger AHERF system.
Anthony Sanzo, who in June replaced Sherif Abdelhak as AHERF's president and chief executive officer, is back in his old post as president and CEO of Allegheny University Hospitals-West, an AHERF division that oversees the system's five Pittsburgh-area hospitals.
Last week, papers filed in U.S. Bankruptcy Court in Pittsburgh disclosed that Sanzo resigned his AHERF position on Dec. 2 as well as gave up his recent appointment as chairman of AHERF's board and resumed his old position.
The same day, the court appointed an outside trustee, William Scharffenberger, to oversee the troubled system (Dec. 7, p. 17). Scharffenberger is a 77-year-old former steel company executive and certified public accountant.
Sanzo's new task is to win back money for AUH-West.
The hospitals, through subsidiary Allegheny University Medical Centers, hope to recover tens of millions of dollars allegedly diverted from their endowments in April to help repay $90 million lent by a group of banks headed by Mellon Bank, Pittsburgh.
In a dramatic filing last week in bankruptcy court, two of AUMC's five hospitals claimed that "by corporate fiat" Abdelhak and former Chief Financial Officer David McConnell "stripped" $45 million from Forbes Health System and $20.2 million from Allegheny Valley Hospital to "quiet bank creditors."
AHERF's flagship facility, Allegheny General Hospital, is expected to file a similar claim for repayment in bankruptcy court.
As AHERF edged toward bankruptcy this spring, a group of lenders led by Mellon Bank demanded immediate repayment of the $90 million loan. A proof of claim signed by Barry Roth, president and CEO of AUMC, declared that the community hospital subsidiary is an AHERF creditor owed $65.2 million. Still solvent, AUMC was not part of the system's Chapter 11 filing in July.
AHERF spokesman Thomas Chakurda declined to comment on the latest development in the system's saga.
AHERF folded the two-hospital Forbes system, comprising 317-bed Forbes Regional and 152-Forbes Metropolitan, into its AUMC subsidiary on Jan. 1, 1997. At the time, Forbes' financial statements recorded $115.6 million in restricted funds.
Allegheny Valley, with 268 beds, in Natrona Heights, Pa., became part of AUMC on March 1, 1997. As of Feb. 28 of that year Allegheny Valley reported $49.5 million in restricted funds.
The AUMC claim included a memo dated April 22 of this year in which Abdelhak directed McConnell to "liquidate sufficient funds" from AUMC's funded depreciation account and AHERF unrestricted funds to pay the Mellon Bank lenders group two days later.
"You are to take this action if you are unable to negotiate another appropriate alternative or extension of time for such repayment. . . . " Abdelhak wrote. "Any funds taken from non-AHERF accounts are to be swapped with AHERF endowments or other funds as you deem appropriate."
The AUMC hospitals claim that Abdelhak and McConnell subsequently debited the AUMC accounts-without consulting the subsidiary's executives or board of trustees. The funds were never restored.
By raiding the AUMC accounts, the AHERF executives allegedly violated agreements with the acquired hospitals that explicitly reserved each facility's assets for its own use, unless their boards approved transfers.
According to the filing, Abdelhak and McConnell also did not consult the AHERF board before shifting the funds.
The unusual move by AHERF's hospitals comes as disappointment sets in that creditors will get no more than $50 million from the $345 million auction of AHERF's Philadelphia assets to Tenet Healthcare Corp. last month.
Not surprisingly, creditors have stepped up their legal efforts to recover whatever funds they can. In a 50-page motion that prompted U.S. Bankruptcy Judge Bruce McCullough to appoint a trustee for the system, the creditors painted a grim picture of AHERF's alleged management failures, a picture that AHERF said was distorted but not altogether wrong.
"We believe firmly that many of the creditors' allegations are untrue, exaggerated or taken out of context," Chakurda said. "There are some, however, that are indeed factual. But importantly, those are related to the actions of our previous administration."
Among the other allegations of AHERF mismanagement and conflict of interest, the creditors claimed:
Massive payments to insiders and others shortly before the July bankruptcy filing, including the $90 million payment to Mellon Bank in April, when the "debtors were desperate for cash." Creditors pointed out that five members of AHERF's boards were either current or former Mellon employees. AHERF has repeatedly claimed there was no undue influence by Mellon-connected board members.
Accounting irregularities that involved "hundreds of millions of dollars," making AHERF's current and historical financial statements "completely unreliable."
Enrichment of AHERF executives through stock option and deferred compensation plans, including $3.6 million paid the day before the bankruptcy filing to the stock option plans of six key executives, including Abdelhak and Sanzo.
Massive transfers of restricted funds and endowments to pay expenses.
An array of additional "improprieties and irregularities" that in combination with the allegations by creditors has led to the impaneling of two federal grand juries and a dozen investigations by federal and state governments and insurance carriers.