Charles "Chuck" O'Brien Jr. likes to make the trains run on time.
On weekends and some nights, O'Brien, a model train buff, puts his HO-gauge replicas of European railways through their paces in the basement of his home in the Pittsburgh suburbs.
It's no surprise, really, that O'Brien, 56, gets a kick out of smooth-running machines. At his former day job as president and chief executive officer of Western Pennsylvania Healthcare System, O'Brien created the lowest-cost tertiary-care provider in Pittsburgh.
Now O'Brien faces the biggest challenge of his 30-plus-year career in healthcare administration: resuscitating the remains of Allegheny Health, Education and Research Foundation more than a year after the system sought bankruptcy protection.
In August O'Brien's two-hospital system took over the four remaining AHERF hospitals, all in the Pittsburgh area: 552-bed Allegheny General Hospital, 268-bed Allegheny Valley Hospital, 120-bed Canonsburg Hospital, and 342-bed Forbes Regional Hospital. The result was christened West Penn Allegheny Health System.
As president and CEO of the new system, O'Brien is tackling the first order of business: getting the AHERF hospitals off the financial critical list.
"It's no secret that they were pretty much stripped of their cash," O'Brien says. "We're getting them stabilized now."
Neither system could provide audited financials for the fiscal year ended June 30. But the four AHERF hospitals will lose money for the year, according to David Samuel, chief financial officer of the new system. The loss was mostly caused by extraordinary charges related to AHERF's $1.5 billion bankruptcy and subsequent restructuring. Revenues, he says, have held up surprisingly well and should be about $700 million. Although the former AHERF hospitals will post an undetermined operating loss, Samuel says, it likely won't be "major," an encouraging sign.
The picture is a bit brighter at the former WPHS hospitals, where cash flow is strong. But aggressive capital expenses have averaged 12% of total operating costs, keeping margins thin.
O'Brien's tertiary baby, 512-bed Western Pennsylvania Hospital in Pittsburgh, should post a profit of about $2.5 million, about $4 million less than profits from the previous year, on revenues of about $230 million. And companion Suburban General Hospital, with 143 beds, will lose about $1.5 million on $30 million in revenues, about the same as year-ago losses.
So much for the good news.
Financial challenges abound at the new system. The biggest is about $450 million worth of debt, which O'Brien and his team expect to refinance by the end of January 2000.
They aim to create a unified credit for the system and lengthen the schedule for debt payments for a large proportion of the Allegheny debt to about 25 years' maturity from eight or nine years. The extended terms should better match the useful life of the assets that were financed.
To some observers, uncertainty about the debt poses the biggest threat to the new system. Without restructuring, several large and "lumpy" payments, as O'Brien calls them, will be due when the limping system can least afford to pay them.
O'Brien, a pragmatist, sees the debt workout as only the latest challenge in the takeover of the AHERF hospitals-one that will be resolved in due time, as others have been. "Clearly, it's been an incredibly complex transaction," O'Brien says, "but you take on one problem at a time and you move on. We're confident that we know what we need to do to get the refinancing done."
Physician defections are another potential problem though less severe than might have been expected. Physician loyalty has remained strong and is a key reason that revenues at the Allegheny hospitals have not collapsed. The most prominent loss has been that of Joseph Maroon, M.D., Allegheny General's chief of surgery and neurosurgery, who jumped to archrival University of Pittsburgh Medical Center Health System last month.
Those who have witnessed the sad financial decline of the AHERF hospitals do not underestimate the task ahead, but O'Brien and his West Penn crew get high marks for doing their homework and charting a prudent course.
"He's got a very good team, and they're decisive," says William Hanna, president of Pilot Group, a healthcare consulting firm in Wexford, Pa., which has worked for WPHS in the past. He says O'Brien is "very quiet, thoughtful and a very good listener."
O'Brien's well-worn penny loafers seem to reflect him more than his fashionable suspenders do. Unlike his flashier rivals, he has resisted big risk-bearing contracts with insurers and has not started his own HMO.
Several years ago, in fact, O'Brien turned down a capitated contract with HealthAmerica, a unit of Coventry Corp., after figuring it could lose $30 million or more per year. That same contract became an important factor in AHERF's decline.
"It wasn't a risk we wanted to take," O'Brien recalls. "It turned out to be one of the better decisions we made."
Likewise, while executives at AHERF and UPMC went on double-digit hospital acquisition sprees, O'Brien brought only one into the fold: Suburban General in 1994.
Operations are his thing. O'Brien, a fiend for benchmarking and decentralization, has already drawn up plans to save more than $55 million during the next three years.
From a modest ground-floor office at Allegheny General, O'Brien reflected on the proper design of clinical workflow: Form follows function.
His approach to healthcare basics applies equally well to system administration.
If you simplify things, O'Brien says, "you usually end up providing a better service and one that's cheaper."