The largest financial disaster in not-for-profit healthcare turned uglier last week as Allegheny Health, Education and Research Foundation's top three executives during its rapid rise and financial downfall were arrested by Pennsylvania authorities.
Former Chief Executive Officer Sherif Abdelhak, former Chief Financial Officer David McConnell and former general counsel Nancy Wynstra were charged with multiple felony and misdemeanor counts of theft and conspiracy arising from their tenure at the Pittsburgh-based system.
If convicted on all counts, Abdelhak and McConnell could face prison terms of more than 20 years, and Wynstra up to 17 years.
With the filing of criminal charges against the architects of the 14-hospital AHERF system, Pennsylvania law enforcement officials have embarked on a significant new phase in the tortuous, two-year-long struggle to affix blame for the financial collapse of one of healthcare's highest fliers. Federal investigations by the Securities and Exchange Commission and the U.S. Justice Department reportedly are continuing.
Abdelhak was ousted by the AHERF board in early June 1998, shortly before the system filed for bankruptcy protection in July. McConnell resigned in June of that year, and Wynstra left the system that August. Last week they were charged with illegally spending $52.4 million in restricted charitable endowment funds to support operations at the foundering system, illegally diverting funds for personal purposes and making illegal political contributions.
"We allege that while AHERF was losing money, these top management officials used AHERF funds for personal and other improper expenses," said state Attorney General Mike Fisher. "They then stole millions in charitable dollars in an effort to save the mismanaged system. This money wasn't theirs to use as they saw fit."
Abdelhak, 54, and McConnell, 45, were arraigned last week and released after each posted $10,000 of a $100,000 bond. Wynstra, 58, who is reportedly ill with breast cancer, is expected to be arraigned early this week.
A preliminary hearing is scheduled for May 25 in a Pittsburgh district court.
A vow to fight charges. Abdelhak "strenuously denies" the charges and will plead not guilty, his attorneys said in a written statement.
"The attorney general has chosen to use my client as a scapegoat for circumstances that were out of his control," J. Alan Johnson, one of Abdelhak's lawyers, said.
The statement marked the first time since his ouster that Abdelhak has commented on what precipitated the $1.5 billion bankruptcy.
The statement said drastic cuts in Medicaid made in 1997 "caused tremendous financial hardships to AHERF, the single-largest provider of healthcare to the indigent citizens of Pennsylvania."
AHERF continued to provide healthcare, the statement said, regardless of patients' ability to pay.
"He is now being criminally charged by the same state that caused, in large measure, AHERF's financial difficulties," Johnson said.
Attorneys representing Wynstra and McConnell did not return calls for comment.
The alleged raiding of millions in restricted funds lies at the heart of the attorney general's case. It also expands on allegations made in a civil suit seeking restitution of the funds that the state filed last month against the same criminal defendants plus five AHERF trustees (Feb. 28, p. 12).
A 10-month grand jury investigation, summarized in a 19-page presentment, produced new details on the alleged diversion of funds and startling new accusations of wrongdoing.
As the system ran dangerously low on cash, Abdelhak issued a memo on Feb. 11, 1998, that directed AHERF financial officials to tap up to $70 million in restricted endowments "as a loan, for your cash needs." In the memo, Abdelhak said he had reviewed the source of funds with AHERF's treasury department and the money could be used properly as long as the system's loan committee approved a specific plan for repayment.
The grand jury presentment said that Abdelhak never consulted with the loan committee and that no plan for repayment was ever made.
Other execs testified. Three former AHERF officials testified under immunity that they questioned the legality of raiding the endowments.
One of them, Charles Morrison, senior vice president of finance for AHERF's Philadelphia operations, said that after seeing Abdelhak's memo he had his staff analyze whether some of the endowments could be appropriately tapped for operations support. He told the grand jury that about $25 million could be accessed justifiably while $45 million could not.
The system first used the $25 million that was justified, but AHERF's finances continued to crumble. David Deasy, former senior director of corporate disbursements at AHERF, testified that accounts payable were placed "at the bottom of the list" of items to be paid. By February 1998, payment terms had stretched to 90 days and soon thereafter ballooned to 200 days. Cash, he testified, was used to cover payroll, and any leftovers were shunted to angry vendors. Deasy testified that "on any given day" he received 150 to 200 calls from upset suppliers.
According to testimony by Morrison and Donald Kaye, former CEO of AHERF's eastern region-who was also given immunity-Abdelhak, McConnell and Wynstra insisted that the restricted funds be used for operating expenses despite the concerns of Morrison, Kaye and others.
Ultimately, $52.4 million in restricted funds were taken without justification and without underlying restrictions being met, according to testimony by Bernard Woolfley, a consultant with Navigant Consulting who was hired by the state to analyze the finances.
Abdelhak's lawyers denied the allegations and said that the attorney general's charges stem from "a profound misunderstanding" of the endowment funds.
According to the grand jury, the former officials of the health system also violated state election laws by inflating the salaries of several staff lobbyists who worked for Wynstra so that the lobbyists could make contributions in their names.
The grand jury also charged that in February 1998, Abdelhak sent a $50,000 AHERF check signed by McConnell to Quaker Valley High School near Pittsburgh, where Abdelhak's son played football, to fund improvements to a locker room.
Abdelhak's lawyers said this gift "was just one of thousands of charitable contributions made by AHERF."
Additionally, the grand jury alleged that Abdelhak directed McConnell to rent a $55,000 luxury box at Three Rivers Stadium in March 1998. McConnell wrote a personal check for the box that was paid for as an authorized reimbursable expense. McConnell later received $25,000 in additional AHERF funds to renovate and stock the box.
Alice Gosfield, a healthcare lawyer in Philadelphia, said the case reminds her of the Baptist Medical Center kickback case in Kansas City-with a significant difference. There, the executives mounted a vigorous defense, as Abdelhak said he plans to do, but they wound up with stiff jail terms (Nov. 3, 1999, p. 3). "Those (convictions) were for technical health law problems. These are not technical health law problems," she said of the AHERF case.
Beyond the sensational details of the AHERF case is a cautionary tale for executives and boards at other hospitals across the country.
"A lot of healthcare systems are facing falling demand and reimbursement, and as they get strapped for cash, it increases the temptation to start looking at these charitable funds that are lying around," said Lawton Burns, a professor at the Wharton School of Business, University of Pennsylvania, who has researched the AHERF debacle.