As the march of time increasingly distances the Pittsburgh hospital market from the polarizing 1998 bankruptcy of the Allegheny Health, Education and Research Foundation, the two largest systems in town have undergone some seismic changes in senior management.
The leadership changes announced in recent weeks indicate that both West Penn Allegheny Health System and UPMC Health System are concentrating on improving the profitability of their operations. The actions on the part of the respective boards to try to improve the situation are what would be expected from any hospital system that is confronting disappointing operating margins, said Martin Arrick, a managing director at Standard & Poor's.
"I think boards are prepared to be pro-active as needed-especially in this day and age," he said.
Earlier this month, Charles O'Brien Jr., the founding president and chief executive officer of six-hospital West Penn Allegheny, which three years ago rose after the fall of AHERF, stepped down and quickly was succeeded by Jerry Fedele, the system's senior vice president and general counsel. As a result of the leadership transition, David Samuel, West Penn Allegheny's chief financial officer, canceled his plans to resign from the system effective Oct. 31, officials said.
Meanwhile, the very same week over at rival UPMC, officials announced the sudden departure of Patricia Liebman, president of the upstart UPMC Health Plan since its inception. Officials would not comment on the reasons but said a team of executives would oversee the 400,000-member health plan while they undertook a national search for her replacement.
Just one week earlier, UPMC officials also announced that John Paul, executive vice president and a 30-year veteran of the far-reaching system, would not return from a six-month sabbatical as previously announced (Oct. 13, p. 42). Officials said his multiple responsibilities would be divided among several positions, including a newly created CFO position.
Paul was widely credited for leading the bruising but ultimately successful contract negotiations between UPMC and the region's dominant insurer, Highmark Blue Cross and Blue Shield. He also played a key role in the acquisition of the city's St. Francis Medical Center in order to build a new home for Children's Hospital of Pittsburgh, a feat that could not have been easily accomplished without Highmark's financial assistance (Aug. 26, 2002, p. 14).
Officials at West Penn Allegheny said the startling turnover in their own ranks had nothing to do with the struggling system's disastrous third-quarter financial results. For the nine months ended March 31, the system posted a $33.1 million loss on revenue of $887 million-half of that deficit racked up in the third quarter alone (June 23, p. 38). But officials insisted the fourth-quarter results, which will be released to bondholders at the end of this month, will show improvement.
Indeed, the selection of Fedele-a 17-year veteran of West Penn Allegheny and the health system's predecessor, Western Pennsylvania Healthcare System-indicated that there might be some minor corrective actions in the system's direction but no huge changes on the horizon.
S&P's Arrick said he suspected West Penn Allegheny board members "were just not happy with the pace of change, and they just needed to speed things up."
"I don't think it was a repudiation of (O'Brien's) overall strategy. I just think, frankly, the organization is ready for change," Arrick said.
Rumors have been rife in the city in recent months that finances were in such disarray that system officials were shopping some of West Penn Allegheny's hospitals to for-profit hospital companies.
Tom Chakurda, a spokesman for West Penn Allegheny, acknowledged that although there has been "much speculation on that, there are no plans whatsoever to sell off our community hospitals." Merging hospitals is not in the immediate plans either, he said.
"There are things we need to do to evolve the organization," Chakurda said. "I think we need to find ways to maximize the strength of the system, but as Jerry Fedele said, you don't consolidate your way to greatness."
As for UPMC, officials would not elaborate on the changes beyond their written statements. But Arrick said the senior management changes at the two competitors might signal that they are mellowing. Not so long ago the two battled over everything from physician practices to the $125 million Highmark loan that was key to getting the West Penn Allegheny system off the ground (March 25, 2002, p. 28).
Though the systems are leagues apart as far as credit ratings stand-S&P has given West Penn Allegheny a junk-grade "B" rating, while UPMC boasts an "A" rating-both are focused on improving operating margins in the wake of recent downgrades, he said.
"I think we are going to see a lot less physician recruitment wars than in the past," Arrick said. "Everybody has to quit fighting with each other and get back to business. I think the change in management will be a catalyst on all sides, and maybe a truce will reign in Pittsburgh."