Bondholders who purchased the nearly half-billion dollars in junk bonds that helped create the West Penn Allegheny Health System in Pittsburgh four years ago can breathe a slight sigh of relief.
The six-hospital system is heralding its first profitable year since it rose from the ashes of the largest hospital bankruptcy in history, laden with $476 million in speculative-grade bonds and a $125 million loan from the region's dominant insurer, Highmark Blue Cross and Blue Shield.
West Penn Allegheny officials are projecting that for the fiscal year ended June 30, the system will break even or better on operations and will earn $18 million in net income on approximately $1.2 billion in revenue. The audited results should be available by mid-September at the latest, said Jerry Fedele, West Penn Allegheny's president and chief executive officer.
The slim profit represents a turnaround in excess of $100 million, considering that one year before the system was formed in 2000 from the dismantled Allegheny Health, Education and Research Foundation, the flagship Allegheny General Hospital and three community hospitals collectively lost more than $90 million, Fedele said. In the past year alone, the system has swung $40 million in the right direction, recovering from a $33.1 million deficit that loomed for the nine months ended March 31, 2003 (June 23, 2003, p. 38).
The system eventually ended the fiscal year with a $15 million loss even with additional financial support from Highmark. The insurer has said that its financial support in propping up the system with a loan and then grants of undisclosed amounts was in the interest of maintaining a competitive playing field in Pittsburgh.
Fedele attributed the turnaround to growing volumes-up 10% across the organization since it was formed. When the system put its recovery plan together four years ago, officials projected only 5% volume growth, he noted. Credit-rating firm Standard & Poor's, which last month revised the system's outlook to positive from stable, reported that the system admitted 80,624 patients in 2004, a 2% increase over the previous year.
"Healthcare is a high fixed-cost business, so a little volume can make a tremendous difference," Fedele said. A number of new programs have also been launched to fuel the growth, such as expanded surgical capacity, inpatient rehabilitation and a kidney transplant program in collaboration with the Department of Veterans Affairs, he said.
The system has renegotiated its rates with insurers, Fedele said. A revenue cycle initiative reduced medical necessity denials by 22%, and monthly administrative denials are down by about two-thirds.
Perhaps the biggest change at the system from a year ago was Fedele, the system's former general counsel, who unexpectedly replaced Charles O'Brien Jr., the system's founding president and CEO (Oct. 27, 2003, p. 14). "A year ago everybody looked up and realized they were losing ground and progress was a lot slower than expected," said Martin Arrick, managing director at S&P. "Sometimes people have to fall in the hole before they realize they have to do things differently."
West Penn Allegheny's debt is rated B by S&P. The rating company said it is possible it might raise the rating "in the near future" if the audited results for the fiscal year and interim results for 2005 show continued improvement.
In changing the outlook for West Penn Allegheny, S&P credited management's successful "efforts to stabilize and improve the financial and operating profile," though it is still a speculative grade. But challenges remain, including slim liquidity in light of plans for more capital spending, pension contributions, losses from physician practices and strong competition from Pittsburgh's leading provider, the University of Pittsburgh Medical Center, according to S&P.
Coincidentally, last week S&P revised UPMC's outlook to positive from stable, also because of an improved financial profile. UPMC's long-term debt is rated A. UPMC similarly went through a major change in its top leadership ranks last year, Arrick noted.