West Penn Allegheny Health System ended a rocky fiscal year in June with operating losses hugely magnified by accounting errors and an ambitious, but realistic $66 million turnaround plan.
The Pittsburgh-based system said in unaudited financial statements released last week that its accounting mistakes stretched back three years and made up $73 million of its $93.9 million operating loss on revenue of $1.5 billion for the year ended June 30.
Errors overstated patient revenue by $48.5 million in 2008, $5.4 million in 2007 and $13.1 million in 2006, unaudited figures show.
First disclosed in July, the accounting errors have prompted an informal inquiry by the Securities and Exchange Commission, lowered West Penn Alleghenys credit ratings with Moodys Investors Service and Fitch Ratings, and put the system at risk for further downgrades.
The write-off was a blow for West Penn Allegheny, which 14 months earlier went to investors for $750 million in municipal bonds to refinance junk-grade debt, a legacy of the systems bankrupt predecessor the Allegheny Health, Education and Research Foundation (April 23, 2007, p. 17).
In a letter to investors released last week with financial statements, Christopher Olivia, West Penn Alleghenys president and chief executive officer of eight months, said he was heartened by cost-saving efforts that have already yielded $33 million, but cautioned the systems financial recovery would take time.
Officials are under no illusion about the significance of our challenges, particularly in an uncertain economic environment, Olivia said. Our turnaround plan is ambitious but realistic.
Olivia succeeded Jerry Fedele, who resigned in July 2007 over differences with the board. Under Olivias leadership, the system has seen a significant shake-up among its top executives.
Tom Chakurda, a spokesman for the system, declined an interview request.
One measure of the systems financial healththe number of days it could continue to operate on cash reserves aloneremains above 50, said Olivia. Roughly 10% of West Penn Alleghenys cash is invested in equities and 20% in fixed income securities and funds.
Analysts with Moodys and Fitch said the agencies were reviewing newly disclosed financial records and at deadline West Penn Allegheny remained on a watch list for further credit downgrades. Jeff Schaub, Fitchs senior director in public finance, said the figures contained no surprises, and analysts will decide whether to take action after discussing with management the systems 2009 budget. Lisa Martin, Moodys senior vice president, said the agency is expected to conclude its review shortly.
Moodys analysts noted in July a significant degree of uncertainty in the systems future operating strength and said West Penn Alleghenys credit strength would rely on performance under new accounting policies, the viability of its turnaround efforts, and proof of its cash reserves, including an analysis of its pension and capital spending.
The systems capital approval process is under evaluation for return on investment and strategic alignment, according to the financial records. Olivia told investors that the systems poor integration has led to duplication of services and capital that could be better deployed elsewhere.