The Pittsburgh Experiment - II - Another Echo of the Fall of AHERF

We recently started a series of posts about the battle for domination of health care in western Pennsylvania.  The contenders are the UPMC hospital system, the dominant hospital system in the region, and Highmark, the dominant health insurer in the region.  While these two health care behemoths fight, patients, health care professionals, and the public seem to be caught in the crossfire.

There is something of history repeating itself in this battle.

The biggest bone of contention in it is Highmark's attempt to purchase the struggling West Penn Allegheny hospital system.  UPMC leadership seemed to feel that this would put the insurer in direct competition with it, even though UPMC already provides a health insurance product, the UPMC Health Plan.

West Penn Allegheny, in turn, is struggling because it is a remnant of a previous attempt by a single organization to dominate the health care system in this area.  As we wrote in 2011,  West Penn Allegheny was formed from some components of what used to the be the Allegheny Health Education and Research Foundation, AHERF.   AHERF was a large integrated health care system formed out of multiple mergers.  AHERF went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University).

As we noted in 2008, although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. I only could locate one article in a medical or health care journal that discussed the case in detail, albeit incompletely since it was written before Abdelhak's guilty plea [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. (There is a new book out about the case, Merger Games, by Judith Swazey, available here as  a set of PDF files from Project Muse for those with the proper password, but it has not yet had much of an impact, and I confess I have not yet read it.)  The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me summarize some of important points about AHERF not found above (see also this narrative, starting on page 5):

• AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care imperial CEOs, Sherif Abdelhak.
• Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
• While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
• Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
• As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
• After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The story of AHERF is not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping the latest management band-wagons and genuflecting before imperial CEOs.  It also shows what happens when a single health care organization, and the person who leads it, becomes too powerful.

If either UPMC or Highmark definitively wins their current battle, the winner will become at least as locally dominant as AHERF.  As we shall see in the posts to come in this series, the leadership of both organizations has already demonstrated a certain arrogance.  Yet since 2008 we have not progressed to the point of controlling the tendency of a laissez faire health care system to approach monopoly, nor the monopolist's tendency to put his self-interest ahead of all else. 

If nothing else, maybe the messiness of the fight between UPMC and Highmark will remind more people of AHERF, hence the need not to let our health care leadership and governance problems remain anechoic, hence the need for true health care reform that would constrain health care leaders to put patients' and the public's health before their narrow self-interest. 

"It's All Been Done Before," If We Only Could Remember What it Was - the AHERF Example

A big Wall Street Journal article by Anna Wilde Mathews featured the latest wave of mergers affecting large health care organizations.

Large, Vertically Integrated Health Care Systems (Redux)

Call it the united state of health care.

Amid enormous pressure to cut costs, improve care and prepare for changes tied to the federal health-care overhaul, major players in the industry are staking out new ground, often blurring the lines between businesses that have traditionally been separate.

Hospitals are bulking up into huge systems, merging with one another and building extensive new doctor work forces. They are exploring insurance-like setups, including direct approaches to employers that cut out the health-plan middleman.

On the other side, insurers are buying health-care providers, or seeking to work with them on new cooperative deals and payment models that share the risks of health coverage. And employers are starting to take a far more active role in their workers' care.

This ongoing consolidation is being discussed as inevitable.

'We're seeing a marketplace reacting to an economic imperative,' says Michael O. Leavitt, a former U.S. Secretary of Health and Human Services who is now chairman of a health-information company. 'The new delivery models are far more integrated.'

The ongoing consolidation is also being proclaimed as leading to a brave new world of health care. For example,

Jim Taylor, the chief executive of the University of Louisville Hospital, says his institution's future depends on an ambitious statewide merger with two other hospital systems. Now, he has to persuade others that he's right.

These mergers often are meant to lead to the creation of large, vertically integrated health systems which may include hospitals, physicians and other health professionals (sometimes as hired help), and an insurance function.

It's All Been Done Before

"Large, vertically-integrated health care systems," of course, were all the rage in the 1990s.  In fact, the WSJ also published a companion article by Anna Wilde Mathews that suggested "it has all been done before," it did not necessarily work then, and therefore, it may not work now.

One example used in the latter article :

Perhaps the most dramatic flameout was the Allegheny Health, Education, and Research Foundation. Starting in the mid-1980s, it was built from a Pittsburgh hospital into a statewide system through hospital and doctor-practice acquisitions. In 1998, AHERF, as it was called, became the U.S.'s largest health-care nonprofit bankruptcy. Its debts became unsustainable after it piled on too many money-losing assets, failed to manage the new primary-care physicians successfully, and lost money on capitated business, according to an account published in Health Affairs in 2000.

The hospitals' moves in the 1990s 'did not improve quality, they did not reduce costs. In fact they increased everyone's spending,' partly because some hospitals eventually used their bulked-up leverage to push for higher rates, says Lawton Robert Burns, a Wharton School professor and the AHERF history's lead author. 'Nobody's showed me we're going to do it a whole lot better this time....To expect that with one piece of legislation, everyone's going to sit around the campfire and sing kumbaya, forget about it.'

However, the Mathews article showed that even people who ought to have been familiar with this case seemed to think that this time things would be different. For example, it included this quote from the CEO of Humana which had problems with the integrated model in the 1990s:

'It's not like we don't understand what we are getting back into here,' said Michael B. McCallister, Humana's CEO, at an investor conference. 'But things have changed.'

Maybe so, but maybe if the enthusiasts of the resurrected vertically integrated health system model realized how badly things went in the past they would not be so optimistic.

A More Complete Version of the AHERF Story

In fact, Professor Burns' take on the AHERF bankruptcy above did not seem to reflect all that went on then. A somewhat more pointed summary of that massive failure had appeared in 2008. Then, Moody's Investor Service issued a report on the 10 year anniversary of the fall of the house of AHERF. Per an article again by Steve Twedt in the Pittsburgh Post-Gazette, who also wrote a significant series in the same newspaper summarizing the collapse of AHERF,

From the distance of 10 years, the historic bankruptcy of Allegheny General Hospital's then-parent organization still offers valuable lessons for today's health-care industry, says a new report by Moody's Investor Service.

'AHERF left such a stain, such an indelible mark on hospital management teams, they realized that if one of the big systems can fail, no one is immune,' said Lisa Goldstein, leader of the Moody's health-care team that produced the report.

On July 21, 1998, Allegheny Health and Education Research Foundation (AHERF) defaulted, resulting in what is still the largest bankruptcy ever among the 560 Moody's-rated not-for-profit health-care entities. At the time, AHERF had $2 billion in revenue and $555 million in outstanding debt, according to the Moody's report.

Analyst Lisa Martin, who wrote the report, says industrywide forces converged with 'the organization's own management and governance failures' to cause the foundation's failure.

The external forces included Medicare reimbursement cuts -- still an issue a decade later -- and highly competitive markets in both Pittsburgh and Philadelphia.

But, she added, 'we believe its ultimate downfall was driven more by decisions of the organization itself -- weak governance, poorly executed strategies, lack of refined leadership, and absence of methodical execution.'

Even that version seems too polite.

Although the AHERF bankruptcy appears to be the largest failure of a not-for-profit health care corporation in US history, its story has produced remarkably few echoes for doctors, other health care professionals, health care researchers, and health policy makers. I often use the fall of AHERF as major example in talks, at least the few talks I am allowed to give on such unpleasant subjects. Rarely have more than a few people in the audience heard of AHERF prior to my discussion of it. The only scholarly article I could locate on the topic that discussed the case in any detail, albeit incompletely since it was written before Abdelhak's guilty plea, was written by Professor Burns, who was quoted above, and colleagues [Burns LR, Cacciamani J, Clement J, Aquino W. The fall of the house of AHERF: the Allegheny bankruptcy. Health Aff (Millwood) 2000; 19: 7-41.] I doubt the case is used for teaching in most medical or public health schools. The lack of discussion of such a significant case is a prime example of the anechoic effect.

Therefore, let me repeat my 2008 summary of some of important points about AHERF not found above (see also this more detailed narrative, starting on page 5):

• AHERF, one of the largest health care systems of its day, was built by the poster-boy for health care  CEOs at the time, Sherif Abdelhak.
• Abdelhak, who started as food services purchasing manager at Allegeheny General Hospital, was repeatedly hailed as a "visionary" (in the March, 1997, ACP Observer) a "genius," and the like. His plans to create a huge integrated health care system were part of the wave of the future. Abdelhak was even invited to give the prestigious John D Cooper lecture at the annual meeting of the American Association of Medical Colleges (AAMC), which was published in Academic Medicine [Abdelhak SS. How one academic health center is successfully facing the future. Acad Med 1996; 71: 329-336.] He proclaimed then that "we will need to create new forms of organization that are more flexible, more adaptive, and more agile than ever before." And he announced that "my aim as chief executive has been to unleash the creativity and productive potential of every individual and to provide an environment that encourages teamwork"
• While Abdelhak was making these grandiose promises, he paid himself and his associates very well. For example, he received $1.2 million in the mid-1990s, more than three times the average then for a hospital system CEO. He lived in a hospital supplied mansion worth almost $900,000 in 1989. Five of AHERF's top executives were in the top 10 best paid hospital executives in Philadelphia.
• Although Abdelhak talked of teamwork, he warned the combined faculty of the new Allegheny University of the Health Sciences (AUHS): "Don’t cross me or you will live to regret it."
• As AHERF was hemorrhaging money, Abdelhak continued to pay himself and his cronies lavishly.
• After the AHERF bankruptcy, which was at the time the second largest bankruptcy recorded in the US, Abdelhak was charged with numerous felonies involving receiving charitable assets. In a plea bargain, he pleaded no contest to misusing charitable funds, a misdemeanor, and was sentenced to more than 11 months in county prison.

The Moral of the Story

The story of AHERF was not merely that of an unlucky bankruptcy. It shows what can go wrong when health care adopts business practices such as jumping on the latest management band-wagons and genuflecting before imperial CEOs.

Yet since the fall of AHERF, we are still hearing breathless stories about the latest wonderful plans to save health care (think about, for example, electronic medical records, pay for performance schemes, etc), and the the need to genuflect to brilliant CEOs who may turn out to be not so brilliant (think about, for example, Dr William McGuire, the former CEO of UnitedHealth, and his back-dated stock options).

We health care professionals need to stop falling for this hype and spin. Saving health care will take clear thinking and hard work by a lot of people. The "visionaries," if we let them, are likely to depart with a huge cache of money, leaving us and health care worse off. If it is just "not done" to talk about cases such as that of AHERF, and other examples of "recent unpleasantness," how will be learn not to fall for the propaganda?

Of course, it is those who benefit from the propaganda who do not want us catching on to their game.

If physicians, health professionals, health care researchers, and health policy makers do not learn the lessons of the fall of AHERF, they will be doomed to see its repetitions.

With apologies to the Bare Naked Ladies - do not forget "it's all been done (before)"

(only live version I could find, actual song starts at about 3:00)

The Restless Shade of AHERF and the Return of Merger Mania: Highmark Tries to Buy Another Insurance Company, a Hospital System, a Medical School, and Physicians' Practices

Starting in the 1990s, as US health care became more commercialized, a wave of mergers lead to super-sized hospital systems, insurance companies, and pharmaceutical companies.  Not all those mergers, especially involving hospitals, prospered.  Although the mergers were justified as drivers of increased efficiency, health care has become decreasingly accessible, increasingly expensive, and of no better quality.  However, now a whole new wave of mergers seems to be upon us. 

The Proposed Highmark Blue Cross/ West Penn Allegheny Health System Merger

The latest example to get national attention is the proposed combination of already large non-profit health insurer Highmark Inc, a Blue Cross Blue Shield plan, and non-profit hospital system Allegheny Health System.  The national attention was in a Wall Street Journal article by Anna Wilde Matthews, which described the proposed transaction:

Pittsburgh insurer Highmark Inc. struck a deal to acquire the second-largest hospital chain in its region, an ambitious, controversial step that would further blur the lines between those who pay for medical care and those who provide it.

Under the tentative plan, nonprofit Highmark will pump as much as $475 million into the five-hospital West Penn Allegheny Health System, which has been operating in the red for the past five years.

If state and federal regulators sign off on the plan, Highmark officials say the deal will allow them to move away from traditional fee models that reward providers for providing unnecessary procedures and services.

Instead they would pay salaries to doctors, offering them incentives to achieve quality and efficiency goals. The integrated model would also rely on primary-care doctors to coordinate patients' care and focus on preventive efforts.

Highmark officials said the deal is the best way to keep West Penn in business. 'It brings our expertise as an insurance company into the provider system,' said Kenneth R. Melani, Highmark's chief executive.

This deal is unusual because it would unite a health care insurance company/ managed care organization with a hospital system.

The Context: An Already Concentrated Health Care Environment

The deal appears in the context of and may be in response to an already concentrated health care environment.  Per the WSJ:

The newly combined Highmark-West Penn will face off against the University of Pittsburgh Medical Center, which is officially known by its acronym, UPMC. The prestigious $8 billion,19-hospital network employs 2,881 doctors and has about 56% of the inpatient market share in Allegheny County. It also owns a health plan with about 1.6 million members.

UPMC's current contract with Highmark runs out next June. Paul Wood, the hospital system's vice president for public relations, said the network won't sign a new one after the acquisition. 'In effect, Highmark expects UPMC to subsidize our competitor,' he said.

UPMC has had its issues, too, as discussed in posts here. 

The deal is also more extraordinary because it was accompanied by several other proposed deals that would create quite a sprawling health care entity.

The Extended Scope of the Merger

First, and as noted in the WSJ article, the proposed deal would involve physicians' practices:

Highmark may also buy or invest in other providers, including doctor practices, Dr. Melani said.

However not noted in the WSJ article, or in a contemporaneous Pittsburgh Post-Gazette article, was that since 2010 there has also been a proposal on the table for Highmark to merge with a non-profit Blue Cross Blue plan in neighboring Delaware. The latest discussion of this deal can be found on DelawareOnline, and was just noted in a Philadephia Inquirer commentary.

In Delaware, a bill that would remove a major obstacle to Highmark's proposed affiliation with Blue Cross Blue Shield of Delaware sailed through the legislature, passing the Senate unanimously Tuesday and the House, 34-5, Wednesday.

That is not all. It seems that while pursuing the merger with Highmark, West Penn Allegheny Health was also pursuing an arrangement with Temple University to set up a branch of its medical school in Western Pennsylvania. As noted by the Pittsburgh Tribune Review:

West Penn Allegheny Health System leaders expressed optimism on Friday about their partnership prospects with Highmark Inc. as they announced plans with Temple University to establish a four-year medical school campus in the North Side.

So it appears that lined up against the UPMC behemoth could be another behemoth combining a large Pennsylvania insurance company, a Delaware insurance company, a good-sized hospital system, physicians' practices, and a branch of a medical school.  So we see a new effort to divide the health care supposed "market" among a few large, vertically-integrated health care systems.

The Eerie Shadow of AHERF

Maybe all these simultaneous deals, which would apparently create a conglomerate of Highmark Blue Cross, Delaware Blue Cross Blue Shield, West Penn Allegheny Health System, Temple University Medical School, and possibly a large group of doctors' practices, were all being discussed separately because of how they could be seen as a strange shadow of the spectacularly failed Allegheny Health Education and Research Foundation (AHERF) of the late 1990s.

As discussed here, AHERF was a large integrated health care system formed out of multiple mergers.  AHERF which went bankrupt in 1998, leading to massive layoffs, hospital closures, and the near dissolution of a medical school (which ended up taken over by Drexel University). The former AHREF CEO, whose high compensation (for the time) was accompanied by an autocratic management style, ended up in the local jail on a plea bargain. Note that West Penn Allegheny Health System was formed from some of the pieces of the failed AHERF, and seems to have never fully recovered from its previous troubles.

Despite the fact that the AHERF bankruptcy was the second largest US bankruptcy up to its time, this vivid case was notably anechoic. The lack of echoes it originally produced made it prototypical of the anechoic effect.

The link to AHERF was briefly noted in the Post-Gazette article:

'They are well-capitalized, and we're not,' said David L. McClenahan, WPAHS board chairman, speaking of Highmark. 'That's putting it mildly.' In the decade since the collapse of the Allegheny Health Education and Research Foundation, whose bankruptcy eventually bore the West Penn Allegheny Health System, WPAHS has been persistently starved for capital, he said.

So far, however, the ominous implications of that previous debacle have not been publicly discussed.

How Some Executives Would Gain

Perhaps the executives rushing to make a deal are being distracted by the potential for personal gain. The DelawareOnline article noted that current executives of Delaware Blue Cross Blue Shield may be able to pull the ripcords of their golden parachutes if its proposed merger with Highmark goes through:

Seven executives at Blue Cross Blue Shield of Delaware, for example, are due a combined $6 million in severance pay -- equal to about three years of salary -- if they lose their jobs.

Details of Blue Cross severance payout packages have attracted attention recently because top executives at Delaware's largest health insurer are busy pressing for a merger with Pittsburgh-based insurer Highmark Inc., which could mean the elimination of some top positions.

Highmark has pledged that Blue Cross President and CEO Tim Constantine will keep his job after the merger's closing, if the deal is approved by state regulators. But Constantine, who has an annual salary of $420,000, would be due a $1.6 million payment if he were to lose his job.

Six other top executives, who earn between $245,000 and $330,000 annually, have potential payouts equal to about $4.3 million. Highmark has not discussed the fate of those officers, who range in position from the company's general counsel to its chief medical and financial officers.

That article further noted:

Some observers worry that the prospect of large severance payments could cloud the judgments of executives working to close the deal.

Considering the size of the Blue Cross payouts in relation to annual salaries, the payout promises deserve attention, said Ethan Rome, executive director of Health Care for America Now, a Washington consumer advocacy group. Severance agreements are typically in place to provide a cushion between jobs, he said. 'Three years is a long time,' Rome said. 'Three years is not a severance. It's a substantial payout.'

One wonders which other executives involved in these potential deals may also have prospects for either larger compensation or golden parachutes. This could include executives in particular current executives of West Penn Allegheny.  One also wonders whether the creation of this new conglomerate will produce rationales for big raises for the current executives of all the organizations involved who get to work for the new merged entity.  Perhaps someone should ask them.

Further Implications

Of course the various mergers were touted as productive of new efficiencies, as attempts to obtain increased market power usually are. As reported by the Post-Gazette:

While the short-term goal of this partnership is to preserve a 'fragile' Pittsburgh hospital system, the long term goal, said Highmark CEO and President Kenneth Melani, is the creation of a new model of health care, one that is outcomes based, with an integrated delivery and financing system.

;Health care services are becoming less affordable,' he said. 'It's important to have choice. It's important to have a second system.'

And, as we discussed here, the former CEO of AHERF pledged "new forms of organization that are more flexible, more adaptive, and more agile than ever before." But common sense and history suggests that increasing market domination will be good mainly for the market dominators, not their customers, or in this case, their patients, clients and students.

As Dr Westby Fisher asserted about how the new conglomerate will likely own physicians' practices:

So doctors lose more professional independence and autonomy and have even more chance that clinical decisions will be compromised by bureaucratic dictates. Yet ask patients who they want steering the boat when they get sick: their doctor.

It continues to be clear who the winners and losers are as health care reform unfolds. But when doctors lose autonomy, patients lose autonomy.

It’s that simple.

To argue that the only way to control the health care dollar is to bloat the bureaucratic levels of our system is a fool’s game. However, bureaucrats promote bureaucrats – it’s always been this way. Until doctors and the public speak up, there’s simply nothing to stop this train.

So I wonder if this complex merger will get more scrutiny than the many mergers that have preceded it in the last 30 years. Someone who is more likely to get answers than I am should be asking:
- What evidence is there that this merger will lead to any benefits to individual patients or to the public health?
- How will any efficiencies achieved benefit anyone other than the organizations' current and future managers?
- What sorts of management layers will the complexity of the multiple mergers proposed necessitate between current Highmark executives and current management of its new acquisitions?
- If the current problem is existing market concentration, why will these mergers be a better solution than a direct approach to that concentration?
- How will the current leaders of all the organizations involve personally benefit from this merger?

Meanwhile, increasing concentration of power in health care continues to benefit the leaders of the enlarging health care organizations, while reducing the choice of individual patients and the autonomy of health care professionals.