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Allegheny's failure sends shock waves through academia

From the December 1998 ACP-ASIM Observer, copyright 1998 by the American College of Physicians-American Society of Internal Medicine.

Related article: Corporate medicine's huge losses, produce doctor layoffs, chaos

By Phyllis Maguire

For two Philadelphia medical schools, it has been a decade of superlatives and firsts. In 1988, the Medical College of Pennsylvania (MCP) became the first medical school in the country to be purchased by a hospital, Pittsburgh's Allegheny General Hospital, the flagship of the rapidly expanding Allegheny Health, Education and Research Foundation (AHERF). In 1994, MCP merged with the city's Hahnemann University to form the nation's largest private medical school and the nucleus of the Allegheny University of the Health Sciences.

This summer, however, brought another milestone: Allegheny University became the first medical school in the country to be part of a bankruptcy filing. Its own deficit, estimated at between $25 million and $30 million, formed a minute portion of the system's catastrophic debt, which by the end of October peaked at about $1.5 billion.

For months, the fate of Allegheny's medical school, along with its schools of public health, nursing and health professions, remained up in the air. Finally, in mid-November, Tenet Healthcare Corp. of Santa Barbara, Calif., completed its purchase of eight of the system's Philadelphia-area hospitals and its university, although it is considering closing the school of public health.

Tenet, with lobbying help from state and local politicians, was able to persuade Drexel University to join forces to manage the university—which has been renamed the MCP Hahnemann University of Health Sciences—in an academic partnership. Drexel's agreement came only after Allegheny's creditors offered a $50 million unrestricted gift to Drexel's endowments.

And while Tenet's deal with Drexel will keep the medical and allied schools open, the university's crisis is far from over. Amid widely publicized allegations that Allegheny officials pilfered funds from restricted teaching and research endowments to keep the hospital system running, there is talk that 100 of the university's 1,300 full-time faculty may be laid off and reports that scholarships might have to be renegotiated. For the students and faculty of what used to be Allegheny University, it continues to be a very long year.

Medical schools throughout the country are watching the situation closely, in part because it reflects trouble prevalent in academic medicine today. "How Allegheny University's problems get resolved will be a defining moment in American medicine," said Sidney Cohen, FACP, chair of the internal medicine department at Temple University School of Medicine and president of the Association of the Professors of Medicine. "Many of the affiliations made by medical schools make sense for only a short period of time, and it remains unclear what kind of alliances can support academic health centers."

Tenet officials had repeatedly said that they would purchase the Philadelphia pieces of the Allegheny system only if the medical school was included. While Allegheny was unable to make the integrated network model work, Tenet insists that there are many benefits to owning both a medical school and hospitals, such as increased referrals and research funding. To demonstrate its commitment, the for-profit hospital giant has promised the university $30 million in the first year of ownership and $33 million in each of the two following years.

Analysts, however, say that Allegheny's disastrous results raise doubts that such large-scale integration can generate enough revenues to even cover system costs. "The notion that there is some magic in this combination is swiftly dissipating," said Mark V. Pauly, PhD, professor of health care systems at the Wharton School at the University of Pennsylvania. "The model of complete ownership and control, with an emperor at the top, doesn't seem to be the way." Instead, he said, what is needed is the "virtual integration" of contracting arrangements, which gives different network components more flexibility than is possible in systems more tightly integrated through ownership.

Faculty at the former Allegheny University hope that the deal between Tenet and Drexel, which calls for Drexel to manage the university's daily operations, will produce just such flexibility. Gerald Soslau, PhD, biochemistry professor and president of Allegheny's chapter of the American Association of University Professors, said that Drexel encourages its faculty to participate in decision-making, something that was anathema under Allegheny's rule. "Allegheny's leaders used intimidation and bribes," he said. "People who questioned Allegheny's actions were given bigger salaries and silenced."

The faculty, determined not to be pushed around by another corporate owner, have worked hard to stay involved in planning and negotiations since the bankruptcy, primarily through the recently-formed 35-member Committee for the University. The Committee consists of the deans and select faculty members from all four schools, as well as student leaders, representatives of the hospital, medical and administrative support staffs and the alumni association.

"As we navigate through new economic systems, we must learn how to stand up for academic principles," said Donald S. Faber, PhD, chairman of the department of neurobiology and anatomy in the school of medicine and president of the Committee. "Allegheny's corporate mentality was impatient with academic procedures, so we actually had chairs hired without search committees. That subverts the academic process and undermines the credibility of the whole system."

If preserving academic principles was the faculty's first lesson, the need for an effective board of trustees to maintain vigilant oversight was a very close second. Critics point to the growing investigation into charges that Allegheny officials misappropriated endowment funds earmarked for teaching and research.

"We got into this fix because there was nobody looking over [Allegheny executive Sherif S.] Abdelhak's shoulder," said Dr. Soslau. "A board should never turn its back and assume that what's being said and done is proper."

Probably the most important lesson for medical centers, analysts say, is that universities must be kept separate from network hospitals. As a for-profit corporation, Tenet cannot control endowment funds, and it has created new nonprofit organizations to manage the charitable restricted accounts of the university and its hospitals.

For Allegheny's former faculty, it is a lesson that has been learned the hard way. "The sad part is that, if AHERF borrowed against endowment growth, most of that may be legal," Dr. Faber said. "With so many problems with the hospitals' operating expenses, it was just too easy to dip into endowment funds.

"The lawyers at the outset told us that bankruptcy would be a feeding frenzy, but despite that warning, we were unprepared," Dr. Faber continued. "This has been an emotional roller coaster."

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