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With the Allegheny debacle fading, Philadelphia medicine rebuilds

From the March 2000 ACP–ASIM Observer, copyright © 2000 by the American College of Physicians–American Society of Internal Medicine.

By Deborah Gesensway

For some Philadelphia physicians, the calamity that befell the Allegheny health system meant the end of a dream. For others, it meant an end to their livelihoods. Yet for others, it meant a fresh start, a chance to change their careers in ways they had never anticipated. For everyone caught up in the Allegheny debacle, however, the events of the late '90s were a wake-up call that paying attention to the business of medicine is as crucial for successful medical practice today as keeping up with clinical advances.

"The Allegheny experience, for all of its badness, was the best thing for us," said general internist Gary D. Yeoman, ACP­ASIM Member, looking back with the perspective that only the passage of time can bring. His practice was one of hundreds bought by the Allegheny Health, Education and Research Foundation in 1996 as the Pittsburgh-based health system aggressively built a mammoth integrated health system across Pennsylvania. Two short years later, however, the health system plummeted into bankruptcy, creating the largest nonprofit health care collapse in the nation's history.

"It made us much more astute about the business side of our practice, which we had let someone else run before," Dr. Yeoman continued. "We came of age, if you will, in that experience. It was like going through an adolescence and coming out the other side and realizing that we are not going to be as stupid and naďve anymore and let people control our lives to the degree that Allegheny did."

Like thousands of colleagues in the community whose livelihoods depended on the state of Allegheny's finances, Dr. Yeoman was forced to make big decisions about his future when Allegheny filed for bankruptcy protection on July 21, 1998, after piling up $1.5 billion in debt. The careers of thousands of other academic and community clinicians were threatened. Researchers had seen their accounts raided and new funding jeopardized. One of the nation's largest medical schools—MCP Hahnemann School of Medicine—looked like it might have to lock its doors for good.

The rapid rise—and even quicker fall—of Allegheny also reverberated further afield. It has led some to question whether the strategy of horizontal and vertical integration arranged around an academic health center is viable given managed care, shrinking reimbursements, the continued drive to outpatient medicine, uncertain Medicare reform and growing numbers of uninsured Americans. It cast doubt on the whole bigger-is-better mantra. Others, including physicians in Philadelphia, have pointed to Allegheny's money-losing experience of owning physician practices as proof that hospitals shouldn't be in that business.

Wake-up call

"Allegheny's decline served as a wake-up call that no one is immune," said Joan Roediger, JD, of The Health Care Group, consultants in Plymouth Meeting, Pa. "They started from a position of strength, coming into the marketplace and instantly being a strong competitor. It really wasn't until the very end that we realized the depth of the problem the organization suffered from. As a result, I think all the other systems are re-evaluating their existing arrangements."

And for doctors who had affiliations with Allegheny, such as Dr. Yeoman, there were tough choices to make. Area consultants estimate that about a third of the roughly 300 practices that had been owned by Allegheny let their contracts lapse with the bankruptcy and melted back into the community, retired or left town. According to consultants, another third of the Allegheny community physicians signed temporary contracts with Tenet Healthcare Corp., which took over Allegheny's Philadelphia operations in 1998, and have not re-signed. About a third remained, and like Dr. Yeoman, have signed long-term contracts with Tenet. Only a very few were able to resell their practice to other health systems, which were themselves noticing with dismay the bottom line of the physician practices they had purchased.

For many physicians, the period since the Allegheny debacle has been the most wrenching time in their lives, so much so that many former Allegheny physicians contacted for this article declined to talk publicly about their experiences. Most of those who are willing to go on the record want to talk about how they have gotten on with their lives instead of dwelling on the past.

"Painful" is how Michael J. Baime, ACP­ASIM Member, described his group's decision to leave the hospital and general internal medicine practice where the seven physicians had spent their entire careers. "It destroyed friendships."

Dr. Baime's group, which ran the internal medicine teaching programs at Allegheny's Graduate Hospital in downtown Philadelphia, left because of problems with how the programs were being managed. "We were less competitive in recruitment, and we were seeing the deterioration of something all of us had spent our whole careers building," he said.

The group's physicians went to the University of Pennsylvania as full-time paid faculty in June 1998, a month or so before Allegheny's bankruptcy. They had to relocate their offices away from Graduate Hospital's premises. While roughly 80% of their patients followed, the physicians were not allowed to take their patient charts with them.

Even though the group's physicians admitted their patients to a Penn hospital, they kept privileges at their old hospital. As Dr. Baime explained, "Our whole set of relationships and our networks were so deeply embedded in that system." Over the last two years, however, all the subspecialists they referred to at the hospital have left, and "all goodwill just evaporated." This year, the group gave up its admitting privileges at Graduate.

Like other physicians interviewed for this story, Dr. Baime said the only good to come out of the Allegheny fiasco is that his group is now much less naďve about business matters. When they went to Penn, the doctors made sure their contract left them a way out--and had no restrictive covenant. "At the end of our five-year contract we can leave, and patients can follow us," Dr. Baime said. "But that's not going to happen. It was painful [enough] to go through once."

Across town in the northeast part of Philadelphia, general internist Dr. Yeoman did a lot of soul searching. After meeting with various consultants, lawyers and accountants, he eventually decided to take his chances with Allegheny's new owner, Tenet.

Dr. Yeoman explained that he and his partners went with Tenet because Allegheny left them with an uncertain financial legacy. "We didn't have any clear financial statements to make us feel comfortable that we could actually go off on our own and be viable," he said. "We couldn't trust the numbers because we didn't know if the numbers we had been getting from Allegheny were real or not real. So we figured we would give ourselves some time with Tenet."

This time around, though, Dr. Yeoman was considerably more cautious about the type of contract he would sign. After 10 months of protracted negotiations, he signed a long-term contract with Tenet that includes an annual review and no restrictive covenant. If things don't work out, the doctors from his group can go into private practice in the community.

For others, life after Allegheny meant leaving Philadelphia. Jeff Glassroth, FACP, had been recruited by Allegheny in its heyday to come from Chicago's Northwestern University Medical School to serve as chairman of medicine at MCP Hahnemann School of Medicine. Allegheny had purchased MCP and Hahnemann separately and merged them in 1994, and Dr. Glassroth remembers being excited about the challenge of merging two culturally different departments and creating a statewide consortium of institutions dedicated to patient care, research and education. "It looked like the possibilities were almost limitless," he reminisced.

Shortly after moving to Philadelphia, however, he realized that Allegheny was not supporting that vision. "A lot of things that were portrayed as being robust and substantial were much less than that, and in some cases, even non-existent," he said. "For example, there was the money."

As published reports would later detail, Allegheny officials allegedly took money from research funds to pay for operating expenses. Even while the system was losing up to $1 million a day and veering toward bankruptcy, the system's top executives allegedly received millions of dollars in bonuses, deferred compensation and low-interest loans. They have also been accused of shifting money out of restricted endowments to pay for operating costs.

Dr. Glassroth heard rumblings of such misconduct, began to see evidence of trouble and got out. He landed on his feet as chairman of medicine at the University of Wisconsin, Madison, where he is now in his second year.

"I consider myself extremely fortunate. I wound up at a fine place with a fine job," he said. "It took a toll on my family, and there were financial hits, but there are people whose retirements were badly affected. There were people who could ill afford to be out of work who were put out of work. A lot of people were hurt."

Rebuilding

Once the magnitude of Allegheny's problems came to light, Philadelphia was forced to welcome Santa Barbara, Calif.-based Tenet Healthcare Corp., the nation's second largest for-profit hospital chain. While for-profit hospitals were a national phenomenon in the '90s, Philadelphia had resisted them.

Tenet bought eight Philadelphia hospitals in November 1998 from the bankrupt Allegheny health system for $345 million. It also inherited about 300 community physicians that Allegheny had purchased and brought together during its decade in Philadelphia.

Tenet also took over the nation's largest medical school. MCP Hahnemann, which was created when Allegheny merged two existing medical schools, today has a new manager, Drexel University, which has agreed to undertake the challenge of running a medical school for two years while it considers whether it wants the long-term responsibility.

While the city may have been uneasy with the idea of putting the fate of so much of its medical profession in the hands of a for-profit hospital chain—Tenet announced in January that it plans to close one Philadelphia hospital this spring—the medical community is starting to rebuild. At the medical school, for instance, a new dean is on board, department chairmen are being recruited and the school recently held a reception to celebrate the hiring of more than 100 new people, noted Elias Abrutyn, FACP, MCP Hahnemann's acting chairman of medicine.

After working at MCP for about 25 years, Dr. Abrutyn decided that life after Allegheny for him would mean staying onboard and helping develop what he views as Allegheny's best legacy: the merger of MCP and Hahnemann. He thinks that the school has the potential to accomplish more in terms of research, teaching and clinical care than the two small schools could do on their own.

At the physician level, life also appears to finally be returning to normal. "Having been through a year of total chaos, everything is starting to repopulate," explained Howard A. Miller, FACP, a general internist with a private practice in downtown Philadelphia who has attended at Hahnemann all his career. The hires the medical school has made so far inspire confidence, he said, and assure him that he made the right choice to stay at MCP Hahnemann as an attending after Allegheny's demise.

It was touch and go for awhile, and even today, Dr. Miller said he encounters patients who tell him they don't want to be admitted to Hahnemann because they fear the financial problems mean they won't get adequate care there. That is beginning to change as they read local newspaper accounts of the financial troubles facing all area hospitals.

That's not to say that the region is completely over its experience with Allegheny. Dr. Miller said that while Hahnemann was once a 550-bed, active hospital with lots of different specialists, it today is a 300-bed hospital with fewer specialists. "For a while, I had to refer some people out of the institution because there were significant holes in some departments," he said. "But it's building back up now." The change also meant a big dip in the income he could earn by seeing patients in the hospital.

There are other lingering effects on physician practices. The whole Allegheny affair prompted Dr. Miller and several hundred other physicians who weathered the storm to start an independent practice association (IPA) last year for the physicians who work at the eight Tenet hospitals. As minor a commitment as joining the Delaware Valley IPA is—dues are only $150 to $300—organizers are learning about another big Allegheny legacy: the skepticism of Philadelphia area doctors toward any sort of integration scheme.

"They are so burned, they don't want to talk to anybody," explained local health care consultant Jerry Katz. "They are saying, 'I am going back to the way it was. I did this before. I can do it again, and I'll learn from the mistakes.' They don't want to have anything to do with corporate medicine. They don't want to have anything to do with external organizations."

In part, Philadelphia physicians are reeling from the unrealistically high expectations set by Allegheny. The conventional wisdom is that Allegheny overpaid for its physician practices, in part because it set off a bidding war with other academic health centers in the city for primary care practices that could be counted on to feed its hospitals. But what Allegheny learned was what hospitals across the country have discovered when they have purchased physician practices: Legally, they can't force doctors to change their referral patterns and admit all patients into their system. An article in the January/February 2000 issue of the health policy journal Health Affairs reported that Allegheny and other health systems in Philadelphia found that they could command only 25% to 30% of the referrals of their community-based primary care providers, not the 80% they anticipated when they started purchasing practices.

Making matters worse, Allegheny's contracts with purchased doctors often guaranteed relatively high salaries for a greater than standard number of years, the Health Affairs article contended. Furthermore, the contracts contained no means to monitor practice productivity, which in some cases declined by up to 25%. "The rich compensation and benefits also attracted an older PCP network (average age reported to be nearly 56) eager to sell and less eager to continue working hard," the article concluded.

Finally, Allegheny, like many hospitals, wasn't very adept at managing these practices. Centralized billing didn't live up to its promise. Bigger meant more overhead, not less.

To top it all off, Allegheny was never able to increase the reimbursements it received from Philadelphia's two behemoth insurance companies, largely because they control 80% of the area's privately insured patients and felt no need to bargain.

Despite the bad experiences with Allegheny, physicians like Dr. Yeoman are hoping Tenet can bring its national expertise to the area and help its doctors negotiate better reimbursement. If it can work that magic, they say, life after Allegheny won't be so bad.

Things are already starting to look up. In January, Dr. Yeoman unexpectedly received a letter from the federal agency that is trying to salvage the Allegheny pension he thought he had lost altogether with the bankruptcy. "It's an unexpected present," he said.


The Allegheny debacle: a brief history

The wild ride that came to characterize Philadelphia's experience with the Allegheny Health, Education and Research Foundation started in the late 1980s, when the very prosperous Allegheny General Hospital in Pittsburgh, under the leadership of newly named chief executive, Sherif Abdelhak, went shopping for a medical school it could call its own.

Across the state, it found what it was looking for in the Medical College of Pennsylvania (MCP), which started in 1850 as the world's first medical school for women but had recently fallen on hard times. Allegheny was looking to cut ties with the University of Pittsburgh Medical School, and it wanted a medical school for prestige and a steady stream of residents and students for its teaching programs and hospital operations.

At the time, the strategy seemed like a good one. Mr. Abdelhak's vision of a statewide integrated health care system was hailed by many health care consultants, economists and policy-makers.

Acquisition after acquisition followed, and while Allegheny acquired hundreds of physician practices, it also had a habit of picking up floundering, debt-ridden hospitals. It also recruited top researchers and physicians and spent lavishly on salaries and began to build new facilities for them.

By the late '90s, it all started to unravel. In 1997, Allegheny laid off 1,200 employees. Mr. Abdelhak was ousted the following year. It all came to an end in October, 1998, when Tenet Healthcare Corp. agreed to buy Allegheny's Philadelphia operations.


In the aftermath of Allegheny, Penn is struggling

In a city where health care is struggling, all eyes are on the University of Pennsylvania Health System.

Since the Allegheny debacle, Philadelphia health care has fallen on some hard times. And while Allegheny's problems dominated local attention for several years, scrutiny has lately shifted to Penn.

Hospitals and health care systems throughout the Philadelphia region are struggling. A report last fall from the Pennsylvania Health Care Cost Containment Council reported that half of the city's hospitals and a third of the suburban ones lost money in 1998. Even the hospitals that remained profitable reported shrinking profit margins.

Penn's health system, however, sustained a $166 million operating loss in fiscal year 1999. Since last May, it has laid off close to 2,800 employees, or roughly 20% of its work force. And at press time, the health system announced that it had replaced its longtime chief executive, William N. Kelley, MACP, who had led much of the expansion.

Given the trouble that Allegheny and other health systems have had with the physician practices it purchased and the ouster of Dr. Kelley, many are carefully watching Penn. They are waiting to see how it handles the 69-practice primary care physicians unit formally known as Clinical Care Associates (CCA).

CCA, which Penn began building in 1993, has been losing money along with the rest of the health care system. And while none of Penn's layoffs directly affected CCA's doctors or office staff, officials say that physicians are not off-limits. As contracts with CCA physicians come up for renewal, health system spokeswoman Lori Doyle said, the health system is not renewing contracts with practices that are not living up to financial expectations.

Despite this strategy, Ms. Doyle emphasized that Penn is still purchasing physician practices. She said that while CCA last year opted not to renew contracts with 20 physicians, it also acquired 17 new physicians located in different geographic areas in and around Philadelphia. The new contracts differ from the old ones, she said, in that they contain incentives for physicians to reduce expenses as well as to increase revenues.

In an interview shortly before he was ousted, Dr. Kelley insisted that a primary care network is an essential component of Penn's integrated delivery system. And despite some retrenchment caused by Balanced Budget Act cuts, shrinking Medicare and Medicaid reimbursement, and a growth in uncompensated care statewide, he said he believed the system was fundamentally sound. "I completely believe that having a vertically integrated delivery system is going to allow us to deliver the best quality care at the lowest reasonable price," he said. The only hint of uncertainty came in his following statement: "Whether that is going to happen next year or 20 years from now, I don't know."

Dr. Kelley said that Penn had learned one very important lesson from Allegheny: Horizontal integration, where health systems try to ensure their presence in every neighborhood in their market, should not be part of Penn's future. "We are not looking for more hospitals or more doctors," but instead need to have enough of the right mix of physicians and facilities in the right places to support Penn's teaching programs, he said.

He also admitted that Penn's aggressive acquisitions in the '90s, which are now hurting the system, were in part a reaction to Allegheny's forays into the region. Allegheny "raided" Penn's physician pool and threatened to oust Penn from some of its traditional teaching hospitals, he explained, so the system reacted.

"The Allegheny dynamics forced us into doing some things on a defensive side that were necessary at the time," Dr. Kelley said. The plan now is to be "careful and intelligent about how we remold CCA," he said. "We are not looking to grow it, and we are looking to shrink it in some selected areas." He pointed to ob/gyns, who he said the system simply doesn't need as many of in some parts of town.

The question now is how Dr. Kelley's replacement, Peter G. Traber, FACP, Penn's former chief of the department of medicine, will proceed. Some analysts said that Dr. Kelley's ouster indicated that the health system's finances were worsening and that additional belt-tightening was needed. University officials claimed that the system was meeting its financial goals and that it is in a "turnaround period."

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