The Fall Of The House Of AHERF: The Allegheny Bankruptcy

Abstract

PROLOGUE: The drama of the collapse of the Allegheny Health, Education, and Research Foundation (AHERF) has captured the attention of industry observers from Wall Street to the ivory towers of academe. All are eager to know who ultimately held responsibility—legal, financial, and managerial—for AHERF's decline. Part of the intrigue of the story certainly stems from the fact that so many actors, both inside and outside the company, appear to have played a part. Indeed, the diffusion of responsibility itself may have contributed to the snowballing catastrophe, for as Polish poet Stanslaw Jerzy Lec observed, “No snowflake in an avalanche ever feels responsible.” There are many stories still to be told about why no one was able to stop the “avalanche,” and many of them will be told only as they are revealed in the courts. Meanwhile, the health policy community waits to see whether AHERF's fall has implications for other struggling academic health centers. Robert Burns is James Joo-Jin Kim Professor of Health Care Systems and Management at the Wharton School of the University of Pennsylvania in Philadelphia. He has studied integrated delivery systems for more than fifteen years. John Cacciamani is a geriatrics fellow at the University of Pennsylvania School of Medicine in Philadelphia. James Clement is a consultant at Andersen Consulting Strategic Services in Boston. He and Cacciamani are currently completing master's degrees in business administration at Wharton. Welman Aquino is a nurse manager at New York Presbyterian Hospital and Columbia-Presbyterian Medical Center in New York City. The $1.3 billion bankruptcy of the Allegheny Health, Education, and Research Foundation (AHERF) in July 1998 was the nation's largest nonprofit health care failure. Many actors and factors were responsible for AHERF's demise. The system embarked on an ambitious strategy of horizontal and vertical integration just as reimbursement from major payers dramatically contracted, leaving AHERF overly exposed. Hospital and physician acquisitions increased the system's debt and competed for capital, which sapped the stronger institutions and led to massive internal cash transfers. Management failed to exercise due diligence in many of these acquisitions. Several external oversight mechanisms, ranging from AHERF's board to its accountants and auditors to the bond market, also failed to protect these community assets.