August 6, 2008
July 21, 2008, marked the 10th anniversary of the bankruptcy filing and payment default of Allegheny Health and Education Research Foundation (AHERF). With $2 billion in revenue and $555 million of outstanding debt, AHERF remains the largest not-for-profit health system to file for bankruptcy, writes Lisa Goldstein, senior vice president/team leader, Moody's Investors Service Public Finance Group/Health Care Team, in an article published in the August issue of hfm magazine. The article is excerpted below.
Moody's believes there are important lessons learned from AHERF's downfall that are applicable to today's analytical efforts to determine which health systems will be able to navigate future challenges.
Strong governance and oversight of management are needed to ensure accountability. In the opinion of Moody's, AHERF's board of trustees provided minimal guidance to a management team that dominated the system's decision making and was not held accountable for its actions. Controls on growth and capital investment were absent. Today, as hospitals across the country seek to populate their boards with financial and industry experts, board members at the most successful organizations will use their expertise from their own professions to question management's strategies. These boards will educate themselves on the challenges in the industry and establish appropriate benchmarks to measure key financial and quality outcomes.
Disciplined growth strategies need to be supported by rigorous financial planning and feasibility analysis. AHERF pursued a very aggressive hospital acquisition and physician employment strategy to establish a statewide network in Pennsylvania and compete effectively with the other academic medical centers. Moody's believes that disciplined growth strategies, including both horizontal strategies (adding more hospitals) and vertical strategies (adding other healthcare-related businesses such as physicians and insurance plans) can be successful over the long-term if supported by solid financial planning and realistic forecasts. The most successful organizations identify potential operating risks and challenges and articulate strategies to address various challenges. These healthcare systems are able to implement strategies on a timely basis, and adapt their plans if early indications suggest that goals may not be met. [For information on a disciplined growth process, see the article "Achieving Scale: Strategies for Sustained Competitive Performance"" by Mark E. Grube, Ryan S. Gish, and Sasha N. Tkach in the May issue of hfm.]
Physician integration is critical to grow market share but needs to be methodical and measured. AHERF went from owning no physician practices to employing more than 500 physicians in both markets in a matter of years, primarily through practice acquisition and paying high multiples for future earnings ("goodwill"). Losses quickly accumulated at the physician practices, which had no productivity measures in the contracts, creating greater pressure on the hospitals to subsidize physician losses. Today, many hospitals are pursuing a number of strategies to align with physicians and offering a "menu" of alternatives, including employment. Hospitals are being much more prudent and methodical in their selection of physicians. Hospitals are also developing effective productivity standards to ensure that financial performance is not unduly burdened with new costs compensating for physician losses. Hospitals that approach physician alignment strategies more methodically and have the resources necessary to invest in these strategies will minimize the impact to their credit position. [HFMA's Physician Alignment Forum provides strategies and tools each month for effective physician engagement .]
Robust information systems are necessary to manage costs, maximize revenue, and provide differentiation in quality and clinical outcomes. Given its large hospital and physician network, AHERF attempted to increase its leverage through a large exclusive capitated contract. However, AHERF did not have adequate infrastructure and technology to identify and manage the risk associated with capitation. Today, information systems are even more critical to position a health system to manage costs, maximize revenue, and differentiate itself along clinical quality. Some hospitals have made progress in improving their information systems to better manage their costs and provide more efficient patient care while others are lagging behind. Having the right data allows a hospital to negotiate better contracts with payers and differentiate themselves on quality and outcomes. [IT planning tools can be downloaded in the hfm article collection Healthcare IT: Getting Value from the Investment.]
Disclosure of the financial performance of all of a health system's operations and obligations (including nonobligated entities) creates greater transparency and builds credibility. The complexity of AHERF's organizational structure and lack of adequate disclosure resulted in difficulties in easily assessing overall financial risks and the interrelationship between various subsidiaries. Today, health systems are often even more complex, with various business lines and subsidiaries, some of which are legally obligated on their bonds and others that are not. Successful healthcare systems not only hold individual businesses accountable for operating performance but also take a system approach to managing and identifying both direct and indirect risks. [More information on financial reporting is available from HFMA's Resource Library.]
The complete article "The Failure of AHERF: 5 Important Lessons" by Lisa Goldstein is available on the hfm magazine web page.