Lawton R. Burns and Alexandra P. Burns
Policy Implications of
Hospital System Failures
The Allegheny Bankruptcy
During the late 1990s and early 2000s, the economy of the United States was rocked by a series of corporate accounting scandals and bankruptcies. Before there were Enron, Arthur Andersen, WorldCom, Tyco, and Global Crossing, however, there was Allegheny. Formally known as the Allegheny Health, Education, and Research Foundation, or more informally as AHERF, Allegheny filed for bankruptcy in U.S. Bankruptcy Court in Pittsburgh in July 1998. Filing papers cited $1.3 billion in debt owed to 65,000 creditors, making this the nation's largest nonprofit healthcare bankruptcy.
Allegheny's growth, decline, and bankruptcy caused tremendous upheaval in both Pittsburgh (where AHERF's corporate office, western Pennsylvania hospitals, and initial flagship teaching facility were located) and Philadelphia (the location of the eastern Pennsylvania hospitals directly affected by the bankruptcy filing). Hospitals repeatedly changed ownership, first among multiple nonprofit systems, and then in for-profit systems. Physician practices and medical researchers who were attracted to join Allegheny with large purchase prices and promises of new facilities and support were later jettisoned. Insurers entered into full-risk capitated contracts with Allegheny, only to have it go bankrupt without providing all of the contracted services. Suppliers and wholesalers continued to sell and deliver medical supplies after it failed to pay its bills. A handful of senior executives captured their pensions before the bankruptcy, but later repaid them—voluntarily or involuntarily. Employees of AHERF's eastern operations, on the other hand, saw their pensions wiped out after the bankruptcy and then later restored by the Pension Benefit Guaranty Corporation. Finally, months before the bankruptcy, executives tapped into the