Moody's urges hospitals to remember lessons of record-setting bankruptcy

In 1998, the U.S. healthcare industry saw what was, at that time, the biggest bankruptcy filing ever by a not-for-profit health system. Allegheny Health & Education Research Foundation, a $2 billion giant that straddled all of Pennsylvania, had emerged during a frenzied period in the industry when health systems were madly buying physician practices and cutting deals with independent hospitals. The idea was to scale up as quickly and aggressively as possible. The problem was, the organization took on staggering amounts of debt, including floating hundreds of millions in bonds, and picking up hospitals that were deeply in the hole. By the end of the debacle, the Foundation had taken on a staggering $1.2 billion in obligations.

Now, 10 years later, Moody's Investors Service is urging healthcare leaders to stop and reflect on what went wrong. As some observers see it, the Allegheny debacle had all of the elements you'd expect to see in a massive collapse, including an extremely ambitious CEO, a board that did little to hold him back and far-too-rapid growth.

Today, Moody's notes, hospitals are even less prepared to expand at the pace Allegheny did. For one thing, while Medicare and Medicaid are about half of hospital revenues, reimbursement is not adequate, and what's more, hospitals remain vulnerable to future shifts in policy. Meanwhile, hospitals are facing their own issues with the weakening economy. To address these issues, Moody's says, hospitals have learned to impose stronger board controls, stick to a disciplined growth strategy and be more transparent in disclosing hospital performance to stakeholders.

To learn more about Moody's report:
- read this Philadelphia Inquirer blog item

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