West Penn Allegheny delays financial report, may be 'teetering on the brink,' expert says
West Penn Allegheny Health System delayed release of an auditor's report on its finances for its most recent fiscal year — a signal of serious trouble for the nearly bankrupt hospital operator, an expert say.
The health system did not meet a Friday deadline to make public its audited financial statements for the year ended June 30, a requirement of its agreement with bond investors who are owed about $725 million.
“Audited financial statements of the system are not available but the system intends to continue to work with its independent auditors to finalize the same,” West Penn Allegheny said in a statement.
The Tribune-Review could not reach officials with KPMG, the accounting firm performing West Penn Allegheny's audit.
Spokeswoman Kelly Sorice said this week that West Penn Allegheny would release the statements by deadline. But on Friday she said the health system is allowed an extra 30 days to complete the audit before defaulting on its bonds.
“We're not technically in default until the 30 days expire,” Sorice said. “And we have no intention of letting that happen.”
The five-hospital health system, Pittsburgh's second-largest, was widely expected to get a warning from auditors that it will fail or declare bankruptcy before its current fiscal year ends on June 30, 2013.
The system received the same warning, known as a “going concern” opinion, at the end of last year. It stayed afloat over the past 18 months, thanks to $230 million in grants and loans from Highmark Inc., which is trying to acquire West Penn Allegheny.
This year's audit remains incomplete, Sorice said, because the auditor has not issued an opinion about the system's financial statements.
No opinion from an auditor is more troubling than a going concern opinion, said Stephen Foreman, an associate professor of health care administration at Robert Morris University.
That means there are serious financial problems at the health system, such as not having cash to meet debt service requirements in the bond agreement, Foreman said.
“It looks like this thing is teetering on the brink,” he said of the system's finances.
Asked whether West Penn Allegheny plans to file for bankruptcy protection, Sorice said: “We continue to talk with Highmark and our bondholders about solutions for our financial situation. Discussions are ongoing, and no conclusions have been reached.”
The trustee for bondholders, UMB Bank of Kansas City, could not be reached for comment.
Highmark spokesman Aaron Billger said the insurer is aware that the audit was incomplete. He declined to comment further.
Highmark CEO William Winkenwerder said last week that he expected an acquisition agreement in January.
“I believe that we are now ready to finalize our strategy and move forward just after the New Year in 2013,” Winkenwerder said in a Dec. 20 letter to West Penn Allegheny's board Chairman Jack Isherwood.
In October, West Penn Allegheny released unaudited financial results for the year ended June 30 showing a loss from operations of $112.5 million, more than double the previous year's operating loss.
The system bled money for years as patients migrated to rival UPMC, the largest health system in Western Pennsylvania.
Highmark, the state's largest health insurer, seeks to rescue West Penn Allegheny through acquisition. But the deal bogged down in recent months as officials fought over ways to reduce the health system's debt of more than $1 billion.
Highmark in September proposed asking bondholders to reduce what they are owed by at least 40 percent, to between $326.6 million and $435.5 million, and to unload the health system's pensions, which are underfunded by about $280 million, onto the Pension Benefit Guaranty Corp.
West Penn Allegheny balked at the proposal and accused Highmark of breaking their deal by trying to force it into bankruptcy. Highmark sued and won a court ruling keeping the health system tied to their agreement.
During a November hearing in the lawsuit, West Penn Allegheny interim CEO Keith Ghezzi was asked whether he thought auditors would issue a second going concern opinion. He said it was likely, given the ongoing losses.
“The auditors have not told us definitively,” Ghezzi testified during the hearing in Allegheny County Common Pleas Court, “but they have represented it's an uphill climb.”
Alex Nixon is a staff writer forTrib Total Media. He can be reached at 412-320-7928 or firstname.lastname@example.org.