SEC Slaps West Penn with Wells Notice

An even darker shadow now hovers over West Penn Allegheny Health System, with the teetering organization revealing that the Securities and Exchange Commission may take action against it over accounting discrepancies.

Pittsburgh-based West Penn, the second-largest hospital network in western Pennsylvania, acknowledged the SEC’s so-called Wells notice in its quarterly report, which it released Thursday.

West Penn Allegheny, whose $726 million of bond debt makes it one of the largest junk issuers in the municipal marketplace, reported a $24.7 million loss for the three months ended Sept. 30. Its loss for the same period a year earlier was $21.8 million.

West Penn board chairman Jack Isherwood said in the report that the SEC is referring to “disclosures made by WPAHS in 2009.” West Penn the previous year admitted it inflated its revenue by $73 million.

The Wells notice, which SEC enforcement staff issued Tuesday, means that staff may recommend that the full commission bring a civil lawsuit or administrative proceeding against West Penn. “A Wells notice by the staff is neither a formal allegation of wrongdoing nor a determination of wrongdoing,” Isherwood said in the report. “[West Penn] intends to make a Wells submission to the commission, setting forth the bases for the system’s belief that the action is not warranted.”

Isherwood does not expect the notice to interfere with its daily operations.

West Penn is in discussions with Blue Cross Blue Shield insurer Highmark Inc., also of Pittsburgh, about a $475 million affiliation agreement, the preliminary agreement for which they announced in November 2011. West Penn broke off talks in late September when Highmark’s new CEO, William Winkenwerder, insisted that West Penn file for bankruptcy before the sale, but the two parties resumed talks after an Allegheny County court prohibited West Penn from negotiating with other suitors.

Highmark is looking to compete with the region’s dominant provider, the University of Pittsburgh Medical Center. In October, amid the West Penn dispute, it announced a $65 million preliminary deal with Saint Vincent Health System of Erie, Pa., which it expects to close by year’s end.

Moody’s Investors Service and Fitch Ratings the past two months lowered their ratings of West Penn to Ca and CCC, respectively. Standard & Poor’s rates the system B-minus. The Allegheny County Hospital Development Authority issued the fixed-rate bonds in 2007.

The West Penn system evolved from the ashes of the Allegheny Health, Education and Research Foundation and sold $430 million of bonds in 2000 to finance its creation. AHERF, an outgrowth of Allegheny General Hospital, declared bankruptcy two years earlier. Allegheny General is now West Penn’s flagship.

The SEC at the time held Allegheny Health accountable for overstating net income by millions of dollars.

According to West Penn’s quarterly statement, a general decline in inpatient volume offset increased reimbursement rates and the reopening of services at West Penn Hospital.

The report also cited a drop in market share when the University of Pittsburgh in July opened a $250 million facility, UPMC East, in Monroeville, about a mile from West Penn’s Forbes Regional Hospital.

West Penn said expenses, including restructuring, through Sept. 30 increased by $10.7 million, or 2.7%, compared with the same quarter a year earlier.

It attributes the increase to a spike in salaries, wages and benefits, which went up 8.2%.

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