Critics Say Charitable Assets Were Lost in Pennsyvania Hospital Deal

Tenet Healthcare, a California company that owns hospitals around the country, will transfer an estimated $190-million to two new charities as part of a deal to buy a bankrupt chain of non-profit hospitals.

But critics of the deal say that the hospitals — formerly owned by the Allegheny Health Education and Research Foundation, in Pittsburgh — had millions more in charitable assets that have now been lost through the for-profit conversion. And Pennsylvania’s Attorney General says the case demonstrates the need to change federal bankruptcy laws to better protect charitable assets when for-profit companies buy non-profit groups.

Jonathan M. Stein, general counsel at Philadelphia’s Community Legal Services, says the amount of money set aside for the new charities was “totally inadequate.” At one time, he says, Allegheny’s charitable assets were worth as much as $500-million.

But just how much those assets are now worth is unclear.

Allegheny filed for bankruptcy in July, claiming $1.3-billion in debts. Last month, Pennsylvania’s Attorney General, Michael Fisher, said that Allegheny had improperly used at least $8.5-million from 23 restricted endowment funds to pay its bills.

“That’s just the tip of the iceberg,” says Mr. Fisher’s spokesman, Sean Connolly, adding that audits of Allegheny’s more than 550 funds are pending. Allegheny officials said they would not comment on the funds until their own audits of them were completed.

Last week, Tenet paid $345-million to buy eight Philadelphia-area hospitals from Allegheny. The sale was contingent on a deal, brokered by Mr. Fisher, that created the two new non-profit groups to receive and administer the health system’s charitable assets.

The Philadelphia Health and Education Corporation will take control of the bulk of the money and will own and operate Allegheny’s medical school. The school will be managed by Drexel University, in Philadelphia. The other new non-profit group — the Philadelphia Health and Research Corporation — will receive about $23-million, which represents the charitable funds of the eight hospitals.

Tenet’s deal with Allegheny is just the latest example of a for-profit company’s buying non-profit hospitals or arranging joint ventures with them. But unlike the scores of such arrangements over the last several years, this case has played out under the aegis of a federal bankruptcy court.

A federal judge in Pittsburgh had denied Mr. Fisher’s request to allow a state court to oversee the transfer of Allegheny’s charitable assets, ruling that the federal court had exclusive jurisdiction.

Mr. Fisher’s spokesman said that the Attorney General was disappointed that the state couldn’t do more to protect the charitable assets. He said state officials have been working with Sen. Arlen Specter, a Pennsylvania Republican who is expected to introduce legislation in Congress that would amend the federal bankruptcy code to require that state laws apply when the charitable assets of non-profit organizations are being transferred or sold.