JF: It’s a very significant milestone in the development of our system. But even more significant than the first quarterly profit is that our hospitals had a deficit of operations of about $90 million three and a half years ago, accrued primarily at Allegheny General and its related AHERF community hospitals brought on by the demise of AHERF. While we’re very pleased to be generating a profit on a quarterly basis now and anticipate to be profitable for the year, when you look over the last three and a half years, we have made a $100 million swing in financial performance. That swing is nothing less than phenomenal over that period of time. At the time we formed the system in August 2000, we did a five-year financing projection that was used to sell new bonds of West Penn Allegheny Health System. We are exactly on plan with the financial projection we put together four years ago.

JF: I think our strategic position is excellent. Our health system is comprised of six hospitals. Geographically, we have good coverage across the market. Our community hospitals are not in markets where they compete directly with one another. We have two tertiaries in the system, Allegheny General Hospital and the Western Pennsylvania Hospital. They’re both large academic teaching centers located within the city and have largely distinct medical staffs. Their patient draw is from largely distinct markets. So, even the two tertiaries that are the closest two hospitals, in terms of distance from one another, have lots of opportunities for synergism rather than head-to-head competition.

JF: I think affiliations play a very big role. There’s been rapid consolidation of health care providers in the western Pennsylvania market over the last eight or nine years. That consolidation has slowed dramatically. What I see, at least for our strategy going forward, is not an approach to the market that would have us acquire large numbers of additional hospitals, but rather to form very meaningful strategic partnerships with the independent hospitals in the market to provide services and clinical programs in those local communities that will strengthen the strategic ties with those hospitals, short of consolidation or acquisition. We intend to increase the number of those partnerships. Our system over the last couple of years has been preoccupied with getting our own house in order, and that’s taken us away from that strategy.

JF: After we consolidated the six hospitals, one of the very first things we did was consolidate the administrative functions of the various hospitals including finance, information systems, human resources, law, insurance. Those consolidations have saved tens of millions of dollars. From that perspective, consolidation has been very good in terms of having a rationalized overhead base that could be spread more effectively across several hospitals. I think the second wave of consolidation we will see will be having our six hospitals work more closely together in terms of clinical coordination. From my perspective, consolidations across the country have provided many challenges. Many of them have failed for any number of reasons. One of the reasons, typically, is a failure to appropriately merge the cultures or leaderships of various hospitals involved in a consolidation. We had the benefit in our case of having one consistent management team and one consistent board leadership since we came together in 2000. I think that’s been a big advantage in helping our system be successful.

JF: I think we’ve been very successful as a competitor in the western Pennsylvania market. Our tertiary hospitals not only have a local, but a regional and national market reputation. I think the success of our initiatives is borne out by our patient growth across our hospitals: we have grown approximately 15 to 20 percent, cumulatively, over the last three and a half years. The fact of the matter is there’s not substantial excess capacity in the region, given some of the hospital closures and consolidations. I think we’ve been very effective in attracting nationally recognized medical talent and in terms of the patients who continue to come to our facilities in increasing numbers. I guess I don’t judge our success relative to UPMC.

JF: I think capital investment is critical. Health care is a very capital-intensive business. If you read any of the literature, access to capital in sufficient levels is something that comes up time and time again as a challenge for all health care providers nationwide. Our plan is to invest in our facilities equivalent with the national rate, which ranges between six and eight percent of revenues. We have plans on a capital basis to spend consistent with the industry norms in that regard.

JF: I think you’ll see capital investment in a couple of areas. First of all, information technology is going to be a critical component for success of health care systems – things from computerized medical records, to computerized physician order entry, to state-of-the-art financial systems – are all going to be important. That’s an area that’s changing very rapidly. Other components of capital investment that will be key for us include cutting edge equipment and technology and, while you’re investing in those areas, you can’t forget about the underlying infrastructure of the hospitals to run the day-to-day business in a quality way that generates satisfied patients.

Within the last six months, we’ve approved capital for MRIs at two of our flagship facilities, and linear accelerators for our oncology program at two of our other facilities. We’ve approved a PACS system for digitized radiology at two facilities. In February of this year we approved $40 million of capital expenditures; about $32 million of that was with our own funds and other $8 million was joint ventured or partnered funds. Historically, hospitals have looked at capital once a year. We have a much more dynamic process, so we’re going through another round of capital approvals in July, when I anticipate we’ll approve projects with a total value of a similar amount.

West Penn is busting at the seams from capacity perspective and we’ve closed the psychiatric unit at West Penn to develop additional space for higher-end medical and surgical patients. There is an expansion plan at Forbes Regional. Forbes is a hospital that sits in a wonderful market and one of my goals as leader of the system is to further develop that hospital by having additional services so people from that community don’t have to travel into the city. A big thrust of that expansion is going to be higher-end surgical services. There’s an open heart program in the planning process that is going to respective board bodies over the next 60 days for final approval before implementation.

JF: We’re going to generate it primarily from operations, as well as from the people who have supported our hospitals over the long term, in terms of charitable giving.

JF: Western Pennsylvania is an aging market with increasing demand for medical services despite a slightly decreasing population. The population is aging much more quickly than it’s shrinking. Our experience has been that high-quality programs become busy very quickly. So, while I’m sure we will take some initiatives to make our patients aware that they exist, promotion or marketing is not something that is of significant concern to me relative to the success of the programs. A high-quality program will draw patients to that service very quickly. A large number of patients have already visited our hospitals and, if you just look at the data over the last few years, you can see we’ve been successful and intend to continue.

JF: When West Penn looked at the market four years ago, our view was that, while West Penn Hospital was a very fine hospital – it was doing very well financially, had a strong balance sheet – one of the challenges we faced was becoming marginalized because of the significant consolidation around us. So, from West Penn’s perspective, the initiative was to create a system that was a long-term, secure provider in the western Pennsylvania market. If you look at it from that perspective – that was West Penn’s primary goal – the merger has clearly been a success.

Three or four years ago Allegheny had some very serious financial challenges and, in combination with West Penn in the context of the merger, was able to resolve all of those challenges and has removed itself 100 percent from the ongoing effects of AHERF’s demise. Now the two together are operating in what is a difficult health care environment, not only locally but across the country, because we have scale and market share that makes us important to our patients and to the local insurers. I think the chances of our success have been increased substantially into the future. When you look at how we’ve benefited each other, we have started to look at working together from a clinical perspective more aggressively. We’ve done that in areas like anesthesia, high-risk obstetrics and invitro-fertilization. We’ve started to work together to a greater extent in graduate medical education. Working together between the two tertiaries creates not only cost savings opportunities, but creates real market opportunities on the revenue side and program development side.

West Penn, had it not merged, I presume would have still been a player that provided good clinical services, but would have been a player with a five percent market share, and it would have had less influence in terms of the number of patients it touched in western Pennsylvania and in terms of its importance to the insurers in the area.

JF: It’s about 22 percent.

JF: All of the management services – finance, information systems, human resources, law, insurance – were consolidated very shortly after the merger. The services that remain autonomous, at least historically, have been the clinical services. Consolidating all the administrative doesn’t happen overnight. It was a two-year initiative to put that into effect where it was running smoothly. We’ve now turned our attention to working together more closely from a clinical perspective, and I think you’ll see that being the thrust of our attention as we go into the immediate future. All of our hospital CEOs are focused on bringing those consolidations together. I think we have some existing programs that will benefit from consolidation across the system, as well as some that will benefit by continuing to operate autonomously, either because they have separate medical staff support or separate patient support drawn from different markets. There are some services that you wouldn’t want to combine, and end up with a patient population that’s less than what you had in two distinct services. So, certainly we’re mindful, as we approach consolidation of services, of the market impact we have. A lot of that has to do with physician leadership, physician commitment to the programs. In some cases it has to do with geographic location of programs and still being convenient for patients.

JF: First, our primary care physician base is critical to the future success of our system. We have, through the combination of West Penn and Allegheny, two primary care physicians networks that were employed by the respective health systems. We have merged those together as an integrated business unit and we have used many of those practices – which now include about 120 physicians – for recruitment of graduating residents from our programs and from outside the area to bring additional primary care physicians to western Pennsylvania and to continue to build our network. That’s going to remain a key strategy as we go forward, as they are a critically important access point to our health system. Our view is to maintain and grow those practices, and add practices in very select areas. But I’d be quick to add that our hospitals are all open staff, and have a significantly greater number of private primary care physicians who practice at them.

At our two academic centers, we have been very successful over the last several years in recruiting nationally for specialists to fill leadership and clinical roles. At all six of our hospitals, we’ve recruited specialists from within the local community, some from UPMC, some from other local providers and nationally, to our programs.

JF: Highmark made a $125 million loan back in August 2000 to facilitate the health system coming together. That loan has a term that will run many more years and we’re going to be making those payments according to the terms of loan for several years to come. Highmark made that loan, I think, because they believed it was in their interest and the community interest to see Allegheny General Hospital and its affiliated community hospitals survive, and they were a very important component of having the merger come together. I believe that Highmark still has the perspective that we are a valuable community resource, but Highmark got no special privileges, nor did West Penn Allegheny gain any special status in receiving the loan. We certainly continue to work closely together with Highmark as we would with any other insurance company. They’re an important customer of ours as we try to do our work.