Six months after Allegheny Health Services unveiled a new affiliation with Philadelphia's struggling United Hospital System, the company is ready to predict a turnaround: After a string of losses, Allegheny expects United to see a $5 million profit for fiscal 1992.

Allegheny has scheduled an investors' meeting Aug. 14 in Philadelphia to offer more details on the status of United. But David W. McConnell, executive vice president and chief financial officer at Allegheny, last week said the revitalization and projected profits are the result of several improvements instituted by Allegheny.

The Stituation at United

New physician practices are beginning to mature, docftors have been recruited, and existing programs and new facilities are being marketed more effectively, Mr. McConnell said in a letter to The Bond Buyer detailing the situation at United.

When Allegheny first announced the merger in January, United was in dire fiscal trouble. Sources said the hospital system was just months from a bankruptcy filing, having lost more than $7 million in fiscal 1991 and almost $10 million the year before.

Moody's Investors Service lowered United to ba from Baa in July 1990, citing "significant and growing operating losses."

The idea of an affiliation with Allegheny -- one of the most profitable and respected hospital systems in the state -- ws welcome news to United bondholders.

But the announcement was less encouraging to Allegheny investors, and it actually created a disclosure controversy in the municipal bond markets. The affiliation came just three days after Allegheny General Hospital sold a $60 million bond issue without disclosing the fact that its parent company was holding affiliation discussions with United.

Also left unmentioned was Allegheny's plan to guarantee a $25 million line of credit to United. That credit, extended by the Pittsburgh National Bank, is now an obligation of the Allegheny Health Foundation, a separate affiliate that manages nonoperating funds for the system.

Many bondholders, after hearing the details of the affiliation, said the deal probably would not have affected their decision to buy the bonds, since Allegheny General Hospital is not legally responsible for United's $135 million in debt service or any of its other financial obligations.

But most said they would have liked to have been told of the pending affiliation anyway, in order to make a more informed decision.

New Source of Capital

In addition to providing United with a new source of sorely needed capital, Allegheny is also shaking up the structure of United's obligated group, according to correspondence sent to trustees and bond insurers earlier this month.

The original obligated group comprised four facilities: Rolling Hill Hospital, Warminster General Hospital, Lawndale Community Hospital, and St. Christopher's Hospital for Children -- all in the Philadelphia area.

Under the restructuring, St. Christopher's will be separated from the others to emphasize its specialized character, sources familiar with the deal said.

St. Christopher's is the flagship of the United team and was spared last March from a cost-cutting measure when United fired 220 of its approximately 3,500 employees. About 50 other workers had their salaries cut or were switched to part-time from full-time status.

Mr. McConnell said St. Christopher's inpatient admissions are expected to grow 10% in 1992, lifting the entire group's admissions to almost 24,000, a 3.5% rise from fiscal 1991 levels.

Based on Allegheny's fiscal and management strength, Pennsylvania earlier this year increased its rates on Medical Assistance -- the state's Medicaid program -- for St. Christopher's. That is expected to help lift the hospital system's operating revenues this year 10.3% from 1991 levels. Operating expenses are expected to rise just 2%, based on savings of about $9 million resulting from the March layoffs.

Mr. McConnell said other key financial indicators also are expected to improve in 1992, including operating margin, return on equity, and annual debt service coverage.

"Bondholders should be quite pleased with Allegheny's involvement with United," said Thomas M. Barry, a director in the public finance department at First Boston Corp., the underwriter for Allegheny's January bond deal. "It will make them more comfortable with the quality of their investment in United."

Health-care analysts agreed the new management and other changes should lend stability to United's credit.

"It's being viewed positively by United bondholders," one analyst said.

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