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UPMC pension suit goes to trial

Health care network claims CBIZ Inc. misstated hospital’s debt by $150 million

A federal civil court jury will be selected Tuesday in Johnstown for a trial in which the University of Pittsburgh Medical Center will be asking more than $100 million in damages from a nationally known financial firm that is alleged to have dramatically underestimated the pension obligations being assumed by UPMC when it acquired Altoona Hospital in 2013.

The financial firm, under the names of CBIZ Inc. and CBIZ Benefits and Insurance Services, and one its retired employees, Jon S. Ketzner, who had an office in Cumberland, Md., are being sued for professional negligence, breach of contract and negligent misrepresentation, according to court papers filed in the U.S. District Court in Johnstown.

UPMC is charging that it relied on an actuarial report prepared by Ketzner in 2012 as it performed due diligence while pondering the purchase of the financially-stressed Altoona Regional Health Systems — the name of the Altoona Hospital after its 2004 merger with the former Bon Secours Hospital.

The lawsuit filed by UPMC charges that the CBIZ actuarial report for the year just prior to the purchase of the hospital stated the pension debt of the hospital was $63.6 million, while later reports showed it was $214 million.

Lawyers for CBIZ argue its financial report was prepared on behalf of Altoona Regional and that the financial firm had no idea that the local hospital board was seeking to “partner” with UPMC or any other large hospital.

It stated in a pretrial document that it did not know UPMC was relying on its actuarial report as a factor in the purchase of the Altoona facility.

The CBIZ defense also contends that UPMC’s acquisition of the hospital, now known as UPMC Altoona, has been a financial asset to one of the state’s largest hospital corporations and that UPMC has suffered no financial damages due to the acquisition.

In a pretrial narrative, CBIZ stated, “UPMC Altoona has performed extraordinarily well despite the revised pension figures.

“UPMC Altoona has exceeded UPMC’s projections and expectations both from revenue from patient services as well as the (increased) revenue to UPMC’s Health Plan,” according to the defense.

The trial in the federal courthouse in Johnstown is the first since COVID-19 restrictions went into effect 14 months ago.

It is expected to last six weeks, and will include hundreds of exhibits as well as testimony by multiple expert witnesses from both sides.

A jury pool of 150 has been summoned to the courthouse.

Testimony will be held in one courtroom while members of the public wanting to view the case will be seated in a second courtroom where the testimony will be presented via Zoom.

U.S. District Judge Kim R. Gibson is to preside over the case.

Filed five years ago

The lawsuit brought by UPMC was filed in September 2016, and since then has included more than 400 court filings. Many of the documents have been filed under seal.

In the complaint, UPMC attorneys from Pittsburgh, Washington and Baltimore point out that from 2008 through 2012, Altoona Regional Health Systems faced growing “financial challenges.”

The hospital financial situation “hovered around the break-even point,” according to UPMC’s assessment.

This was due to:

* Declining inpatient numbers with health care delivery shifting to outpatient care and other facilities.

* Altoona Regional faced additional costs to complete the “physical consolidation with Bon Secours.”

* The area’s aging population resulted in more Medicare and Medicaid patients.

The situation led the Altoona Regional board to seek consolidation with other local hospitals, or with major health care corporations such as UPMC, Geisinger, Highmark and Hershey.

During this time period, Ketzner of CBIZ performed the annual actuarial studies concerning the pension debt of the hospital.

According to pretrial documents, Ketzner had been performing this function for more than 20 years, and UPMC used his financial reviews as it was considering the acquisition of Altoona Regional.

CBIZ, the lawsuit claimed, worked with the Altoona hospital for years, and it stated, CBIZ knew that Altoona relied on its work to make financial and administrative decisions regarding pension plans of both union and nonunion employees of the hospital.

UPMC acquired Altoona Regional on July 1, 2013, and Ketzner retired from his CBIZ job as a certified actuary in early February 2015.

Pension debt

His replacement, Albert Winters, took over the task of calculating the hospital’s pension debt and his review determined that it was much higher than the numbers reported by Ketzner.

According to the lawsuit, it was eventually determined that Ketzner’s work was “riddled with errors,” and that he used “methods, assumptions and adjustments to value the Altoona (pension) plans’ liability which he neither disclosed to his client, Altoona, nor included in his actuarial reports as required by actuarial standards of practice.”

For instance, he assumed in his valuations that vested employees would not retire until age 67, according to the lawsuit.

His reports to federal authorities “did not adhere to any standards and were improper,” UPMC continued.

It is charged that had CBIZ and Ketzner properly calculated the pension debt, steps could have been taken by the Altoona Regional board to shore up the hospital pension systems, including possibly seeking a “distress termination” that would have led to the takeover of the pension liability by the Pension Benefit Guaranty Corp., thereby reducing the pension debt the local hospital would have to assume.

CBIZ responded in its pretrial narrative that the Pension Benefit Guaranty Corp. would not have granted “distress termination” to the Altoona hospital and maintained that while the hospital faced financial challenges, they could have been addressed through normal cost-cutting methods.

CBIZ noted that when UPMC assumed control of Altoona Regional, the hospital had unrestricted cash on hand of more than $95 million. UPMC took the cash.

Since the UPMC purchase, the hospital’s major pension funds have been absorbed into the UPMC system and the local hospital has thrived financially, CBIZ contends.

It also argues that Ketz­ner’s reports represented an accounting estimate for the employer’s use in preparing financial statements and it was not to be used by third parties like UPMC.

Ketzner and CBIZ state they were not aware UPMC intended to purchase Altoona Regional and were never informed UPMC intended to rely on CBIZ’s report to acquire Altoona.

According to the CBIZ defense, UPMC contends Ketzner should have explained his methods of calculating pension debt during the time UPMC was investigating its possible purchase of Altoona Regional.

The defense concludes in its pretrial narrative, “… Ketzner did not believe his calculations were incorrect and believed his numbers accurately stated Altoona’s future pension obligations.

“He could not have disclosed what he did not know,” according to the CBIZ defense.

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