The Case Against Hospital Bankruptcy
As Hospital Center of Excellence (HCOE) has been presenting the business case (of taking over St. Mark’s Medical Center) to potential investors, several investors have stated they would prefer to just buy it out of bankruptcy. While bankruptcy may very well be in the cards if HCOE is not successful in securing commitment for another $5 million in funding, bankruptcy is not a valid approach to saving the hospital. Why not?
Private sector acquisitions are often done through an “asset purchase.” Buying assets after a bankruptcy filing is a form of asset purchase. It succeeds in purchasing only the assets, leaving behind unsecured creditors, liabilities, the risk of litigation, and depreciates any overpriced enterprise “good will.” According to a General Accounting Office report on HUD mortgage defaults the average discount to mortgage principal is 62%, so that would be appealing. However, that does not take into consideration several unique aspect of hospital operations.
The most significant factor is that hospitals depend on managed care contracts (Blue Cross Blue Shield, United, Aetna, etc.) and payor contracts from the Centers for Medicare and Medicaid Services (CMS). If the hospital ceases to exist, the contracts are nullified. Once nullified, any new entity, will be required to negotiate and establish new healthcare payor identification (HPID) numbers. These HPID numbers reportedly can require between 6 and 18 months to be approved. During this time the hospital does not receive any reimbursements from managed care providers or CMS. Once approved, reimbursements are paid in arrears so the money eventually comes through, but the hospital does not receive income during this approval period. Therefore, the hospital may have to operate for up to a year and a half with no income. If we cannot raise $8.5 million, we certainly cannot raise $45 million. That is the quintessential reason a bankruptcy asset management purchase is not a valid approach, even if you could buy the land and assets for $4.8 million. That is only the start.
Under a lender foreclosure, HUD will reimburse the lender and then perfect its collateral and take possession of the land and buildings. Under the regulatory agreement filed with the County Clerk (vol 1257, page 850) on page 5 it states, “To secure the Secretary (HUD) . . . Mortgager (SMMC) respectively assigns, pledges, and mortgages to the Secretary its rights to the income and charges of whatever sort which it may receive or be entitled to receive from the operation of the mortgaged property.” And the Amended and Restated Security Agreement, page 1 states, “The Collateral and the Property identify and include all the land, buildings, fixed and moveable equipment and personal property of the Debtor.” The agreement further states, “Debtor hereby grants a security interest to Secured Party (HUD) on each of its Deposit Accounts included as part of the Collateral.” A federal agency will be in control of the property buildings, and the equipment as well as any cash it has or may receive. HCOE cannot find any reference to the specific timing for HUD liquidation. It may take years. And during this time the building, with a leaking roof will continue to deteriorate. Mold will set in. The cost to bring the building back on line once settled, may be beyond the building’s value if mold remediation, vandalism, and system replacements are required.
TheHUDregulatoryagreement terms mean all vendors are unsecured. None of these vendors, some of which are local businesses, will be paid. Vendors will have no recourse as an unsecured creditor. This may be catastrophic for some. For those that can absorb the loss, how willing do you think they will be to ever conduct business with any future hospital? The reputational damage may never be overcome.
And then you have staff considerations. Under a bankruptcy, over 120 jobs will be lost. Depending on timing, employees may not receive their last paycheck as they are also unsecured. PTO may not be paid out there will not likely be any severance funds under these circumstances. Staff will be forced to find employment elsewhere. Some of these staff may not be able to make their own car and mortgage payments. The economic impact will be broad. And recruiting staff back to a rejuvenated hospital months to years later will be difficult at best.
And then you have a total lack of public trust and confidence that may never be recovered as residents seek healthcare in neighboring counties.
In the end the county will lose one of its biggest employers and a critical healthcare asset for years to come. Not to be overly dramatic, but there will be people who die without timely access to acute care. Residents will defer getting medical attention and will become sicker. Some in the county simply will not have the means to get to healthcare facilities in other counties. The only access to emergency care in the county will be Fast Aid Urgent Care. These are just a few of the realities that make buying this hospital out of bankruptcy and returning the hospital to operation post-bankruptcy unfeasible at best. We have an opportunity to continue operations at our hospital without these devastating impacts if we can raise the $8.5 million required to fund the work out plan we have so carefully crafted. Please help HCOE save our hospital while we have the opportunity to do so, economically with a smooth transition to local management.