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Sacred Heart owner rejected deal that would have saved hospital


By Andrew L. Wang, Crain's Chicago Business
Posted: July 3, 2013 - 12:00 pm ET
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Just three days before Sacred Heart Hospital was shut down, owner Edward Novak walked away from a deal to sell the troubled facility, according to a lawyer for the buyer, opportunistic healthcare investor Paul Tuft.

If the offer had been accepted, Mr. Tuft was prepared to lend enough money to the 119-bed, West Side hospital to keep it running until the sale was completed, said attorney Edward Green, a partner in the Chicago office of Foley & Lardner LLP, which represents Mr. Tuft.

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Mr. Novak is the focus of a federal investigation into alleged illegal kickbacks at the hospital, which was closed on Monday after Medicare decided to suspend payments. The hospital filed for Chapter 11 protection from creditors yesterday.

Mr. Tuft is an experienced hospital investor and turnaround executive. The founder of Scottsdale, Ariz.-based Southwest Healthcare Services LLC, he has owned or operated hospitals in California, Missouri, Texas, Ohio and the District of Columbia, according to an undated biography posted to Southwest's website.

In Chicago, he played a key role in the late 1990s in Lincoln Park Hospital, which was eventually sold; the facility closed in 2008. He was also owner and president of Michael Reese Hospital on the near South Side before it closed in 2009.

Mr. Tuft on Friday submitted a letter of intent to acquire Sacred Heart and two related businesses also owned by Mr. Novak, Mr. Green says in an email.

The deal was approved by the independent board of the hospital on Friday afternoon, but “current ownership,” meaning Mr. Novak, rejected it Friday night, Mr. Green says.

“Pursuant to the terms of the letter of intent, Mr. Tuft was also prepared to lend money to Sacred Heart Hospital, Garfield Kidney Center, and Superior Home Health so these three affiliates could meet their respective payrolls and ultimately facilitate the transactions without the need to close Sacred Heart Hospital,” Mr. Green says.

Even after the rejection, Mr. Tuft may still be in the running to buy the hospital.

“The situation remains fluid and Mr. Tuft has no further comment at this point,” Mr. Green says.

'EXTRAORDINARILY COMPLICATED'

Mr. Green did not disclose other terms of the deal, including a proposed sale price.

A lawyer for the hospital declined to specifically comment on Mr. Green's account.

“We are and have been in discussions with several parties regarding a purchase of the hospital which will provide for its continued operation,” Robert Wild, an attorney in the Chicago office of law firm Krieg DeVault LLP, said in an email. “The suspension of payments by (Medicare) has made the continuation of operations at the hospital and negotiations for its sale extraordinarily complicated.”

State officials on Tuesday moved to revoke the hospital's license.

Sacred Heart hopes to gain the cooperation of officials with the Illinois Department of Public Health and the Centers for Medicare and Medicaid Services, which runs Medicare, so that the hospital could complete a sale with bankruptcy court approval, Mr. Wild said.

In a letter to state officials yesterday, Karen Davis, the hospital's interim CEO, described the closing as a temporary step.

The bankruptcy petition was crucial because “the hospital could no longer operate until the facility enters protection under Chapter 11 of the Bankruptcy Code, and hopefully secures a buyer,” according to Ms. Davis, an executive at turnaround firm Alvarez & Marsal Holdings LLP.

Any offer would almost certainly come with a deep discount considering the risk the buyer would be undertaking.

The hospital has been on life support since mid-April, when federal authorities arrested Mr. Novak, Sacred Heart CFO Roy Payawal and four physicians in connection with an investigation into an alleged kickback scheme that paid doctors thousands a month in exchange for referring their Medicare patients to the hospital for care.

Sacred Heart owes about $866,000 to its top largest creditors, according to the bankruptcy petition filed in U.S. Bankruptcy Court in Chicago. The largest item was $197,378 to the Illinois Department of Employment Security. Sacred Heart cut about 40 employees on Monday.

"Sacred Heart owner rejected deal that would have saved hospital" originally appeared in Crain's Chicago Business.


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