In the end, a Chapter 11 bankruptcy reorganization was the only way to keep four nursing homes from bleeding too much red ink onto the income statement of a small Massachusetts healthcare system.
The homes were built or acquired a decade ago by Holyoke (Mass.) Hospital when it was the thing to do. But rampant change in the healthcare climate of the 1990s skewed all the assumptions that made diversification beyond acute care a sound strategy.
The once-full nursing facilities serving a once-full acute-care hospital had become a drain on Valley Health Systems, the parent company of the facilities, says Clark Fenn, vice president of management services.
What's more, the system couldn't sell the homes to a willing buyer because of legal complications stemming from an attempted merger-another market trend that sideswiped Valley Health instead of giving it a ride.
Under the reorganization plan filed last month, the nursing facilities will remain open and will be managed by Oasis Healthcare, a Newton, Mass.-based operator of long-term-care facilities.
Oasis and Valley Health had negotiated a tentative purchase agreement late last year, but the sale was blocked by an injunction sought by Sisters of Providence Health System.
The Springfield, Mass.-based Catholic network thought it had a merger agreement with Valley Health after 15 months of negotiations that began in 1994.
But Valley Health, then called Holy-oke-Chicopee Area Health Resources, abruptly decided against the deal. Sisters of Providence sued for breach of contract, contending the deal was done (June 19, 1995, p. 16).
Just before entering merger discussions, the Holyoke system had decided to get out of long-term care because of financial problems caused by declining occupancy, complicated by a newly tightened federal policy on reimbursement, Fenn says.
But because the merger focused on coordinating and preserving community services, the system held onto the homes, anticipating they would be combined with a similar number operated by the Providence system, creating economies of scale that could make them all viable, he says.
When the merger fell through, Valley Health began looking for a buyer for the four homes, and it began negotiating with Oasis in April 1996.
Meanwhile the homes were losing money for the system's long-term-care subsidiary, called Summerfield, approaching "mid- to high six figures on an annualized basis," Fenn says. The division was taking loans from parent Valley Health that had accumulated to more than $1 million.
In January, soon after agreement was reached on the sale, the injunction stopped the sale in its tracks. The state court's decision took into account a scheduled April trial date for the contract dispute, but docket backups now threaten to postpone the case until late fall, Fenn says.
The bankruptcy filing not only gives Summerfield breathing room in the interim but also separates the sale issue from the contract dispute. The bankruptcy court is preparing to take qualified bids on the nursing homes to resolve creditor issues, giving Oasis and others an opening, Fenn says.
Oasis operates 15 facilities in Massachusetts and southern New Hampshire, giving the company the critical mass to succeed where Valley Health could not. As a standalone operation, "you can't run at 75% or 80% occupancy and stay in the black with these facilities," he says. The four homes range in size from 60 to 120 beds.
When the system acquired the homes in the late 1980s, Holyoke Hospital was at full occupancy and hard-pressed to find skilled-nursing facilities to which it could discharge patients.
That shortage of nursing home beds gave way to a building boom, however, that sent the area's nursing home capacity soaring.
Meanwhile, managed-care pressures to reduce hospitalizations created competition in post-acute care for the 30- to 90-day rehabilitation stays that once were directed to nursing homes, Fenn says.
But while the combination of more competition and decreased potential revenues in long-term care were making the business unprofitable, the healthcare system remained committed to keeping all four homes open.
"We could have opted to close the homes but felt that was not in keeping with our mission and not in the best interests of our community," Fenn says. "Our goal throughout has been to preserve jobs and ensure there would be no disruption for the residents of these facilities."
The talks with Oasis were grounded in an assurance that none of the homes would be shut down, but ironically the news of those negotiations led to job anxiety. The facilities sustained a 35% to 40% turnover during that period among the 365-member work force due to concern that some jobs would be cut.
That contributed to the difficulty in managing the homes efficiently. "We couldn't hire and train employees as fast as we were losing them," Fenn says.
The reorganization is part of the effort to stabilize the situation, aiming to "preserve jobs and ensure the continuity of care for our residents," he says.