Primary Health Systems, the investor-owned company that controls four Cleveland-area hospitals, sought bankruptcy protection last week as plans to return the hospitals to not-for-profit ownership were disclosed.
The Chapter 11 petition, filed in U.S. Bankruptcy Court in Delaware, makes Primary the largest hospital group to file bankruptcy since Allegheny Health, Education and Research Foundation's Philadelphia operations sought relief from creditors last summer.
Awash with debt, more than a dozen hospitals in the past six months have defaulted or have asked U.S. bankruptcy courts to help bail them out.
Primary's filing is the latest example of a company toppled by overwhelming liabilities. The Wayne, Pa.-based company and its subsidiaries claimed $237 million of debt on assets of $157 million.
The bankruptcy filing also is significant because it signals the departure of Primary founder and Chairman Steven Volla, and his investor group.
Primary was formed in June 1994 with private money, some of which came from investors who knew Volla when he was president and chief executive officer of American Healthcare Management, a now-defunct Dallas-based hospital chain, and a top executive of King of Prussia, Pa.-based Universal Health Services. The company launched its regional network strategy that year with two Cleveland acquisitions.
None of the company's 40 to 50 investors will play an ongoing role or have a continuing economic interest in the reorganized operation, said Kevin Barrett, a lawyer in the New York office of Gibson, Dunn & Crutcher, Primary's outside counsel.
Barrett said he did not know how much money investors had committed to the nearly 5-year-old venture, and Volla did not respond to an interview request.
Over the past nine months, Primary's long-troubled Cleveland network, anchored by 344-bed Mt. Sinai Medical Center, has been managed by Crossroads Capital Partners, an outside turnaround firm (June 29, 1998, p. 164).
Dennis Simon, managing principal of Crossroads, said his company has made strides in building patient census and physician loyalty. However, he declined to disclose current census figures.
Simon said the bankruptcy will enable Primary's Cleveland network, to get back on track.
Primary and its hospitals and subsidiaries generated $219 million in revenues last year. Officials did not disclose the system's net loss for the year.
During the bankruptcy, the system will operate on a $23 million line of credit extended by two of its largest creditors-First Union National Bank, Charlotte, N.C., and Key Corporate Capital, an affiliate of Cleveland's Key Bank.
Simon's recovery plan envisions the creation of a community-based network fed by primary-care doctors in the market who wish to remain independent. By converting to not-for-profit ownership, Simon hopes to position the Cleveland network to compete on an equal footing with its market competitors and to tap local philanthropists for grants and donations.
However, the future of Primary corporate remains hazy. "The first thing it has to do is regroup," Simon said.
Primary gained a foothold in the Cleveland market with its 1994 acquisition of Deaconess Hospital. And although the company eventually amassed a four-hospital network with 3,000 employees, it failed to fill beds.
"What happened is basically two systems have been set up (in the market)-one around the (nine-hospital) Cleveland Clinic (Health System) and the other around (six-hospital) University Hospitals Health System," said Nancy Roth, executive director of the Health Systems Agency of North Central Ohio, the region's health planning agency. "I think that made it difficult for (Primary) to compete."
