In the age-old conflict between lenders and creditors, a new source of tension is cropping up between struggling hospitals and receivables financing companies.
A few recent incidents highlight the ill feeling that can arise when cash-desperate hospitals sell their accounts receivable or rely on nontraditional sources of financing to back multimillion-dollar sales of troubled operations. Providers, and some traditional lenders, complain that an increasingly active breed of lender is prone to panic. The critics maintain that these lenders demand their money back or bow out of commitments just when dollars are needed the most.
"I do think that people are a lot better off by not getting involved in a lot of these kinds of practices (such as the selling of receivables)," says Paul Horvitz, president of Dominion Healthcare Financial Corp., a Los Angeles-based company that makes more-traditional loans backed by property and other assets.
Receivables financiers contend they are providing the liquidity that keeps workers' paychecks coming and supplies rolling in. If providers are operating on the edge of solvency, it's not lenders' fault, they say.
Although the money can cost several percentage points over the prime rate, using receivables financing does not necessarily indicate trouble, the financiers say. It can be a perfectly legitimate cash-management strategy.
The lenders contend they try to help hospitals solve financial difficulties. But they also move to protect their assets when circumstances show it is prudent to do so.
No deal. One site of controversy is Stoneham, Mass., a middle-class suburb of Boston, where residents were shocked by the swift financial collapse of their century-old hospital this February.
Even executives of Stoneham's ailing Boston Regional Medical Center seemed to cling to the hope that the hospital would be plucked from the quicksand of insolvency. Nearly 18 months earlier, a company called Doctors Community Healthcare Corp. offered to do just that. The Scottsdale, Ariz.-based company promised to buy the 195-bed facility for $52 million.
As it turns out, the deal had no legs. The proposed purchase languished as losses piled up. The hospital's balance sheet fell out of kilter, with $60 million in debt and $44 million in assets. Citing fiscal 1997 data, local press reports pegged Boston Regional's losses for the year at $7.8 million. Any remaining hope of resuscitating the hospital was dashed when Doctors Community decided to pull the plug. Boston Regional promptly shut the doors, filed for bankruptcy and put up for sale its land, buildings and equipment.
"We did confirm that we ended our purchase agreement with Boston Regional on Feb. 5," says Sharon Kirsch, a spokeswoman for Doctors Community. It is still something of a mystery why the private for-profit company backed away after stringing the hospital along for nearly a year and a half.
"We didn't comment on it at the time, and I can't comment on it now," insists Kirsch, who spoke on behalf of company Chairman Paul Tuft. Doctors Community also controls Brea (Calif.) Community Hospital; Hadley Memorial Hospital, Washington; Michael Reese Hospital and Medical Center, Chicago; Pacifica Hospital of the Valley, Sun Valley, Calif.; and Pine Grove Hospital, Canoga Park, Calif.
Sources close to the debacle suggest the financier of the proposed deal, Dublin, Ohio-based National Century Financial Enterprises, got cold feet.
National Century is one of about a dozen boutique firms that dole out high-cost loans and lines of credit-usually by financing accounts receivable-to cash-poor healthcare providers. These lenders of last resort are especially enticing to struggling or unproven providers.
Growth momentum. Until recently, such lenders operated off the radar of most healthcare executives. But the market for fast-cash solutions is gaining momentum as more hospitals, nursing homes and physician groups succumb to deft competitors and constrained reimbursement.
For Boston Regional, National Century was the financier behind the proposed buyer, Doctors Community. Separately, National Century has provided accounts-receivable financing and other loans and lines of credit to Boston Regional. John Snellings, a lawyer representing National Century as a secured creditor in the bankruptcy, says the funding includes a $1 million equipment loan, $550,000 in pre-petition financing and $1.4 million in debtor-in-possession financing.
Nontraditional lenders may tout themselves as financial lifeboats-navigating rough waters where banks fear to tread. But recent events involving National Century and another receivables financier, New York-based Daiwa Securities America, show that quick fixes can sometimes lead to unsatisfactory conclusions.
Jeffrey Blumengold, healthcare services partner-in-charge at accounting and consulting firm M.R. Weiser & Co., and a member of the Healthcare Financial Management Association's Principles and Practices Board, represents receivables lenders and, when there's no conflict, borrowers, too. The bottom line is many providers have a dire need for cash flow. "Their options are limited," he says.
Here's the hitch: Cash may cure a short-term crisis, but it doesn't get to the root cause, which is a long-term imbalance of revenues and expenses, says Fred Hyde, M.D., a consultant to unions and hospitals in financial disarray. He would like to see lenders take more interest in troubled providers' workout plans. But governing boards and management need to take responsibility first, he says.
Washington mess. A case in point: Hyde recently advised the District of Columbia Nurses Association, which represents 400 nurses at Greater Southeast Community Hospital in Washington. On May 27, the 300-bed hospital and its parent company filed for Chapter 11 protection from creditors as part of a financial reorganization. The hospital owes bondholders $45 million and suppliers $11 million. Upon filing for bankruptcy, the hospital received an $8.5 million line of credit from District officials.
As the union's adviser, Hyde was privy to confidential financial information provided by Greater Southeast. But as Hyde points out, even publicly available information "showed that this institution had gone from relative prosperity. . . to financial calamity." Hyde blames Greater Southeast's problems on the abdication of responsibility by the board and management. The financial decline of the hospital's parent, Greater Southeast Healthcare System, became apparent in 1997, according to Moody's Investors Service, which lowered the system's bond rating three times last year. The bond-rating agency says the parent amassed $33.9 million in losses on operations in the first nine months of 1998.
Amid the chaos, someone decided two years ago to finance the hospital's Medicaid receivables. Now, on top of everything else, Greater Southeast is on the hook to yet another creditor-Daiwa Securities-for $10.6 million.
In May, the District of Columbia Superior Court rejected Daiwa's attempt to recover assets controlled by Greater Southeast, including approximately $2 million in monthly Medicaid money, which Daiwa expected to receive that month. Under Greater Southeast's agreement with Daiwa, those funds are to be turned over regularly.
After that court decision, Daiwa released a statement explaining that by accepting cash advances, then failing to turn over funds collected on the purchased receivables, the hospital is double-dipping.
"Over the last two years, Daiwa paid Greater Southeast more than $10 million. . . . In return, Greater Southeast agreed to transfer to Daiwa the relevant payments when they were received by Greater Southeast," the lender said. "We cannot permit the administration of the hospital simply to take what belongs to us."
New Jersey fallout. If the locking of horns between lender and creditor sounds familiar, it should. Many New Jerseyans recall the 1997 shuttering of United Healthcare System, a Newark, N.J., acute-care hospital. Although the 329-bed facility had not been well for some time, it had a pulse-that is, until a cash-flow crisis slit United at the jugular and bled its coffers dry.
In January 1997, the beleaguered institution began missing payroll and couldn't keep basic supplies, such as blood and pharmaceuticals, in stock. In a matter of weeks, United landed in bankruptcy. A February 1997 filing listed $73.3 million in assets, $37.5 million in debts and a line of creditors 600 deep.
Months before United's undoing, Daiwa Securities, a unit of Japan's Daiwa Bank, provided the hospital with roughly a $20 million line of credit as part of an accounts-receivable-for-cash transaction meant to defuse the hospital's capital crunch. When Daiwa later pulled the line of credit in response to plummeting receivables, United had no means of keeping the operation afloat other than filing for bankruptcy and selling its assets.
Union leader Virginia Treacy still gets steamed thinking about it. Treacy's organization, JNESO, represented 460 United nurses. To this day, the union remains embroiled in litigation over the matter. In a civil action against executives and board members, JNESO alleges that United bilked nurses out of tens of thousands of dollars in payroll deductions that should have gone to the nurses' union dues, health insurance and retirement savings.
Among those named as defendants in the action are former United Chief Executive Officer John Dandridge Jr., board Chairwoman Dorothy DaMaio and former Vice President of Finance Ronald Jones. But Treacy also considers Daiwa Securities a villain in the tragedy.
So what does Treacy think of Daiwa today?
"At best, there was a financial institution that obviously never heard the phrase 'due diligence'; and at worst, it was an intentional way to profit off of other people's mismanagement and misfortune."
Treacy is adamant because "they extended that credit line at a time when the hospital was already severely in debt and had no prospect of generating any other revenue other than (by) being bought."
A Daiwa spokesman said the company got involved with the Newark hospital by buying out another lender. So it did not increase the number of creditors or the institution's indebtedness. "From our vantage, Daiwa worked quite hard for some time to find a solution to the problems of United Healthcare."
Daiwa, as a secured creditor, will lose about $1 million on the United transaction when all is said and done, a source familiar with the situation said.
Differing views. The Stoneham bankruptcy is even more complicated because of the involvement of Doctors Community.
To sort out the matter, MODERN HEALTHCARE tried to contact Boston Regional's former CEO Charles Ricks, but he did not respond.
Sue Coppola, the acting court-appointed CEO overseeing management of the physical plant and facilitating the bankruptcy, says the deal did not proceed because Doctors Community could not obtain the necessary financing.
National Century, the financier that was going to bankroll the purchase, has a longstanding relationship with Doctors Community, a company launched eight years ago by Doctors' Chairman Tuft, a former healthcare finance partner with the Omaha, Neb.-based firm Kutak Rock. "We finance over 50 of their facilities nationwide," including hospitals, clinics, physician groups and managed-care plans, says Lance Poulsen, chairman of the financing company. National Century's holding company also owns an 11.5% equity stake in Doctors Community, he says.
But Poulsen offers a different account of the events that unfolded in Stoneham. He claims Boston Regional's board of directors, management and bondholders sacked the deal by failing to meet explicit conditions in the purchase agreement. Poulsen says National Century would have paid bondholders 50% in cash and 50% in notes for their roughly $30 million stake.
"There are no contractual obligations that (National Century) failed to perform," Poulsen says. If the process seemed to drag, that's because hospital management failed to do its part. "They asked for more time and more time and more time to do the things they needed to do (to improve performance), and we gave them more time and more time and more time."
Ultimately, he contends, the deal fell apart because of the hospital's unwillingness or inability to implement a profit-improvement plan and bondholders' unwillingness to accept the transaction.
National Century, in fact, did get cold feet because Boston Regional dropped the ball, Poulsen maintains. But that's not typical. "We're not in the business of not funding people, because we make money by making our money work," he says.
Representing bondholders in the negotiations was Merrill Lynch Asset Management, which manages various mutual funds that held Boston Regional bonds. Poulsen says he told Merrill Lynch that rejecting the deal was unwise.
But Bill Halldin, a spokesman for Merrill's asset management arm, denies the firm tried to block a sale. "Our fund managers were completely supportive of the transaction and were hopeful that it would be consummated," he says.
Poulsen says National Century escaped unscathed. "From our standpoint, (it was) no skin off our nose," he says. "We had little to risk, and we didn't lose anything."
By the time the deal fell through, however, the hospital could not drum up an alternative buyer and was forced to close.
Harold Murphy, a Boston lawyer representing the unsecured creditors in the bankruptcy proceedings, declined to comment on the creditors committee's ongoing investigation. But when asked whether the committee is exploring National Century's role in the bankruptcy, Murphy was decisive: "Absolutely."