As Cleveland's Primary Health Systems tries to emerge from bankruptcy, some creditors and market observers are questioning the system's proposed reorganization, asking, in effect, "Where's the beef?"
The question arises as the for-profit system strives to craft a reorganization plan that will satisfy lenders and other unsecured creditors while landing the troubled provider back in the black.
Primary filed for bankruptcy in Delaware March 17, citing $237 million of debt on assets of $157 million (March 22, p. 2).
Core elements of the system's turnaround plan are converting to not-for-profit status and scrapping teaching programs (March 29, p. 17). Eliminating the system's tax burden will save roughly $6.5 million per year, says Beth Sweeney, a system spokeswoman. Primary's exit from the teaching business will free another $5 million to $6 million annually.
Sweeney, responding to a request to interview Chief Executive Officer Dennis Simon, says a third leg of the plan is building a community-based system around doctors who want to retain their independence. Primary would be positioned as an alternative to its two major competitors: the Cleveland Clinic and University Hospitals Health System in Cleveland. Primary isn't ready yet to disclose how that would be accomplished, Sweeney says.
"We are moving forward," Sweeney says. "We feel that things are going very well."
But observers say they're not sure Primary has a solid strategy for giving creditors a decent payback while emerging from bankruptcy as a financially sound organization.
"We haven't seen anything that makes a heck of a lot of sense to us," says one major unsecured creditor, who spoke on condition of anonymity. "We're waiting to see."
Primary recently obtained bankruptcy court approval to secure $6.7 million in additional "debtor-in-possession" financing from its lenders, First Union National Bank and Key Corporate Capital. The extensions boost total availability under the DIP facility to $30 million.
Of the system's original $23.3 million DIP facility, $10.1 million was tapped immediately to repay the bank loans made before the bankruptcy, says Kevin Barrett, Primary's outside counsel. The additional financing was needed for "purely external factors that could not be anticipated," such as an accelerated state deadline for payment into a state uncompensated-care pool and a slowdown in receivables resulting from an outside vendor's computer glitch, he says.
The court also extended to Dec. 10 Primary's deadline for filing a formal reorganization plan.
"While we're hopeful (about the plan), we are concerned," says Reggie Jackson, a lawyer in the Columbus, Ohio, office of Vorys, Sater, Seymour and Pease who is representing the committee of unsecured creditors. "Are we certain it's going to be a successful reorganization? Until we see a plan, we can't say that."
Jackson says unsecured creditors are owed about $60 million, excluding potential malpractice claims and money in dispute between Primary and one of its outside software vendors. Although it's too soon to say how creditors will fare in the bankruptcy, discussions are progressing, Jackson says. "The lenders have committed to meet with us and begin to talk about those issues."
Ditching taxes and teaching costs will help Primary gets its financial house in order, Jackson says. "But obviously things like getting patients in the door and running (the healthcare system) in an efficient manner have to happen as well," he adds.