It's a card game out there. If you're stuck with a losing hand, sometimes the best thing to do is to get out of the game.
Last week the nation's largest psychiatric hospital chain became the latest healthcare company to lay down its cards and ask for a new deal. Charter Behavioral Health Systems filed a voluntary bankruptcy petition in U.S. Bankruptcy Court in Wilmington, Del., and announced its intention to sell its 37 hospitals to its majority owner, Fort Worth-based Crescent Operating, for $24.5 million.
The sale is subject to court approval and will likely be completed through a bidding process.
The bankruptcy filing followed several months of downsizing at the Alpharetta, Ga.-based chain, which closed 18 hospitals last year and 33 more in January.
"Since the closure of 33 hospitals, we've been working on a process to address a strategic direction for the company (and its remaining) 37 core hospitals," said Michael French, Charter's president and chief executive officer.
Charter had sought an investor to put up $50 million to keep the company solvent, but none had been forthcoming.
Selling the remaining hospitals through a bankruptcy would give "a potential investor a fresh start, without the (old) liabilities and responsibilities," French said.
According to the petition, Charter has between $10 million and $50 million in assets and more than $100 million in debts.
Other potential liabilities include an ongoing investigation by the U.S. Justice Department into possible Medicare fraud by Charter hospitals. The agency had no comment on that investigation.
Charter's bankruptcy comes on the heels of similar filings in recent months by several large long-term-care chains. Those nursing home failures can be largely chalked up to fallout from an abrupt change in Medicare payments to skilled-nursing facilities.
But Charter's downfall stemmed from pressures that have plagued it on and off for years, including questions about quality of care and ever lower reimbursements from managed-care companies.
"It (the psychiatric hospital industry) is a difficult industry to be in right now, going through extreme change and revolution," said John Goff, president and CEO of Crescent Real Estate Equities and its affiliate Crescent Operating. The real estate investment trust owns 30 Charter buildings and was founded by healthcare mogul Richard Rainwater.
"This company, as many others, will have to redefine itself, but unfortunately from where I sit as landlord and an investor it's a necessary thing. If they don't do it (the bankruptcy), the whole thing dies," Goff said.
Crescent Operating has agreed to pay $20.3 million in rent for the 30 buildings, compared with the $45 million in rent Charter had been paying for its 87 facilities before the closures.
Goff said he will keep the current Charter management in place, and plans no more downsizing once the acquisition is complete.
Last week's filing was not the first time the chain has tried to get a new deal.
In 1992, what was then Charter Medical Corp., filed for bankruptcy that allowed it to emerge months later as a stronger, less indebted company. Charter Medical at that time said pressures from insurance companies had hurt its bottom line.
In 1997 the company went through a second attempt at revitalization, when the renamed Magellan Health Services gave up 50% of its ownership of the psychiatric hospitals in return for a $400 million investment from Crescent Real Estate. The hospital chain was revamped as a joint venture between Magellan and Crescent Operating.
Last September, Magellan gave all but 10% of its Charter stake to Crescent Operating. The change in ownership was followed by the series of hospital closures and culminated in the bankruptcy filing last week.
Charter's reorganization could take as little as three months, French said.