A string of adverse circumstances--ranging from a poorly timed initial public offering to competitive markets and mounting losses--culminated in a bankruptcy filing for New American Healthcare Corp. last week.
The Nashville-based for-profit, which originally billed itself as a rural hospital company, filed a voluntary Chapter 11 petition in U.S. Bankruptcy Court in Nashville. The company is seeking buyers for all of its eight hospitals and hopes to sell them by the end of July, said Craig Gabbert, a lawyer representing New American in the bankruptcy.
"New American Healthcare, like other acute-care hospital companies, operates in a challenging environment and is impacted by below-cost reimbursement from government programs such as Medicare and Medicaid, greater leverage by managed-care organizations, and continually rising costs of equipment, goods, services and labor," said Dana McLendon Jr., the company's senior vice president and chief administrative officer. "The unfortunate result of all these factors is that the company is undercapitalized; as a result, we voluntarily filed for Chapter 11 protection."
At the end of March, the company had assets valued at $144.9 million and liabilities of $135.9 million, McLendon said. "In the final analysis it wasn't that we ran out of cash, it was that we didn't have the ability to raise the cash to give the hospitals a reasonable chance of success," he said.
At the time of its filing, New American had obtained letters of intent from potential buyers for seven of its hospitals. It had just sold its flagship hospital, Wentzville, Mo.-based Doctors Hospital, which has 90 beds, to Essent Healthcare, a Nashville-based start-up. Financial terms were not released.
The company's senior lenders, led by Toronto Dominion Bank, have agreed to provide $5 million in debtor-in-possession financing so New American can continue to operate its hospitals, pay employee salaries and pay vendors, McLendon said.
The bankruptcy filing came less than five years after New American was founded by a group of former HealthTrust executives led by Robert Martin, who became the company's chairman and chief executive officer.
The company was part of a wave of new for-profit hospital chains that sprang up in the mid-1990s, trying to capitalize on the availability of troubled rural community hospitals and castoffs from some of the bigger chains.
Martin resigned in February 1999, and Thomas Singleton replaced him.
At the end of 1999, New American notified its lenders that it was going to miss interest payments and said it had fallen below the New York Stock Exchange's listing standards. In February, the company missed another interest payment.
Analysts attributed the company's financial decline to its portfolio of hospitals, some of which were not rural enough to escape managed-care and market-share competition.
"I guess ultimately they just didn't get the growth out of these assets that they thought they could, and therefore in hindsight, it appears they overpaid," said Deborah Lawson, a healthcare analyst at Salomon Smith Barney.
Furthermore, the company had earnings troubles soon after it went public in August 1998, she said. "Typically, that's a poor way to start your life as a publicly traded company."
In February, the company announced it had lost $13 million during the quarter ended Dec. 31, 1999, compared with net income of $1.2 million in the year-ago period.
Frank Morgan, an analyst with Nashville-based J.C. Bradford & Co., also pointed to New American's hospitals, which at times included facilities in small cities. "A lot of them were not truly rural hospitals; they were smaller hospitals on the fringes of larger markets," Morgan said. "If you pick the wrong market, it can be very painful. You can't make a good market out of a bad market."