Federal bankruptcy court once again has become the matchmaker between a for-profit hospital chain and a struggling not-for-profit hospital, with hospital creditors left at the altar.
Last week, Province Healthcare Co., Brentwood, Tenn., agreed to acquire 75-bed Ashland (Pa.) Regional Medical Center for $4 million only after not-for-profit Ashland rinsed off $10.7 million in debt by filing for bankruptcy.
"Typically bankruptcy is a way to accomplish a sale if there's a lot of debt which the buyer doesn't want to assume," said Ashland's attorney, Eric Brossman, a partner in Duane, Morris & Heckscher in Harrisburg, Pa., explaining one of the primary reasons for the bankruptcy filing. "It was a way for Province to buy."
Stuck in the middle of an ill-advised renovation project, buried under mounting vendor debt and lagging in lease payments for capital equipment, Ashland last year went looking for a white knight. It found a possible suitor in November 2000 when officials at Province, interested in the fast-changing Pennsylvania hospital market, first made overtures to the foundering not-for-profit hospital.
In January, Province and Ashland executed a letter of intent whereby Province would lease the hospital, assume all debt and invest about $20 million into the aging facility. But by February, the deal was off. After due diligence, Province said it was not willing to take on Ashland's debt.
On March 29, Ashland erased $10.7 million of debt by filing for reorganization under Chapter 11 in U.S. Bankruptcy Court in Harrisburg. Brossman said he expected that after filing motions to approve the transaction and establish sale procedures last week, "this will happen in short order," meaning as soon as 45 days. In total, 573 creditors with 57 claims have stepped forward, according to the bankruptcy court.
The sale, which is expected to close in the next three months, marks the convergence of several trends first reported by Modern Healthcare: not-for-profits using the bankruptcy courts to make themselves more attractive to buyers; for-profit chains strongly hinting to their not-for-profit acquisition targets to do just that; and for-profit chains finding the state of Pennsylvania fertile ground for hospital acquisitions.
If the deal goes through, it would mark Ashland's third incarnation since it was built by the state as a public hospital in 1882 to treat injured coal miners. The state divested the hospital in 1992, selling it to the Ashland community for $100,000. The not-for-profit started its new life with $1.6 million in accounts receivable and $900,000 in cash, according to bankruptcy filings.
At deadline, the precise value of Ashland's assets and liabilities at the time of the bankruptcy filing was not available.
For most of the next decade, the hospital struggled to stand on its own feet under three outside management teams. It posted operating losses three of its first four years, through 1996, then operated in the black for the next three years before declining in fiscal 2000.
The hospital lost more than $600,000 on $21 million in net revenue in the fiscal year ended June 30, 2000, said Dawn Gideon, Ashland's interim chief executive officer. This year's losses are projected at more than $1 million, she said.
Gideon, a principal at Transition Management Group, Pittsburgh, was hired to manage the hospital in February, replacing Michael Callen of Commonwealth Health Associates, Philadelphia, who was fired after managing the hospital since 1995, according to bankruptcy documents. Gideon said that when she came on board, the hospital already was buckling under $8.5 million in debt.
Before Gideon put a stop to it, the hospital had withdrawn $4 million from a $6 million bank loan to spruce up the patient-care areas, she said. The hospital owed its vendors another $4.5 million, and it was in arrears on "several million" in capital leases, she said.
Gideon said she immediately implemented a turnaround plan, reducing operating expenses by $2.5 million, primarily by eliminating 30 positions from a staff of 380 workers.
"Despite those reductions, we were just suffocating," Gideon said. "The only way to keep the doors open was to look for an acquisition partner and restructure our debt."
Brossman, Ashland's attorney, said the hospital's largest creditor is Main Street Bank, although that is for a secured loan of $4 million. A variety of vendors hold unsecured claims on the remainder of the debt. Although Province is not willing to assume the debt, it has agreed to hire most hospital employees and is also committing "substantially more money" over and above the $4 million purchase price to provide working capital, Brossman said.
Brossman said Province only dictated its terms, not the bankruptcy itself. "We were able to revitalize (the discussions) by planning to file Chapter 11 and reorganize the corporate debt," Brossman said. Province officials similarly deny a quid pro quo.
"We buy underperforming hospitals, and any time a hospital in an attractive market is contemplating bankruptcy, it's a hospital we would be looking at," said Merilyn Herbert, a spokeswoman for Province.