A financial company that purchases accounts receivable from 2,100 healthcare providers has halted weekly payments, imperiling funding for hundreds of cash-strapped hospitals.
The company, Dublin, Ohio-based National Century Financial Enterprises, services home health agencies, hospitals, nursing homes and physician group practices. It has not paid its clients since Oct. 25, according to the company and hospitals Modern Healthcare contacted.
Some NCFE customers are relying on limited cash reserves and even are asking for help from federal agencies to weather the shortfall. Privately held NCFE's troubles began in July, when Fitch Ratings downgraded two of its bond issues.
NCFE is the holding company for National Premier Financial Enterprises, the program sponsor for healthcare accounts receivable-backed funds called NPF-XII and NPF-VI.
In response to the crisis, late last week NCFE co-founder Lance Poulsen resigned as chairman and chief executive officer. Poulsen also stepped down as president and director of National Premier and as director and officer for the funds.
"Resigning was a necessary step toward preserving employment for the professional at NCFE ... and to keep progress moving forward so NCFE's customers receive funding," he said.
NCFE's situation worsened on Oct. 25 and again last week when Moody's Investors Service twice downgraded bonds sponsored by NCFE, affecting nearly $900 million in securitized hospital accounts receivable. NCFE informed Moody's of a liquidity problem caused by its failure to access capital markets, partly because of earlier bond downgrades. What triggered the most recent downgrades was a move last month by NCFE to instruct the company that operates the funds and serves as its trustee, Bank One Corp. in Columbus, Ohio, to transfer more than $300 million from those fund reserve accounts to other funds. Moody's said it was concerned about NCFE's liquidity problems, lack of documentation and ability to service its transactions.
"If NCFE becomes unable to fund future receivables originated by healthcare providers, the financial condition of those providers could be jeopardized," Moody's said, citing a likelihood of default. "This could lead in turn to impaired collections on government receivables originated by those providers."
NCFE purchases accounts receivable at a discount from providers that cannot qualify for other funding. It then sells bonds and uses the proceeds to front the hospitals cash for payroll, sparing them the wait to be reimbursed by the government and private insurers. NCFE collects the receivables and assesses the provider clients various fees and interest for the money advanced.
NCFE claims to be the largest of such companies that serve the healthcare industry and said that since its 1991 founding it has securitized more than $19 billion in medical receivables, a large portion of that to hospitals. At issue is more than $3.5 billion in bonds that ratings firms said may not be backed by mandated cash reserves.
American Hospital Association spokesman Richard Wade said the AHA is aware of the payment freezes and is concerned for its members.
"When you have a third of the nation's hospitals operating in the red, facing labor shortages and increased labor costs, liability crises and new Medicare cuts, this is just one more arrow directed at their fiscal hearts," Wade said. "We're not sure what we can do now or what an appropriate role is for a trade association."
A number of NCFE clients are seeking to be paid directly by the Centers for Medicare and Medicaid Services. NCFE last week filed a temporary restraining order in Franklin County (Ohio) Common Pleas Court to prevent the clients from seeking payment directly from Medicare. Later in the week Bank One asked an Ohio state judge to put NCFE in receivership.
While CMS sources refused comment, the agency is cutting checks and establishing new accounts for a still-unknown number of hospitals that had been paid directly by NCFE. One of the hospitals asking the CMS to pay them directly to circumvent NCFE is Dickenson County Medical Center in Clintwood, Va.
Benjamin Peak, CEO of 41-bed Dickenson County Medical Center, said the arrangement with NCFE worked well until three weeks ago. Peak said the hospital depends on the $100,000 to $225,000 per week NCFE sends. Then, abruptly, the payments stopped Oct. 25. The hospital, owned by Fort Lauderdale, Fla.-based Rx Medical Services Corp., has tapped its limited cash reserves.
"If all goes well we'll be able to hold out a few more weeks," predicted Peak, who said the hospital lost $40,000 on 2001 revenue of $18 million. "But I don't know how long that can last."
He said NCFE keeps 25% to 30% of the receivables it takes in from the hospital and fronts the rest to the hospital, a heavy price to pay, but one Peak said has enabled the hospital to remain open in tough times.
NCFE faces other troubles, including a bankruptcy lawsuit filed by the shuttered Boston Regional Medical Center, whose financing NCFE was allegedly arranging, and an investigation by the U.S. attorney in Baltimore into a nursing home-financing deal.
Fitch said it is concerned NCFE is "not operating in a manner consistent with a servicer of investment-grade transactions." Fitch Senior Director John Bella said Fitch lacks the information to make definitive ratings decisions about NCFE, but said its healthcare funds may not even be investment grade now. Fitch now questions the reliability of NCFE's information, Bella said.
NCFE spokesman Jim Nickell said the company wouldn't comment on the market reaction. He said the company ordered Bank One to transfer the reserve funds to purchase additional accounts receivable because "we were not able to go back and access the market because our audit had not yet been completed. And our ability to access the market was a direct effect of the downgrades." Nickell said NCFE has laid off some contract workers and is exploring other cost-cutting measures. In addition, NCFE has hired turnaround firm Alvarez Marsal of New York.
NCFE is working with its investors, clients and Bank One to resolve the payment issues, Nickell said. "All we can do is instruct the trustee to wire money to our customers and we've done that. But the trustee is not moving the money forward," he said. Nickell refused to say how many hospitals are affected by the payment freeze and how much money is involved.
Bank One spokesman Jeff Lyttle said the company would not comment.