The fallout from the meltdown of healthcare financier National Century Financial Enterprises continued last week as two of the company's customers filed for bankruptcy protection from creditors. More healthcare providers are expected to close operations or file for bankruptcy as their limited reserve funds dry up and they become unable to meet payroll and other obligations.
The first casualty last week was home health agency Tender Loving Care Health Care Services, a subsidiary of Andover, Mass.-based Med Diversified. TLC filed for Chapter 11 bankruptcy protection on Nov. 8 in U.S. Bankruptcy Court in New York. Three days later, PhyAmerica Physicians Group, a Durham, N.C.-based physician practice-management company, filed for Chapter 11 in U.S. Bankruptcy Court in Baltimore.
NCFE's implosion has rippled throughout the healthcare industry, raising questions about a business model that has serviced more than $19 billion in healthcare accounts receivable, and jeopardizing financing for 2,100 providers in 48 states.
"It's going to have a devastating impact on those providers and on their future access to capital," said Don Carlson Jr., senior managing director of Chicago-based investment banking firm Ziegler Capital Markets Group. Carlson pointed out that most of NCFE's clients were for-profit healthcare providers in troubled industry sectors such as home health, physician practice management and long-term care, which all have been plagued by frequent bankruptcies in recent years.
"Their ability to borrow capital has been extremely limited and I think this just exacerbates that even further," Carlson said.
NCFE, based in Dublin, Ohio, buys accounts receivable at a discount from financially distressed healthcare providers, primarily home health agencies, hospitals, nursing homes and physician group practices. The company then consolidates those bills into a pool, assesses the risk and sells them as bond issues. Using the proceeds of the bond sales, NCFE advances the providers working capital. NCFE and similar cash-flow financing companies then collect the accounts receivable and assess the providers a variety of fees that can exceed 30% of the receivables sent.
In the last six months, NCFE's bonds were downgraded several times by New York credit-rating agencies and its access to capital markets was cut off when it could no longer sell the bonds to purchase new receivables. NCFE stopped paying its customers, many of whom rely on the company to meet payroll and other obligations, as early as September. The situation triggered further bond downgrades that culminated in the resignation of NCFE co-founder, Chairman and Chief Executive Officer Lance Poulsen and the hiring of New York turnaround firm Alvarez & Marsal to restructure the for-profit, privately held company, which terminated 111 employees, about one-third of its workforce. At deadline, NCFE had not filed for bankruptcy and was struggling to reorganize, access capital and resume payments to its customers.
On Nov. 13, five days after it filed for bankruptcy, Med Diversified sued NCFE; Poulsen; Hal Pote, an NCFE board member; the two bond funds; and their trustees, J.P. Morgan Chase & Co. and Bank One Corp., alleging fraud and conspiracy. Med Diversified filed its civil fraud suit in U.S. District Court in Boston. The company alleges that NCFE owes it more than $7 million it has not advanced in needed cash from accounts receivable. The 21-page suit charges that the defendants conspired to commit NCFE to overextend itself to finance more healthcare providers than it could back with reserves, causing it to deplete reserve funds and trigger the ensuing collapse. The suit further charges that the trustees knew about the company's precarious finances, yet took no action.
Attorney Matthew Kairis, who represents NCFE, said the lawsuit "has no merit whatsoever. Med Diversified is a substantial creditor of NCFE. It and its subsidiaries have been advanced funds in arrears in excess of $80 million. The notion that Med Diversified has been harmed in any way by its relationship with NCFE is clearly against the true weight of the facts."
NCFE has helped finance PhyAmerica, which specializes in managing emergency medicine practices, since June 1997. Its 200 subsidiaries manage practices for 2,200 physicians in 30 states treating 3.5 million patients annually and 33 clinics in three Southeast states treating 500,000 patients. Annual revenue for the privately held firm exceed $300 million, according to Eugene Dauchert, the company's executive vice president and general counsel.
Dauchert said NCFE had been funding the company an average of $24 million per month. Dauchert said NCFE did not forward $18.5 million in October. He said PhyAmerica is considering joining the Med Diversified suit.
"Under our agreement, they were obligated to fund us and they breached that obligation," Dauchert said. "We had no choice but to seek protection and seek our own cash."
This week an Ohio state judge is expected to rule on a request by Bank One and J.P. Morgan Chase to put NCFE into receivership.
NCFE's largest debtor is Scottsdale, Ariz.-based Doctors Community Healthcare Corp., a privately held, five-hospital chain primarily owned by lawyer Paul Tuft, who serves as the company's chairman and CEO. Tuft confirmed that Doctors Community owes more than $400 million to NCFE, which has financed its hospital acquisitions and owns an 11.5% stake in the company.
Doctors Community is bidding to purchase 379-bed Mercy Hospital and Medical Center in Chicago and two Prince George County, Md., hospitals owned by Cheverly, Md.-based Dimensions Healthcare System, 133-bed Laurel Regional Hospital and 312-bed Prince George's Hospital Center. Tuft said he has found another source of financing, GMAC Financial Services, formerly known as General Motors Acceptance Corp., a wholly owned subsidiary of General Motors Corp., to back his proposed purchases.
That may pose a challenge. Charles Cooper, a lawyer with the Columbus, Ohio, office of Cooper & Elliott, represents a Columbus physicians group that was a customer of NCFE.
Cooper said last week NCFE moved to expand an earlier judicial order preventing its customers from circumventing its "lockbox sweep" and obtaining reimbursement directly from payers. And each of the Doctors Community hospitals is on that new list.