A physician-owned hospital in El Paso, Texas, has filed for Chapter 11 bankruptcy protection in an effort to seize control of its cash flow from bankrupt healthcare finance firm DVI.
It's the second bankruptcy in three years for Pan American Community Hospital, formerly Southwestern General Hospital, which has sought protection from creditors under two separate groups of physician owners. The latest bankruptcy was filed earlier this month under the name of the hospital's current parent company, Pan American General Hospital.
The bankruptcy appears to be an unusual case. While the collapse of healthcare finance firm National Century Financial Enterprises, Dublin, Ohio, in November 2002 touched off numerous bankruptcies of healthcare companies (See story above), DVI's failure has not caused a similar ripple effect. Unlike NCFE, DVI has maintained financing to its clients since its Aug. 25 Chapter 11 filing.
DVI, Jamison, Pa., provides Pan American with a $2 million line of credit backed by the hospital's accounts receivable. Nearly all of the hospital's reimbursements for services have been sent to a bank account under the control of a DVI subsidiary, DVI Business Credit. DVI empties the account daily and retains money owed for principal and interest before forwarding the remainder of the cash to the hospital, which uses it to fund operations.
A bankruptcy judge in El Paso was expected to issue a written order last week allowing the hospital to receive its reimbursements directly from payers, after a verbal ruling earlier this month.
Pan American co-administrator Bruce Rossiter called the hospital's bankruptcy filing "a defensive move." In its Chapter 11 filing, Pan American listed assets of $12 million and liabilities of $9.9 million. DVI is listed as its largest creditor, with approximately $5 million owed, followed by the Internal Revenue Service, which has a tax lien of $1.9 million. In addition to the accounts receivable financing, Pan American owes DVI at least $4 million, backed by the hospital's real estate.
Rossiter said the hospital feared DVI creditors could claim the hospital's cash if DVI converted its Chapter 11 case to Chapter 7, which is liquidation, or that DVI will sell its loan to a company that will terminate the hospital's credit. DVI has not commented on whether it is seeking to convert its bankruptcy reorganization to a liquidation.
Rossiter said the hospital would have difficulty finding affordable alternative financing comparable to DVI's interest rates of 2 percentage points above the prime rate.
"We could not afford to take the chance that somehow we would get cut off from our funds," which total about $750,000 monthly, Rossiter said. If that happened, he said, "We will be absolutely out of business."
DVI, which is pursuing a reorganization under the direction of a turnaround firm, did not respond to requests for comment. A judge overseeing DVI's bankruptcy appointed an accounting expert to investigate alleged financial improprieties.
Pan American Community was purchased out of bankruptcy in June 2001 by about 30 physician investors. In 2002, Pan American lost $3 million on net revenue of $12.1 million, Rossiter said, but he said operations have been improving and the hospital has had some break-even months this year.
Although the hospital can accommodate up to 65 inpatients, its census averages 15, Rossiter said. The hospital has 150 full- and part-time employees.
Rossiter said it would be difficult for Pan American investors to obtain financing for another announced hospital project until they can turn around Pan American Community. The investors announced plans to build a$25 million 60-bed hospital in east El Paso, with construction to start in early 2002 (July 30, 2001, p. 21). But ground has not been broken. "The economy got tougher, lenders became tougher and the true extent of problems at Pan American became more apparent," Rossiter said.
Rossiter said his turnaround firm, M2 Capital Ventures, San Diego, is a minority investor in Pan American Community.