Another bankrupt Brooklyn hospital

Crushed by long-term debt and expenses that far outstrip revenue, Interfaith Medical Center will file for bankruptcy this week, making the Brooklyn facility the 11th city hospital or health system since 2005 to go belly up.

Behind that grim statistic is a common story: New York City hospitals on the financial ropes can no longer count on a bailout from Albany. For years, the state helped community hospitals struggling with low reimbursements because their poverty-level patients were either underinsured or uninsured. But the recession and a shift from inpatient care ended the handouts.

The restructuring of Interfaith, the largest employer in Bedford-Stuyvesant, will give it more time to stay afloat while it pursues a likely merger with the Brooklyn Hospital Center, an outcome that was long the preference of the Cuomo administration. It's unclear what a restructuring would mean for Interfaith's 1,516 full-time workers.

Rumors of Interfaith's imminent Chapter 11 filing have circulated for months. Last winter, the hospital hired restructuring counsel from Willkie Farr & Gallagher to explore bankruptcy protection. At the same time, its board of directors repeatedly asked state health officials for aid. Spurned by Albany and faced with an unstoppable flow of red ink, the board spent the past few days debating whether to finally file. The court action is expected as early as Dec. 3. Interfaith and state health officials declined to comment.

The hospital's largest secured creditor is the Dormitory Authority of New York State, which backed Interfaith's bonds.

Interfaith enjoyed some financial stability between 2005 and 2009, when its Medicaid reimbursement was among the five highest in New York City, according to a former Interfaith executive. But in October 2009, the state introduced new payment policies that triggered a 40% drop in Interfaith's Medicaid revenue.

The program covers 65% of Interfaith's patients, and with few commercial insurance contracts to make up for the losses, the hospital began to hemorrhage. By 2010, after ending with a $57 million loss, its net worth was a negative $126 million. Its long-term debt per hospital bed was $517,000—more than double the $210,000 median for Brooklyn hospitals and three times the statewide median, according to a November 2011 report issued by a Brooklyn health care work group convened by the state's Medicaid Redesign Team.

"Interfaith cannot continue to survive even in the short run," concluded the report.

In October 2011, Interfaith Chief Executive Luis Hernandez laid off some 200 workers as part of a plan to cut $10 million. The move was a mere Band-Aid. The hospital ended that year with a $33 million loss and stopped making debt payments to the Dormitory Authority.

In a Dec. 15, 2011, letter to senior state Department of Health officials, Interfaith Chairman Nathan Barotz began pleading for a bailout, warning that financial decisions made in the coming weeks were critical to "the survival of the hospital." In subsequent letters, he argued that Interfaith's disproportionately high Medicaid population made it particularly vulnerable to cuts from Medicaid, the government health program for the poor and disabled. In a Feb. 6 letter to Lora Lefebvre, a top-ranking state Health Department official, Mr. Barotz asked the state for a bridge loan and higher rate adjustments to cancel out the 2010 Medicaid cuts. "Without the state's immediate financial help, Interfaith will not be able to continue to operate," he wrote.

The state offered a $2 million loan. The Cuomo administration, through its Medicaid Redesign Team, had made it clear that it preferred Interfaith to be part of a three-way merger with Wyckoff Heights Medical Center and Brooklyn Hospital Center, itself a former bankrupt facility. Interfaith entered into negotiations with Brooklyn Hospital, but its deteriorating financial condition made it clear it could not hang on long enough to execute the consolidation plan.

Mr. Barotz maintained pressure on Ms. Lefebvre, warning again in a Feb. 22 letter that the health of the local Brooklyn community was in jeopardy if Interfaith were to go into bankruptcy.

"Nothing good," he wrote, "could come from such an action."

His theory will be tested this week.