Tuomey Healthcare System in Sumter, S.C., is looking for a partner to help it survive its financial woes, including a costly 10-year legal battle over alleged illegal payments to doctors.
The system is anchored by 301-bed Tuomey Regional Medical Center, which is the only hospital in Sumter, a city of about 40,000 located 45 miles east of the Columbia, S.C. Two years ago a federal judge ordered the not-for-profit provider to pay the government $237 million, a sum that exceeds its annual revenue.
Now Tuomey executives and board members are letting their community know that the hospital's financial trends are unsustainable, citing an admissions drop, an inability to meet lender requirements and the ongoing legal battle.
“In order to complete the required financial turnaround and secure Tuomey's long-term future, we believe that partnering with a culturally compatible, large, healthy [not-for-profit] organization is required,” the system stated in a slide prepared for a series of community meetings. The slides note that Tuomey's board and management are continuing to pursue a settlement with the government. The system also has appealed the decision to the 4th U.S. Circuit Court of Appeals, which is expected to rule soon.
Tuomey's prepared presentation does not name any potential partners, and attempts to reach Tuomey for comment were unsuccessful. Leaders have said, however, that they expect to make an announcement in the next month or two and are focused on a “small number of culturally compatible, healthy, South Carolina not-for-profit systems.” The local newspaper, the Item, reported that Tuomey's Board Chairman John Brabham, said that leaders have narrowed the field of potential partners to fewer than five from 11.
Tuomey has suffered operating losses in the multimillions of dollars and its low-cash liquidity is hurting its ability to invest and stay competitive, according to the presentation. In addition to uncertainty imposed by its legal predicament, the system is burdened by an outdated and overtaxed emergency department and by debt service needs, and believes it must become part of an integrated healthcare delivery system.
A federal jury concluded in 2013 that the hospital violated the False Claims Act by submitting tens of thousands of illegal claims to Medicare. The jury found that Tuomey paid doctors in ways that rewarded them financially for referring patients to the hospital in violation of the Stark law, causing the Medicare claims to be tainted.
The damage amount is believed to be largest ever levied against a community hospital and Tuomey is in no position to pay it. The organization lost $8.4 million on $197.3 million in revenue in its fiscal 2013, according to the most recent audited financial results reported to bondholders.
According to the community presentation, admissions dropped 8% between the fourth quarter of 2013 and the fourth quarter of 2014, partly because of Medicare's so-called two-midnight rule regarding observation stays, and the hospital sustained $9.5 million in operating losses in fiscal 2014. Tuomey also said it spent $4 million in legal fees in fiscal year 2014, and was required by a federal court to make an appeal bond payment of $40 million last August.
Experts say this isn't the first time that a hospital has had to find a partner to help it weather legal battles and expenses.
“Much depends on the facility and whether it's part of a large system or not,” said S. Craig Holden, president and chief operating officer at law firm Ober Kaler in Baltimore. Given Tuomey's size and its independence, “I am not at all surprised to hear that this approach is being taken,” he said.
In 2012, St. Joseph Medical Center in Towson, Md., was acquired by the University of Maryland Medical System, following a $22 million settlement the hospital paid the government over allegations that it profited from unnecessary cardiac procedures. The hospital made no admission of guilt in that settlement, but the settlement may have been a driver in St. Joseph's change of ownership, Holden said.
Most hospitals with significant False Claims or Stark costs have found ways to carry those expenses on their own by dipping into reserves or refinancing their debt, said Peter Pavarini co-leader of the healthcare practice group at the law firm Squire Patton Boggs, and president of the American Health Lawyers Association. But when the potential costs of a settlement or judgment exceed a hospital's ability to manage those costs, partnering becomes more likely, he said.
And even a hospital with the baggage of potentially massive damages has a chance of finding a suitor.
“Any hospital with a potential liability of that magnitude obviously has a severely diminished market value,” Pavarini said. “That said, if the hospital in question has offsetting value to the potential partner (for example, an attractive market), there are organizations that may be willing to take that risk.”
Tuomey has lost its case over the alleged overpayments twice in U.S. district court over the last 10 years. A jury ruled against the system in a split verdict after a 2010 trial, and the judge ordered Tuomey to pay $45 million. That result was overturned on appeal, but in May 2013 a second jury found the hospital liable for wider violations.
Merging with another hospital or healthcare system, Holden said, may actually be a condition of a settlement agreement between Tuomey and the government, which might not want to put the hospital out of business if that would make it harder for the community to get healthcare services. And any suitor might demand a tentative deal with the government that would resolve the liability.
“I can't imagine someone would come in and partner and expose themselves to the risk of that judgment unless there was some potential resolution with the government on the horizon,” Holden said.
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