Little River, a rural provider with high lab charges, files for bankruptcy

A Texas health system whose flagship critical access hospital billed $372 million for outpatient labs in 2016—86% of its total bills that year—has filed for Chapter 11 bankruptcy.

Rockdale, Texas-based Little River Healthcare filed for bankruptcy in the Texas Western Bankruptcy Court on July 24. The two-hospital company and its affiliates have nearly 600 employees and an associated physician practice that employs 63 doctors, but records show it has struggled to keep up with payroll and owes more than $1 million in unpaid wages.

Little River's Rockdale hospital and other hospitals it has operated show unusually high lab charges in recent years, according to data from Medicare cost reports. Struggling rural hospitals in recent years have struck deals with lab test companies under which they bill for high volumes of lab tests for out-of-state patients that in some cases were not performed in those facilities. The problem enters when commercial insurers try to recoup money they feel they paid in violation of their contracts, which some say contributed to Little River's bankruptcy.

"What I understood was the payers stopped paying them and that was the problem," said Kevin Reed, general counsel for the Texas Organization of Rural & Community Hospitals. Reed added Little River seemed to be more of a lab company than a hospital operator.

Little River, whose CEO and attorney did not return requests for comment, filed separate cases for its physician practice, holding company and management company. Peggy Borgfeld and Jeffrey Madison are listed as the company's managers.

Court records show Little River and its affiliates' top 20 largest creditors are owed a combined $16.9 million, but the total list of creditors contains the names of several thousand individuals and businesses.

Little River entered into an operating agreement with Healthcare Management Partners on June 25 under which HMP will provide financial and business advisory services. HMP is in a joint venture with Modern Healthcare. Ronald Winters, a managing director with HMP, will serve as Little River's chief restructuring officer and Derek Pierce, also a managing director with HMP, will serve as Little River's chief financial officer, under the bankruptcy plan.

A lab test company called True Health is listed as the second-largest creditor, and it is owed $3.4 million, according to the bankruptcy filing. A True Health representative did not return a request for comment. Little River's flagship Rockdale campus reported outpatient lab charges that were 86% of its total charges in 2016 and 62% in 2015, according to the most recent Medicare cost report data available. Little River shows a pattern of high lab charges at its hospitals, including those it operated briefly and left under questionable circumstances.

The company's biggest creditor cited in the filing, American Express, holds a $3.5 million claim, and Cerner Corp. is owed $1.4 million. The documents show Dr. Eugene Fung, who is listed on Little River's website as a rheumatologist, is owed $630,000.

According to court records, Little River and its affiliates owe more than $1 million in unpaid wages, more than $500,000 to independent contractors, and hundreds of thousands more for employee expenses, benefits plans, worker's compensation and other items. Little River and its affiliates estimate their employees' accrued paid time off is worth $4 million, court records show.

Little River has until Sept. 22 to file its financial reports with the court, including its assets, liabilities, income and expenditures. The law typically allows 14 days from the bankruptcy filing, but Little River's attorney, Morris Weiss with the firm Waller Lansden Dortch & Davis in Austin, argued more time is needed because of the case's complexity. He also successfully petitioned the court to prohibit Little River's roughly 100 utility providers from discontinuing services that the company pays about $150,000 per month for.