Health system’s reorganization may take longer than planned

The word “undetermined” appears more than 1,000 times in LRGHealthcare’s bankruptcy filing, quantifying the specific amount owed to vendors, the worth of many of its contracts and the value of particular assets.

“Undetermined” is an apt word, especially when it comes to LRGH and its future.

When LRGH, parent company of the hospitals in Laconia and Franklin and about a dozen affiliates, filed for Chapter 11 reorganization on Oct. 19, it came with a willing buyer, its well-endowed neighbor to the south, Concord Hospital.

Concord Hospital, with its 295 beds and nearly 3,000 employees, was ready to pay $30 million and assume a pension system underfunded to the tune of $13 million.

LRGH has 172 beds and 1,400 employees and lost $20 million last year, before the pandemic.

“We can’t stand by and let that healthcare system fail right next door to us,” said Concord Hospital CEO Robert Steigmeyer in an Oct. 27 remote community meeting.

But Concord Hospital could not afford to take on some of LRGH’s $128 million in debt. The only way such a merger would be “sustainable” is for the debt to be “extinguished” through bankruptcy, said Steigmeyer. “That is the main reason for this filing. The debt will go away.”

At the time, the deal seemed as if it would be signed, sealed and delivered shortly before Christmas.

That was the plan. But bankruptcies often don’t go according to plan.

10 potential bidders

Two years ago, LRGH could not find any buyer willing to undertake its debt, and in October it looked like Concord Hospital would be the only one coming to its rescue.

But a bankruptcy sale free of debt is another matter, even though another bidder would have to best Concord Hospital’s bid by $1.1 million. That’s the “break-up fee” that Concord Hospital is entitled to as a “stalking horse” should LRGH sell its assets to another bidder.

It turned out that 10 potential bidders — all connected to the healthcare industry — have signed confidentiality agreements to allow them to enter the debtor’s “reading room” to do their due diligences, an indication of serious interest. That doesn’t mean they will all make a bid, but LRGH CEO Kevin Donovan thinks it is likely that at least some will make an offer at the auction, which is scheduled for Dec. 16.

“I expect it will be greater than one and less than 10,” said Donovan at a Nov. 23 creditors hearing.

Multiple bidders could drive up the price, meaning that creditors — there are more than 400 of them — may get a little more of what they are owed. But a competitive auction could also delay that payment and the whole process, since any winning bid is likely to be contested. Indeed, after learning about other possible bidders, Bankruptcy Judge Michael A. Fagone asked the attorneys involved in the case to be prepared for a Zoom trial, just in case.

There are also the uncertainties of a hospital bankruptcy in the midst of a pandemic.

Such a sale, for instance, has to be evaluated by the New Hampshire Justice Department’s Antitrust and Charitable Trust divisions. Calls about how those processes will work were not returned by deadline, but neither division has ever dealt with this kind of merger, since no hospital has filed for bankruptcy in the state in recent memory.

Hospital bankruptcies are becoming more common nationwide. In the first half of the year, some 29 hospitals filed for protection in such rural areas as Boonsville, Mo. That is more than the 20 that filed between 2016 to 2018, which was considered a big increase at the time.

Other uncertainties

Straightforward business bankruptcies can drag on for years, but “this has to be a very fast case, very quick,” Donovan told NH Business Review. “Because the runway is not too long.”

The tight schedule for the bankruptcy proceedings attests to that, with a bid deadline, auction and sales hearing set for Dec. 14, Dec. 17 and Dec. 21, respectively.

What’s the hurry?

Well, even after some adjustments to satisfy creditor objections (such as reducing monthly payments to Key Bank, holder of a $111 million HUD-backed mortgage), there will only be about $1.5 million of unrestricted cash by Christmas, according to LRGH’s latest budget. That’s enough to last about three days, said the state’s attorney at a November court hearing.

But Donovan said there is more money than that, pointing out there is about $16.4 million (including $12.3 million set aside for the aforementioned mortgage), and $41.4 million in receivables (though the hospital only expects to collect $15.6 million).

Taking all of that into consideration, the hospital figures, and the bankruptcy judge agrees, there will be enough money for the hospital to keep going until the end of March — the target day for the deal to close. But during those months, lots of things could happen.

For instance, the pandemic could get even more out of control, forcing the hospital to perform fewer, or perhaps no, elective procedures. This happened in April, resulting in 600 furloughs, a staff reduction of 43%.

On the other hand, there is the hope that the new Congress will pass another stimulus package, taking pressure off hospitals.

There are other uncertainties. Hospitals have a unique arrangement with the state, which is both a creditor and a regulator. The state provided LRGH with $5.25 million in stimulus money, but LRGH is not sure if it will have to pay it back. And, like all hospitals in New Hampshire, LRGH participates in a complicated deal through which the state pays the hospital for Medicaid services and levis the Medicaid Enhancement Tax. The amount of that tax for LRGH could total millions, and how all that will work out under bankruptcy is another undetermined aspect, much to the frustration of the state’s attorney, who has said that it has been trying to get that information for months.

Medical records system

How did LRGH amass so much debt? The current management partly puts the blame on prior management, which made “significant investments in inpatient services and facilities at a time when patient demographics and medical trends indicated more reliance on outpatient services and decreased hospital use,” wrote Donovan in his affidavit.

Did it start in 2002, when LRGH took over Franklin Regional Hospital? Or in 2009, in the heart of the recession, when it doubled its debt to $143 million, mainly to finance capital improvements? In 2015, LRGH refinanced, lowering interest rates but upping the principal to $159 million. That’s just around the time that it invested in a new electronic medical records system that now sucks up 9% of its operating budget — more than twice the percentage paid by most hospitals.

LRGH didn’t have much of a choice when it comes to the medical records system, Donovan told NH Business Review.

The Affordable Care Act requires such a system to get a handle on health costs. After a lower-cost system failed, the hospital ended up installing a “highly sophisticated and expensive system” developed by Cerner Corp., a publicly traded medical software firm with revenues of nearly $5.7 billion last year.

Concord Hospital also has a Cerner system, which, if it extended it to LRGH, “would cut its cost in half and maintain a better system,” said Steigmeyer, Concord Hospital’s CEO.

Donovan said such a system is simply too big for a small hospital to handle alone.

So LRGH partnered with Speare Memorial Hospital in Plymouth to form Asquam Community Health Collaborative in implementing the Cerner system, but LRGH pays 75% of the cost, which comes out to $342,194 a month, according to its budget.

“It would have been nice for us to be the smaller organization in the equation,” Donavon said.

He might get his wish. Although that would present “financial challenges” for Speare, in the words of its CEO, Michelle McEwen.

McEwen said she hopes that LRGH will continue to participate in Asquam until May 2022, when the contract expires. If it doesn’t, she said she is confident she will be able to work with Cerner until a replacement is found “so that the lights just don’t go out.”

But LRGH didn’t just have to deal with debt. It also had to reduce operations to remain open, outsourcing them to Concord Hospital, including maternity and cancer services. Operating revenue shrank by $10 million in fiscal year 2019 to $206 million, and they fell by $26 million, to $180 million, in fiscal 2020, which ended Sept. 30, six weeks before the bankruptcy filing.

Some $15 million in CARES Act funding helped LRGH. Indeed, in the few weeks following the bankruptcy filing, the hospital was $2.5 million over budget, partly because bankruptcy initially cut some of expenses. Still, Donovan was not clear what will happen during this second wave of Covid-19. When interviewed shortly before Thanksgiving, the hospital was only caring for two Covid patients; a dozen would be another story.

This concerns the bankruptcy trustee, which opposed a motion by LRGH to waive a requirement that the court appoint a patient ombudsman to make sure patients aren’t endangered by any effort to cut costs. The trustee’s motion points to the debtor’s own wording, which describes a “dire” financial situation, its “downward spiral of increasing costs” and its “dramatic workforce cuts” as evidence.

LRGH’s lawyers argued that it was already heavily regulated and that an ombudsman would be costly and a “distraction” on top of everything else. Besides, said Donovan in his affidavit, “any input by an ombudsman probably would be rendered moot before it could have any meaningful impact because the Debtor is likely to sell substantially all of its assets to a third party.”

But that sale might not be easy, as the trustee’s three-hour grilling of Donovan and other LRGH officials attested.

A hospital’s financial arrangements are complex and may be difficult to unravel. Some of LRGH’s entities involve Concord Hospital itself, such as an insurance exchange that protects the institutions from medical malpractice suits.

The details involved with that and other arrangements could bog down the bankruptcy process. And while it would be easier if the state approval processes occurred simultaneously, Donovan said any antitrust examination can’t really get underway until it is clear who will be buying LRGH.

Thus, a March 31 closing date is more of a goal than a deadline. If the bankruptcy process drags out, LRGH might need some kind of bridge loan to get it to the finish line. Donovan did bring up the possibility of financing by the winning bidder, and Concord Hospital did not dismiss the idea during the Oct. 27 community meeting.

“We’ll take that as it comes,” Steigmeyer said.

Bob Sanders can be reached at bsanders@nhbr.com.

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The buildup

2002: Lakes Region Hospital Association and Franklin Regional Hospital merge to form LR-GHealthcare (LRGH).

December 2009: LRGH refinances, taking out a $143.5 million HUD-backed loan with 5.5% interest rate to fund $51 million of new improvements.

September 2015: LRGH rolls old debt into a $159.3 million loan. Launches expensive new medical record system with Speare Hospital in Plymouth.

January 2018: LRGH renovates the emergency room costing $7 million.

June 2018: LRGH engages Kaufman to try to find a buyer.

September 2018: LRGH ends fiscal year with $216.4 million.

March 2019: All possible buyers drop out because of the debt.

September 2019: LRGH ends the fiscal year with $206 million in revenue, a $10 million drop, and an operating loss of $20 million.

This year

March 13, 2020: Gov. Chris Sununu declares state of emergency, as the pandemic causes all hospitals to halt non-emergency procedures, causing huge drops in revenue.

April 8, 2020: LRGH takes out a $5.25 million loan from the state’s Healthcare System Relief Fund, which might be forgiven.

April 10, 2020: LRGH furloughs 600 employees, more than a third of its workforce.

September 30, 2020: LRGH ends fiscal year with $185 million in revenue, a $20 million decline.

October 19, 2020: LRGH files for bankruptcy plus a $30 million sales agreement with Concord Hospital, with assets of $134.4 million and liabilities of $128 million, and only $8.1 million of cash.

November 17, 2020: LRGH reveals it has 10 possible bidders doing due diligence and will only have three days left of unrestricted cash by Christmas. Judge approves sales schedule, rejects patient ombudsman, and presents a reward of $1.1 million for Concord Hospital for being the “stalking horse” should they get outbid.

November 23, 2020: Creditors meeting. Trustee drills LRGH on finances.

To come

December 11, 2020: Sales objection deadline

December 14, 2020: Bid deadline

December 16, 2020: Bankruptcy auction

December 18, 2020: Deadline to challenge winner

December 21, 2020: Sales hearing scheduled

March 31, 2021: Closing date for sale