Charitable Trust Unit findings come after bankrupt organization’s 2020 bankruptcy
An investigation into the governance of LRGHealthcare, which declared bankruptcy in October 2020, has found that the organization’s board of trustees “made misjudgments and were too deferential to the recommendations and conclusions of the long-term executives,” although it didn’t specifically say they breached their fiduciary duties.
The report by the Charitable Trust Unit of the NH Department of Justice noted that the lengthy tenure of the executives — 25-year CEO Thomas Clairmont and Chief Financial Officer Henry Lipman, who was with the organization for 20 years — was “highly unusual in the hospital industry.”
LRGHealthcare declared bankruptcy after failing to overcome nearly a decade of flagging financial performance.
Lakes Region General Hospital in Laconia, founded in 1893, acquired Franklin Hospital in 2002 to form LRGHealthcare. Three years later, management proposed, and the trustees adopted, a master plan to im prove facilities and update IT and mechanical systems at both hospitals by investing $97 million over 10 years.
By 2008, soon after the plan was complete, LRGH was buffeted by the headwinds of the Great Recession. Patient volume flagged. Private paying patients migrated to Concord Hospital. Changes to the Medicaid reimbursement formula led to annual losses of $1.2 million. And adjustments to the Medicare wage payment system threatened another “few million” in operating revenue, prompting Lipman to tell The Laconia Daily Sun at the time that “LRGH would be in the red as soon as they take effect.”
Although the trustees began to question the capital project, they approved spending $36.3 million to design the capital project, restructure and refinance outstanding debt, purchase medical offices and build an operating room.
Near the close of 2008, LRGH’s operating margin was shrinking and cash on hand was tight — just 74 days compared to the industry median of 110 days. The board withheld contributions to the employee pension fund and the workers’ compensation trust, but spent $913,000 on capital projects.
In January 2009, the board, at Clairmont’s recommendation, put the expansion project on hold for six months. By that point, LRGH’s withered financial position precluded access to conventional financing. But rather than reorder the corporation’s priorities, Lipman turned to alternative financing — a hospital mortgage insurance program funded by the U.S. Department of Housing and Urban Development.
In June 2009, LRGH borrowed $170 million to construct a “patient tower” in Laconia, improve the emergency room in Franklin, expand an outpatient clinic in Meredith, retire some borrowings and defray financing costs. On the strength of a financial forecast prepared by Lipman and his team, an independent auditor concluded there would be sufficient funds to meet operating expenses, debt service and working capital. In retrospect, the report found, the projections were “overly optimistic.”
Meanwhile, management began squeezing costs, an effort hindered by the requirement to draw $3.1 million from its operating revenue and credit line to maintain the employee pension fund and workers’ compensation trust.
With the approval of the HUD loan, the board endorsed the 2010 budget, adding $10 million for capital improvement. Lipman projected LRGH’s operating margin would improve to $5.3 million in 2010, but instead it posted a loss of $12.7 million.
By 2012, LRGH had invested $51 million to renovate and expand facilities in Laconia and Franklin, signaled by the patient tower and new lobby fronted by a sweep ing arch at Lakes Region General Hospital.
But the improvements failed to generate enough revenue to keep pace with the cost of the HUD debt.
Clairmont resigned in 2014, and a year later Lipman reported LRGH was running in the red, with operating expenses over budget by $2.5 million in the first quarter. Nevertheless, management and the board proceeded to purchase an electronic medical records system in partnership with Speare Memorial Hospital of Plymouth. The capital cost of the system was estimated at $15.8 million and the annual operating cost at $15.7 million. LRGH bore 80 percent of the cost, which represented 9 percent of its annual revenue — two to three times the industry standard.
Soon after, LRGH refinanced its HUD loan, paying $15.6 million in cash to reduce the interest rate.
By the close of 2015, LRGH’s operating deficit had swollen to $30 million and its net assets had shrunk by $37 million. The board engaged three consulting firms to trim costs. Vascular and surgical services were closed in Franklin along with obstetrics in Laconia. Employee benefits were trimmed and staffing was reduced. In 2016, Kevin Donovan was hired as CEO and directed to find LRGH a partner to sustain healthcare in the region. Lipman resigned a year later.
LRGH lost $12.8 million in 2018 and $19.7 million in 2019, while net assets plummeted and cash on hand dwindled to single digits. Only by paring costs and suspending services, together with state and federal pandemic funding, the report notes, “was LRGH able to limp along until its Chapter 11 filing in 2020.”
In 2018, Kaufman Hall, the firm retained to sell the hospital, approached 19 potential buyers, but none offered enough to pay off LRGH’s liabilities. The trustees concluded the sole option was an asset sale and bankruptcy filing. Concord Hospital was the lone bidder, and with the approval of the Bankruptcy Court and Charitable Trust Unit, the transaction closed on May 1, 2021.
‘Legacy endeavor’
The report concludes that a number of factors contributed to the demise of LRGH.
In his statement to the Bankruptcy Court, Donovan pointed to the decision “to make 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. Soon thereafter, LRGH found itself caught in a downward spiral of increasing costs, decreasing reimbursement, shrinking service lines and volume leakage to other com munities.”
The authors of the report heard several comments describing the expansion project as “a legacy endeavor for Mr. Clairmont, to assure that LRGH facilities reflected his many contributions over the years,” and “despite warning signs in the local market and in national healthcare trends, Mr. Clairmont used his clout with the board of trustees to push through his plan.”
The report found that while the trustees acted in good faith and honored their fiduciary obligations, they “deferred too much to the recommendations and conclusions of the long-term executives and failed to challenge the executives.” In particular, the report notes with respect to the HUD loan and the expansion project, “there should have been more and louder voices casting doubt on the feasibility of the project.”
The report draws a number of lessons from the demise of LRGH, the first financial failure of a nonprofit hospital in the state since the closure of Newport Hospital in 1991. It recommends hospital trustees undergo regular training and education as well as avail themselves of independent expertise when weighing major financial, operational and legal issues bearing on the provision of healthcare.
