Facing a $100 Million Loss, Downey Regional Files for Bankruptcy

HealthLeaders Media Staff, September 21, 2009

Downey Regional Medical Center has filed for Chapter 11 bankruptcy protection in an effort to escape unprofitable HMO contracts in favor of patients in preferred provider organizations.

Just about everything went wrong that could possibly go wrong financially with the 199-bed nonprofit hospital 13 miles southeast of Los Angeles, managers acknowledged in documents sent to employees last week. Most important, hospital officials weren't aware of it until recently.

Internal reviews recognized a loss of nearly $100 million from financial reserves to cover operating expenses over the past decade, or about $1 million a month.

In those documents to employees, president of the new management team, Kenneth Strople, described staff as "feverishly working to fix literally thousands of problems," some of which involved its dysfunctional computerized financial systems.

"For over a decade, the hospital lost tens of millions of dollars annually. We have spent the last two years vigorously working to figure out why, and to correct the problems," one of the letters to employees said.

The hospital blamed much of the dysfunction on issues with five HMO contracts, and a lawsuit against the hospital from a physician group demanding millions of dollars it claims the doctors are owed from capitated risk pool funds.

The financial problems were recognized some time after a new team took over management of the hospital two years ago, says Downey spokesman Eric Rose.

Rose says Downey Regional has about 50,019 visits to its emergency room and treats a total of 71,764 patients a year.

Strople and other hospital executives have been scrambling to explain to employees how the hospital got itself into such deep trouble. He said that not only were the hospital's financial computer systems and processes broken, but "the so-called capitation model lost us lots of money and we did not know it," Strople wrote.

Although those financial systems are largely fixed, and the hospital has been able to move away from capitated contracts, "we are still facing the one-time transition consequences of exiting from capitation, that amounted to over $25 million."

Additionally, although the hospital is able to make its payroll, it has had "delays in paying vendors and putting aside money for capital expenditures."

"We are getting by, but some of our creditors have no more patience.  For example, one of the physician groups has aggressively sought to obtain payments for capitation risk pools relating to 2006 and later.

"They sued us, demanding millions of dollars… (and) we do not have any reserves to pay them right now, so we needed to prevent them from taking more legal steps to grab the money the Hospital had set aside to meet your payroll."

Chapter 11 bankruptcy accomplishes this by providing "an automatic federal injunction against any creditor from collecting money or continuing any lawsuits until the matters are settled as part of the reorganization plan the federal court approves at the end of the bankruptcy proceeding."

In a statement, Downey officials said the bankruptcy filing "actually allowed the hospital to access new lending markets that have committed to providing DRMC with needed cash during the bankruptcy process."

Nate Kaufman, a Southern California-based hospital industry analyst, is doubtful that financial rescue will work.

Kaufman says the hospital should have been able to see growing financial problems as long ago as 2005, when days and accounts receivable were above 70 days, 30 days over the industry standard, which indicates how quickly the hospital receives reimbursement for services.

"If it was indeed the case in 2005, why are they just finding out about it now, and just starting to fix it?" he asks.  "Did these guys just fall off a turnip truck yesterday?"

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