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?"
Kaufman also says even with the bankruptcy, he doesn't have high hopes the stand-alone hospital can remain viable as long as it is free-standing, and not in a hospital network.
"This (bankruptcy) will stop the hemorrhage, but it won't ensure the viability of the organization over the long term. The question is, if they have to buy new equipment and build new facilities, do they fit the profile of an organization that financial institutions would be wiling to lend to. The answer is no."
Downey Regional is listed as one of the 273 hospitals in the state with buildings that must meet seismic upgrade requirements in coming years, which in some cases may mean replacing entire buildings with new construction, or extremely expensive retrofits.
Meanwhile, hospital officials in the region are worrying about a "domino" effect if the hospital goes out of business or stops accepting emergency room patients, says Jim Lott of the Hospital Council of Southern California. That's because six other hospitals have taken their emergency departments offline in the last decade, including Los Angeles County's Martin Luther King.
Downey serves a high number of Medi-Cal and uninsured patients and serves a region with about .9 beds per 1,000 residents, fewer than the state average of 2.24 beds per 1,000 residents. The national average is 3.4.
"Downey Regional has become a critical part of the emergency medical services system," Lott says.
That EMS system may not be able to withstand the stress of Downey's emergency department goes offline as well, he adds. Some relief after re-enrollment may come from the new Kaiser Permanente hospital, a 352-bed unit that opened last week less than two miles away from Downey Regional. But that facility is only accessible to Kaiser enrollees.
Hospital officials described in painful detail what went wrong with its five capitated contracts. Those contracts required Downey to pay hospitalization costs for HMO members assigned to it, as well as pay actual costs for out-of-network charges when members were hospitalized elsewhere, which amounted to $1.8 million monthly.
When debiting the "risk pool," they said, "our prior risk sharing contracts with the physician groups allowed us to charge only an artificially low amount to the risk pool for ourselves for care provided here at the hospital. In fact, only about $1 million got debited per month, while the Hospital's actual cost of care ran nearly $3 million monthly."
The hospital has negotiated its way out of four contracts, but still has an agreement with Aetna. In the reorganization proceeding, it plans to "reject all of Aetna's contracts."
"With no cash reserves since March of 2008, and with credit markets in a free fall for the past year, the lack of working capital has caused the Hospital to struggle with liquidity," the documents continued.
"Filing reorganization actually makes lending to the hospital much more attractive for new lenders, who have committed to making necessary cash available as the Hospital manages the capitation exit consequences and finishes the fixes on its financial systems."
"DRMC expects to resume cash flow surpluses in the next quarter and therefore rebuild its investment reserves while repaying its accumulated debts over the next several years. In fact, since the new management team has been in place, the Hospital has seen a dramatic financial turnaround."
Soon after emergence from bankruptcy, the hospital should be able to replenish its depleted endowment.
The hospital will remain "open and operational" and will continue to meet its payroll, said Rose. He says he does not anticipate the patients will notice any difference. Suppliers will get paid in the hope they will continue to honor their contracts with the hospital, the documents said.