As healthcare companies react to the pressures of the tightened credit market, some will inevitably default on their obligations. Lenders to healthcare companies have become familiar with the routine: slow pay, no pay, and then notice that a bankruptcy has been filed. Once in bankruptcy, very few companies emerge intact. On average, only 7% of all bankruptcy reorganizations result in the company becoming a thriving concern. The remaining companies liquidate with creditors recovering less than 100 cents on the dollar. Two prevalent reasons companies fail to emerge are the time and expenses of a reorganization.
Receivership
A less common but historically tried-and-true alternative to bankruptcy is a receivership. Receiverships are primarily creatures of state law. Prior to the federal bankruptcy laws, when a company became insolvent, individual states had statutory provisions for liquidation under court supervision. This was accomplished by appointing a receiver over the business. Although more recent bankruptcy laws have changed the landscape of remedies for insolvency, receivership remains an effective remedy for lenders.
A receiver is an "officer of the court" who gathers, markets, and sells all assets of a company. In a typical receivership, after marketing is done for a reasonable period, a purchase agreement is negotiated. Then the receivership court approves the sale and the sale is consummated. Once the sale is consummated, the receiver distributes the cash generated by the sale in accordance with the state law priority scheme (secured creditors first, then unsecured creditors, and lastly, equity holders) and the case is then closed. Frequently, where healthcare assets, such as surgery centers, hospitals, or skilled nursing and assisted living facilities, are the subject of such a sale, the facility remains intact and continues to serve the community.
Appointment of receivers
Today, receiverships are typically sought by a creditor with liens against a company's assets. The secured creditor will sue the company for repayment of the debt owed and seek, as one of its remedies, the appointment of a receiver. Receivers are usually appointed early in a case. An appointed receiver will operate the business as profitably as possible but will also normally market the company or its assets for sale. Particularly for healthcare companies, receiverships may provide a less expensive resolution for defaults while keeping healthcare facilities intact and servicing their communities.
Receiverships have a number of advantages over a bankruptcy filing. First, an independent third party operates the business, not the old management that may have an emotional attachment to the business or, even worse, an embattled mentality. Less-than-satisfactory management is often cited as a primary reason for poor operations and ultimately bankruptcy filings. For example, in nonprofit healthcare entities, management may not have its incentives aligned with the successful operation of the business, or the board of directors in place may only meet very infrequently. Neither scenario is conducive for struggling healthcare entities facing bankruptcy. Instead of allowing poor or absentee management to continue to run the business as is the case in bankruptcy, appointing a receiver allows the best interests of the company to prevail.
Lower costs
Second, the cost of a receivership is often lower than a full-blown Chapter 11. Once a receiver is appointed, the displaced management members usually do not have a role. No creditors' committee (and its attendant counsel and advisors, all paid by the company) is appointed. While a receiver must be compensated, unlike a trustee in bankruptcy, a receiver is usually not paid a commission. And unlike bankruptcy, no plan, disclosure statement, solicitation, or confirmation hearing is necessary for a receivership. As a result, court costs and attorneys fees are significantly lower. Third, because there are fewer roles in a receivership compared to a bankruptcy (no debtors' counsel, no creditors' committee), the process often moves more quickly. The receiver manages most aspects of the reorganization, including the sale of assets and distribution of funds. The faster process usually also translates to lower costs. An additional benefit to the secured creditor is the greater control it has over the sale and distribution process under a receivership as compared to bankruptcy proceedings.
Shortcomings
The chief drawback to a receivership is that the secured creditor normally foots the bill in the event there is a shortfall in revenues that are used to support operations and the costs (usually the receiver and his or her counsel). Before embarking on a receivership, secured creditors should make certain that revenues and cash flow will be sufficient to allow for a reasonable marketing period. This will ensure that the secured creditor will not be forced to support the company during the receivership, or worse, contributing sales proceeds, otherwise payable to it, to the cost of operating and administering the business in the receivership.
Another drawback is that there can be more "home cooking" in a receivership than a bankruptcy. Filing an action in the hometown of the business in receivership can result in the court being more sympathetic to the local entity rather than the out-of-town creditor. State courts may not be as familiar with commercial disputes as with other types of disputes. One way to alleviate the "home cooking" problem is to file the matter in the local federal district court as opposed to the state court where the facility is located. One last drawback to receiverships is that companies with appointed receivers can still file bankruptcy.
When a creditor is considering its remedies against a healthcare company that owes it money, particularly secured creditors, keep the receivership option in mind. It is likely to be a cheaper, faster, and simpler solution.
Joseph A. Sowell and John C. Tishler are partners with Waller Lansden Dortch & Davis in Nashville, TN. They may be reached at joe.sowell@wallerlaw.com and john.tishler@wallerlaw.com, respectively.
For information on how you can contribute to HealthLeaders Media online, please read our Editorial Guidelines.
Many of you who regularly read this column are hospital CFOs. You have my sympathy these days. You're trying to figure out how to project financial success, or at least, financial independence, through 2009 and beyond. Perhaps you're just trying to survive. You've already been hit with huge investment losses, a lack of access to capital, and in many cases, rapidly declining volumes. It's hard to deal with that level of triple-witching that so quickly soured good economic times for the industry, but you aren't standing idly by.
You're trying to deal with the uncertainty of future revenues through a variety of measures. You're taking a hard look at eliminating money-losing services. You're tightening up on the supply chain, you're postponing needed investments in technology as well as bricks and mortar, and you're working on refocusing the strategic direction of the hospital or health system through a cracked lens. But those solutions take time. Meanwhile, the positive hit to the bottom line from laying off staff is almost instantaneous, and hospitals are taking advantage of it.
Not a week in the past half-year has gone by in this newsletter without at least one hospital or health system announcing a 6%, 7%, or even 10% across-the-board staff reduction. It's true many of these layoffs don't include clinical staff—many such positions are still in shortage, in fact—but the cutbacks are pretty brutal on administrative staff—people who are hard to replace should the economy turn.
On the other hand, recessions offer opportunities for resizing often-bloated organizations. And I'm going to give you the benefit of the doubt by assuming that many of the first people laid off at any institution are the low performers, but in times like this, it's often hard to be so surgical. This recession hit lightning-quick, so as responsible CFOs, you've responded in kind. Often in times of such strategic stress, it's difficult to cut with a scalpel rather than a hatchet. And it seems to me from the news reports that across-the-board cuts can't, by definition, be made with any precision.
I'm concerned that even financially secure organizations are cutting too deeply. You should act quickly to contain the financial damage during any business downturn as drastic as this one seems to be, but be careful not to destroy any hope of recovery should the business climate turn around as quickly as it soured. Many CEOs and CFOs I've talked to over the past couple of years have said how they appreciate the level of scrutiny being placed on their organizations by outside individuals—one recently remarked to me that hospitals and health systems are being judged on the same metrics as public companies—especially when it comes to being able to borrow. But let's remember something here: Nonprofit hospitals are not public companies, and never will be. You have more flexibility in good times and bad, so take advantage of it.
It's easy to fire good people, and of course it's the last course of action you'd like to take. But once they're gone, it's not nearly as easy to rehire them and continue on your merry way. If you've spent years in time and talent building your market position and operational excellence, don't destroy it permanently in a short-term attempt to minimize your losses. You'll take heat, but you can justify keeping good people even in bad times, because in the long term, those losses in talent might not be so easy to recoup even if the economy turns quickly.
When it comes to taking prudent measures, lay off people if you have to. It's up to you to decide how much is too much.
P.S. Check out our two new blogs on leadership and marketing. I think you'll be happy you took the time.
Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.Note: You can sign up to receiveHealthLeaders Media Finance, a free weekly e-newsletter that reports on the top finance issues facing healthcare leaders.
Amid a major restructuring and an expected announcement of several hundred job cuts, the chairman of the largest group of doctors at University of Chicago Medical Center has resigned. Skip Garcia, MD, chairman of the University of Chicago Department of Medicine since May 2005, has stepped down. He will, however, remain on the faculty, according to a letter issued to faculty and staff at the medical center. In a letter to faculty, the chief executive of the medical center alluded to Garcia's departure as related to the problems the medical center was having dealing with the economic downturn. The university would not comment further nor would it disclose the number of layoffs that will be announced.
CMS announced February 6 the permanent RAC program is once again underway as the RAC bid protests filed by Viant, Inc., and PRG Schultz, USA, Inc. have been withdrawn. Viant and PRG’s protests were resolved February 4, which means the stop work order has been lifted, according to CMS.
The Government Accountability Office (GAO) had 100 days to issue a decision after the unsuccessful bidders filed their protests November 4, 2008. The GAO had been set to render a decision on the protests on February 9 for Viant, and February 11, for PRG Shultz.
The RACs by jurisdiction are as follows:
Region A: Diversified Collection Services
Region B: CGI Technologies and Solutions
Region C: Connolly Consulting, Inc.
Region D: HealthDataInsights, Inc.
"If you have put your RAC preparation on hold, it's time to start finalizing your strategy. And it's time to become familiar with the contractor in your area," according to Kimberly Anderwood Hoy, JD, CPC, is the director of Medicare and compliance for HCPro, Inc.
As a result of the protest settlements, these RACs will be subcontracting with PRG-Schultz and Viant. (PRG-Schultz will work with Diversified Collection Services in Region A, CGI in region B, and HealthDataInsights in Region D. Viant Payment Systems will work with Connolly Consulting in Region C.) PRG-Schultz and Viant will have different responsibilities—including possible claim review—in the various regions.
Editor’s note: To view this information on the GAO Web site, visitwww.gao.gov/decision/docketand enter file #400443. For additional details from CMS, visit their Web site atwww.cms.hhs.gov/RAC.
This story first appeared as a breaking news item from the editors of The Revenue Cycle Institute, a division of HCPro, Inc. The Revenue Cycle Institute is a multidimensional resource for healthcare professionals offering consulting and on-site education for a range of revenue cycle issues.
Massachusetts public health officials have begun monitoring heart programs at Massachusetts General Hospital and at St. Vincent Hospital in Worcester after discovering that they had high death rates in 2007 among patients who underwent cardiac catheterization procedures. An analysis of mortality data showed that 43 of 1,543 patients died at Mass. General and 16 of 112 patients died at St. Vincent. The death rates were significantly higher than the state average for patients who undergo the procedure to remove blockages in their coronary arteries.
Jim Houser has stepped down as chief executive of Nashville-based Saint Thomas Health Services, a victory for physician leaders who had questioned his leadership. But it remains to be seen whether a shift at the top softens potential budget cuts that have some doctors concerned about the future of its four hospitals. In casting no-confidence votes against Houser's leadership less than two weeks ago, medical staff leaders at three of those hospitals raised concerns about how proposed budget cuts and a move to a more centralized management could affect patient care.