CEO at Bankrupt Curae Health: 'Vision Was Correct, But Circumstances Didn't Pan Out'

CEO Steve Clapp says the four-hospital rural health system 'hit our targets' with expense reductions, but couldn't overcome a 'problematic' decline in net revenues.

Nearly two years after acquiring three rural hospitals in Mississippi and doubling its size, Clinton, Tennessee-based Curae Health has filed for bankruptcy. 

Curae Health CEO and President Steve Clapp spoke with HealthLeaders Media about the filing, the factors that led to it, and the challenges facing rural healthcare in the United States. The following is a lightly edited transcript.

HLM: What factors led to the bankruptcy?

Clapp: Our organization is small and doesn't have the deep pockets like other organizations. So, it was very important that we hit the numbers that we needed to make this thing work.

The biggest thing that really hit us was a significant decline in net revenues after we acquired the hospitals. We hit our targets in terms of expense reductions and savings that we had anticipated when we took over. But that net revenue declined was just too problematic.

Physician turnover contributed a little bit. There were delays in the Medicare extender programs in Congress. Those had ceased in October 2017 and didn't get reinstated until the spring, and it was just within the last 60 days that we've been paid on our low-volume adjustment.

We had some challenges obtaining financing on our information systems, so we had to compress a little bit of the financing there. It was just a series of things.

HLM: When you acquired these hospitals it doubled the size of Curae. Do you think that the expansion may have been too rapid?

Clapp: Part of the desire to acquire these hospitals was the proximity to the hospitals that we owned. We felt like we can we can add these hospitals and manage them effectively. We'd had the Alabama hospitals at that point for a little over two years. We thought there were synergies that we could achieve. We had waited a couple years before we made another acquisition, so I felt like the integration was fine. It was a net revenue decline in the big picture.

HLM: What will happen to Curae Health when the bankruptcy proceedings are completed?

Clapp: We'll have one hospital left that's not in bankruptcy in Russellville. We divested the other two hospitals to the local communities in Alabama. We are in the process of seeking buyers for the Russellville hospital as well. We have a letter of intent on that one as well. Curae will eventually divest all of its hospitals. Once all the legal proceedings and processes are worked out we will cease to exist.

The vision was correct in terms of what we're trying to accomplish. But the circumstances didn't plan out to pan out like we had hoped.

HLM: As you look for buyers for these three hospitals, what are the selling points?

Clapp: What attracted us to these hospitals was the fact that they had sufficient revenue. These were larger facilities than we had traditionally focused on, generating anywhere from $35 million to $60 million in revenue. So, they are bigger, and the communities are bigger. These are hospitals that should stay in place and they will in the long term. The community has built a medical community around it to make it work. There's a good physician base in place. There's good community support to keep these hospitals open and operational.

The bankruptcy court process, for lack of a better term, becomes an auction process and our intent is to find stalking horse bidders for each of the hospitals and then there will be an auction process once that initial stalking horse bid is put in place.

HLM:  Is Curae Health a microcosm of the problems that rural hospitals face everywhere in this country?

Clapp: Yes. Interestingly enough, we were not the only Mississippi hospital to the file for bankruptcy (on Aug. 24). There was a hospital in Magee. We've seen over 800 rural hospitals close in the last 30 years. That's almost 25%. The number of urban hospitals has stayed flat at about 3,100.

The crisis in healthcare is in rural America, not in urban America. Urban communities are still producing a lot of development projects, a lot of expansion projects at a much higher cost to Medicare and Medicaid than what it would be to keep these smaller hospitals open and provide the services out there.

HLM: Was the Medicaid non-expansion in Mississippi a factor?

Clapp: I'm cautious as to how to address that. There are two sides to that coin. Obviously, from a hospital perspective, you love to have more insured folks. On the flip side, somebody's got to pay for it. That's the balancing act.

HLM: What are the unique challenges for rural hospitals?

Clapp: It depends on who you talk to. Tertiary hospitals will tell you they've got the same problems, but we're not doing $100 million expansions. We've got declining populations in these communities. The younger generation does not necessarily want to live in these communities. We have aging facilities that we're not able to adequately maintain or recapitalize. Some of these states that we operate in, Alabama, Mississippi and Tennessee, have a significant disadvantage relative to wage rate indices. They're particularly low.

HLM: How will rural hospitals evolve to adapt to these challenges?

Clapp: Eventually, rural hospitals are going to end up in one of four buckets. They're either going to end up with a larger health system, or they're going to go back to the community, or at least require some type of community subsidy, like we did 40, 50, 60 years ago.

The third thing is from an operating model perspective. Do we need to create the freestanding outpatient center model that has an emergency room with it? That allows hospitals to transition to another type of entity to ensure that we have some availability of local healthcare.

That can be a freestanding ER, which as originally designed was a good idea. The concept got used in large communities as a competitive tool, rather than as a means to provide emergency services. You don't need one more ER in an urban setting, but you do need one ER and an outlining county that has no other services.

On the outpatient side, it's a piecemeal deal. The primary care is in a physician billing level and your diagnostics and even your surgery can be paid at less-than hospital rates, and the ER becomes more like an urgent care. You can't operate a 50,000-to-100,000 square-foot building on those kinds of reimbursements. We have to create another model.

The fourth option is some of these hospitals will close. If you only have 1,000 admissions, it's hard to justify keeping a hospital open because it's a 24/7 operation. You can create an 18-hour operation that provides for the needs of the community and helps out with the EMS runs that have to go out of town all.