A $14 million question is looming over the pending sale of Lower Bucks Hospital to a for-profit health care system: Will Bucks County remain on the hook for the money it borrowed to help the hospital emerge from bankruptcy?
As of last week, county officials — including the head of the agency that owns the hospital — didn’t have firm answers.
“It is a very complicated situation that will have to be resolved before the (Bucks County Redevelopment) Authority board votes to approve the sale,” said Robert White, the authority’s director.
The $14 million bond is the result of an agreement between the county’s redevelopment authority and Lower Bucks Hospital to allow the hospital to exit Chapter 11 bankruptcy earlier this year. Under the agreement, the redevelopment authority would have to approve any sale of the Bristol Township hospital.
In 2010, the Bucks County commissioners approved the redevelopment authority borrowing the money by issuing bonds secured by the county and the hospital’s dedicated .05 percent from Pennsylvania table games revenue at Parx Casino in Bensalem, which is estimated to be $750,000 to $1 million a year.
Under the agreement, the redevelopment authority took title to the hospital property as collateral, and leased it back to Lower Bucks Hospital. In exchange, the hospital committed all its rights to future gaming revenue to pay the debt service on the bond.
The hospital agreed to repay the loan with interest over 20 years and buy back the property. The total amount the hospital promised to repay would be almost $30 million.
But now that the hospital is slated to be sold to Prime Healthcare Services, a California-based, for-profit chain of 18 mostly West Coast hospitals, some are wondering if the county will be stuck paying off a loan for the new for-profit owner.
White said that there are “no simple answers” to questions regarding the bond and its repayment with the pending sale. He added that the redevelopment authority has not received any “official” notification about a sale.
If the $14 million is not carried as a liability on the hospital’s balance sheet, then it is unclear as to how the debt would be satisfied, said Robert Hill, director of business and financial practices for Health Strategies & Solutions Inc., a Philadelphia-based national health care strategy consultant firm.
Lower Bucks Hospital CEO and President Albert Mezzaroba said that the new owner would not be responsible for the debt service on the loan.
“The short answer is no, there is nothing in the lease, or any other document that would require a new owner to ... pay the debt service,” he said.
Rather, Mezzaroba said the new owner would step into the current lease agreement that exists between Lower Bucks Hospital and the redevelopment authority; if the sale is approved, Prime Healthcare would have the same responsibilities as Lower Bucks Hospital including operating the property as a health care center.
Bucks County Commissioner Diane Marseglia expressed frustration at the lack of answers.
“I am mystified as to why (the commissioners) are in the dark,” she said.
She said her inquiries with county financial people confirm one possible scenario is that the county would be required to keep paying the bonds using the casino revenue until they reach maturity in 15 to 20 years.
The other scenario, Marseglia said, is that the new owner pays off the bond debt or agrees to pay off the bonds over the next 15 to 20 years from its profits.
If the new owner pays off the bond, the county could reap up to an additional $1 million a year in gaming revenue, Marseglia said.
That’s because Prime Healthcare is a for-profit group, which means it is not entitled to receive the table gaming revenue under state law. Instead, the money will go to the county.
If the bond is paid off at the time of the sale, the county could use the table game revenue for other purposes, such as to offset tax increase or make infrastructure repairs, Marseglia said. Otherwise, the county cannot use the gaming revenue until the bond is repaid.
Lower Bucks Hospital would be the second Pennsylvania hospital in Prime Healthcare’s growing portfolio; in February it bought the financially struggling Roxborough Memorial Hospital in Philadelphia.
The company specializes in financially challenged hospitals that treat mostly low income patients and rely heavily on government reimbursement, according to published reports.
In January, Prime Healthcare Services was recognized one of the top 15 U.S. health systems by Thomson Reuters, a business data provider.
In formally announcing the sale last week, Lower Bucks Hospital said that as part of the sale agreement Prime Healthcare had agreed to a list of conditions, including:
- Maintain all services, including emergency departments.
- Provide access to a $3 million loan for working capital, with plans to invest up to $10 million for needed capital improvements.
- Hire all employees and maintain all collective bargaining agreements.
- Assume all health care contracts and liabilities.
- Provide the same level of charity care for indigent and low-income patients.
Pennsylvania regulators could require the new owners to fulfill those promises, too, said Health Strategies & Solutions’ Hill, who has worked on a number of hospital sales.
With hospital sales, the state will develop and impose a set of conditions on the buyer and monitor to make sure the conditions are adhered to, Hill said. That said, the employees could be terminated for cause and the new owner could request state permission to terminate a service.
Nonprofit community hospitals, such as Lower Bucks Hospital, generally have higher levels of charity care than for-profit hospitals because they offer a wider array of services, some of which require they accept low-income patients, Hill said.
Increasingly nonprofit hospitals are finding access to capital more difficult because of the challenging credit markets. nonprofits tend to run on tighter margins, which makes lenders more reluctant to approve loans, Hill said.
As a result, more for-profit health care groups, such as Healthcare Services — which has substantial capital reserves — are buying up nonprofit hospitals. The attraction for the for-profit groups is that a nonprofit hospital is still a money generator — and a good investment, Hill said.
Often for-profit health care companies will buy struggling hospitals, invest in infrastructure and services, and improve the economies of scale so they can buy things at better prices — then once the portfolio is in a good financial position, they sell them, Hill said. Typically the turnaround process is five to 10 years, he said.
The biggest downside to for-profits, Hill said, is that the organization likely doesn’t have that same community commitment and roots. Also there is a loss of local control of what many people consider a critical community asset.
For-profit owners might be more inclined to terminate select services that they deem unprofitable.
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