Skip to content

What does hospital receivership really mean?

December 8, 2011

I am embarrassed to admit I don’t totally understand how hospital receiverships work, despite the many hours I’m spent covering Landmark’s financial situation.  My co-workers were asking me some questions about Westerly’s receivership filing that I just couldn’t answer. So, I decided it was time to talk with an expert.

I called Attorney Gerard Goulet, a partner with Hinkley, Allen, and Snyder, who often offers legal counsel to the Hospital Association of Rhode Island. He graciously walked me through the basics of hospital receivership.  Here are the highlights of our conversation-

The Pulse: Let’s start from the beginning. If a hospital voluntarily decides to file for receivership, how does it make that decision?

Gerard Goulet: Basically, it’s a determination by the board of trustees after looking at the financial situation of the institution that it needs some protection from its existing creditors because it is spending more money than it’s earning in operations over the course of a year.

The Pulse: Is this bankruptcy for hospitals?

Gerard Goulet: What’s happening here is Westerly is going through a special master situation which is a lot like a receivership. And the goal is either going to be to sell the facility, or affiliate with a stronger player, or to close the facility or to restructure its financial situation so that its revenues match its expenditures on a more favorable basis than they do now.

The Pulse:Is that bankruptcy for the hospital?

Gerard Goulet: Bankruptcy is a federal proceeding. Receivership, special mastership, is a state proceeding. So we’re just in a different forum. It doesn’t mean the hospital couldn’t move from the receivership side and go into an actual bankruptcy. There’s more flexibility in a receivership proceeding than in a bankruptcy proceeding.

The Pulse:So would it be accurate to say this is sort of like a state level form of bankruptcy?

Gerard Goulet: Yes, absolutely.

The Pulse:When a hospital files for receivership, what are the pluses about their new situation?

Gerard Goulet:  Well, they don’t have to pay the current debts that they may have incurred over the last year or two. Let’s just for arguments sake say they owe the person who delivers milk, the person who provides health insurance, and a variety of players $9 million dollars. The Special Master will get permission from the court not to pay those bills while they’re trying to restructure. So they’ll pay bills going forward. The company that delivers milk is owed a thousand dollars, it will not get paid that  thousand dollars, but if it delivers that milk tomorrow it will be paid currently, sort of like cash on delivery.

The Pulse:So it says, OK, everything you owe up to now, you don’t have to pay. But you do have to pay bills moving forward.

Gerard Goulet:  You’re right. You don’t have to pay while this proceeding is going on. The idea is at the end of the proceeding, to the extent that they emerge with a restructuring plan, they’ll go to a creditors committee, a committee of all the people who are owed money, and they’ll say, ‘Ok, we can move forward out of this if we pay you all 50 cents on the dollar.’ And the creditors committee could say yes or no.

If the creditors committee say no, it would go to the judge, the judge would make a determination as to whether it was fair under all the circumstances. It’s a proceeding where you can get some of your existing debt waived, or it could very well be that you get sold to somebody else who recognizes all that debt. Lots of different potential outcomes, but sort of in those three buckets I talked about which is sale, closure, or restructuring.

The Pulse:What kind of powers does a Special Master have that he or she can wave a magic wand and make a hospital profitable again? What does this person know that the board of trustees or the president doesn’t know?

Gerard Goulet: They don’t know any more than anyone else. What the receivership proceeding does is it gives them the ability to at least stop the bleeding in the short term while they try to figure out an angle. So, if the board and the president are trying to do it right now, they still have that $9 million dollars in debt that they have to keep responding to phone calls about.

With the receivership in the mix, that money that would otherwise go out to creditors, it can use some of that money to pay someone to come in and take a look at the operation. Maybe there are some services that could be subtracted or some services that could be added, or some buildings that were extraneous to the hospital operation that could be sold. There are lots of different possibilities out there… And it could very well be that the receivership is going down the very same path that the board and the president have already identified.

The Pulse: And if the board and the president disagree with the special master, can they do anything about that?

Gerard Goulet: They can advise the special master, but they’ve really turned over the operation. The special master for all intents and purposes is running the show, trying to find an affiliation partner, trying to restructure things, maybe they’ve got contracts that need to be reformed. Any of the contracts could be reversed upon court approval. The goal is to preserve the institution, to get it back on its feet, to figure out a platform on which it can operate in the future and the special master has powers that wouldn’t normally accrue to the institution.

The Pulse:Who pays for the special master?

Gerard Goulet: The hospital pays for the special master as an administrative expense.

The Pulse:I’d imagine that the special master’s fees are not cheap. How do they pay them while the hospital is struggling financially?

Gerard Goulet: Again, they’ve got this certain slug of available money that they were otherwise going to have to pay old bills on. I mean, you could say that the special master is using the creditor’s money.

If you wanted to be really crass about it, you could say, ‘You know those $9 million dollars in debt? Well the special master can take some of that money to try to solve the problem.’ And maybe the solution will be one that will pay everybody back, but maybe it will be one that pays everybody back but for the amount of money that had to go to pay the special master and special consultants that may have been brought in.

The Pulse:Anything else people should know about hospital receivership?

Gerard Goulet: I don’t think a hospital goes into a special mastership without thinking about it hard. Because even though the hospital will continue to run just like it did the day after it’s in special mastership as it did the day before, the general public doesn’t understand, and they have a sense that ‘Oh my goodness, the hospital is going to close tomorrow.’ Or, ‘I shouldn’t go into the hospital for this service because I don’t know what’s going to happen there.’ Lots of misinformation about what it means to be operating. That includes whether you’re in bankruptcy or anything else.

To the extent that that does catch the public, then they don’t go and then the hospital’s revenues are down even further. You end up in a spiral of sorts. So you have to be very careful. You have to make sure you have your press releases out to assure the public that everything is business as usual and you’re still going to get quality care at your institution.

While receivership or special masterships are going on, the institutions continue to run and operate appropriately. The Health Department will be in, checking on it periodically,  I’m sure. Dr. Fine’s quote today was he’s not terribly worried. He thinks the hospital is going to run perfectly well. I think that’s the key point the general public should know.

Anything else you’d like to know about Westerly’s situation? I’ll be talking about this topic tomorrow afternoon during All Things Considered. Send me your questions and I’ll try to figure them out.

12 Comments leave one →
  1. Concerned in Westerly permalink
    December 9, 2011 12:41 am

    This is a good post. The thing to watch in this situation is (just like anything else) the money. The receiver stands to make huge amounts of money. Look at how much Mr. Savage drained out of Landmark over the past three years. It’s really criminal when you think about it. Where is the incentive for the receiver to get things moving when they are making big money (and getting paid first). Again look at what Mr. Savage did at Landmark and then watch very closely what happens in Westerly. People should be asking questions of the hospital’s lawyer, Mr. Beretta at Adler Pollock & Sheehan. He urged the judge in the last hearing to hire another lawyer, Mark Russo, Reporters should be questioning these lawyers if it all goes down. Questions could be: will the hospital still need to retain its expensive law firm if there is a receiver in place? Was there a deal cut between Mr. Beretta and Mr. RUsso to get this recommendation before the judge? Personally, I think the judge would be wise to select someone with absolutely no relationships between the hospital, its lawyers, or anyone else. The situation needs a truly unbiased observer who can get in, get the hospital’s financial house in order, and get out. Sooner rather than later. Again, questions should be asked of the lawyers. That’s the scam in any receivership.

    • December 9, 2011 1:25 pm

      Thanks for your detailed comment and the questions you raised. As you probably know, the judge picks a special master today. Let’s see if it’s Mark Russo.

  2. Bruce McIntyre permalink
    December 9, 2011 2:09 am

    Great job Megan. You picked one of RI’s smartest health care lawyers who did an outstanding job of making receivership easy to understand.

    • December 9, 2011 1:35 pm

      Thanks Bruce! I plan to call on Gerard Goulet in the future. His explanations were incredibly helpful and clear.

  3. Steven permalink
    December 9, 2011 3:22 am

    As the spouse of an employee of the Hospital, I’d like to know more information about how this receivership will affect hospital employees. For example:

    Are the wages and benefits (health/retirement) form their current contracts guaranteed and will be continued to be paid by the hospital?

    Is the hospital able to negotiate a new contract if an employee’s existing contract is ending soon??

    Is an employee pay cut a usual concession mandated by the special master?

    Answers to these questions and an overview on how this situation effects the
    hospital employees would be greatly appreciated.

    • December 9, 2011 3:04 pm

      Hi Steven-

      I left out a portion of the interview that might be relevant to your question. Here’s what Gerard Goulet said about the powers of the special master-

      The special master is running the show, trying to find an affiliation partner, trying to restructure things, maybe they’ve got contracts that need to be reformed. Any of the contracts could be reversed upon court approval. The goal is to preserve the institution, to get it back on its feet, to figure out a platform on which it can operate in the future and the special master has powers that wouldn’t normally accrue to the institution.

      So, yes, it seems like the special master CAN reverse contracts, but that move would have to happen with approval from the judge. I’m not sure how common it is for special masters to cut wages. I’ll check with the nurses union from Landmark to see what their experience was. Thanks for the great questions!

      • Steven permalink
        December 9, 2011 3:29 pm

        Thanks for the quick response Megan!!! What my spouse is concerned with is they are in the last year of their contract with the hospital and have been negotiating a new contract over the last few weeks….how does the receivership process affect the negotiation process and does the hospital maintain its ability to continue the negotiation process or does the special master get involved?

      • December 9, 2011 4:19 pm

        Steven- You’ve inspired me to do a new blog post about employees under the receivership! I’ll go into more detail there, but UNAP says under receivership the special master is responsible for negotiating all contracts. BUT, that doesn’t necessarily mean your spouse will get a bad deal. UNAP says it’s in the best interest of the special master to retain employees. More later…

      • Steven permalink
        December 9, 2011 4:36 pm

        Again thank you for the prompt and informative response…Im looking forward to the new log!!!!

  4. Steven permalink
    December 9, 2011 1:48 pm

    I tired to post a comment but do not see it here..so ill try again…. As a spouse of a Westerly Hospital employee I was wondering how this receivership will affect hospital employees….Are their wages/benefits at risk??? Is the hospital able to negotiate new contracts if an employee’s contract is set to expire soon??? Ive heard that during a receivership there is usually a call for employee pay cuts is that true?? Thanks for any input..

    • December 9, 2011 3:05 pm

      Sorry about that! I thought I approved your earlier comment but I must have pressed the wrong button. It’s up now, with a response. Thanks for reading The Pulse!

  5. December 27, 2011 6:58 pm

    While receivership or special masterships are going on, the institutions continue to run and operate appropriately. The Health Department will be in, checking on it periodically, I’m sure. Dr. Fine’s quote today was he’s not terribly worried. He thinks the hospital is going to run perfectly well. I think that’s the key point the general public should know.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: