What does hospital receivership really mean?
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.